Does your brokerage practice dual agency? If so, you are already paying higher premiums for errors and omissions coverage than companies that practice single agency. And your rates are only going to get worse.

E&O insurance has gone up as much as 25 percent to 200 percent, depending on risk assessments, according to insurers. At least three major insurers consider agency and agency disclosure by brokers and agents as a key determinant in pricing.

Joan Schmalz, senior vice president of George F. Brown & Sons, a wholesale and surplus lines brokerage firm and program manager, says, "The problem is that most insurance companies haven't done anything about it for years, and now they are more restrictive in what they are willing to do. Since 9/11 everything has been tightened up."

"On our application we ask, 'what percentage of your business is dual agency?'" says Schmalz, "if it is over 20 to 25 percent, I will decline you."

And don't try to put transactional brokerage by Schmalz as nonagency and therefore, lower risk.

"Transactional brokerage is worse than dual or designated agency," says Schmalz. "The licensee could be handling both sides of the transaction as a transactional agent, as opposed to one agent working for seller while another agent in the same brokerage works for the buyer."

At the risk of splitting hairs, it is the broker who is liable, so what is the difference? As far as insurance perspective goes - a lot.

"If I have an agent working on both sides, that's a problem because people don't understand," explains Schmalz. "One of the two, either the buyer or seller, is not going to get it, and they are going to sue. When the buyer has an agent and the seller has an agent, even if they both work for the same firm, at least they have someone that they are comfortable with that is representing them. Visually, and in the mind of the consumer, it makes a big difference."

Not only are E&O insurance companies beginning to take a hard line with agency, some companies that haven't asked about agency and agency disclosure before are changing their forms. The following questions were added about six months ago to the latest Real Estate Agents Errors And Omissions application form from Cal-Insurance carried by American Home Shield, under Section 8 - loss control/risk management:

• What percentage of sales used local board, state association or other approved contract forms? Attach copies of your forms if other than above and explain their use:
• What percentage of your licensees attended a risk management seminar in the last 12 months beyond what is required for continuing education?
• Do all of the applicants' salespeople and brokers disclose to their clients in writing the nature of their relationship, i.e., whether representing the buyer, seller or both?
• Describe steps taken when an agent has violated firm policies and or procedures:
• Describe procedures for handling transactions when your firm is representing both the buyer and seller:
• Describe the insured's supervision/delegation procedures:

Explains John Yacono, vice president of national accounts for American Home Shield, and the carrier for Cal-Surance, "We have found that the insurers we represent have seen in their loss analysis that when a particular company is on both sides of a transaction, it lends itself to more claims. When a buyer wants to bring suit, they sue everybody. If two different companies were involved in the claim, both may have E & O, and there is more room to negotiate with respect to who is paying the claim."

Brokers can get away with being less than truthful - who wouldn't admit to being anything less than 100 percent compliant with agency disclosures? - but the insurance companies nonetheless have other ways to deal with the agency and disclosure issues.

If you're not used to being questioned about agency, get used to it. More insurers will use a brokerage's position on agency and agency disclosure to determine rates.

Steve Sargenti, vice president of CRES Insurance Services, says his company is looking at the risk factors of agency and may make a blanket policy about agency and agency disclosure soon.

"Agency disclosure is a primary area of liability for listing agents," explains Sargenti, "and that is an area that insurance companies want to make sure that agents are doing well. We don't ask for details on whether or not a client is complying with disclosure, our insurance program is different. We provide disclosure forms and supplemental forms, and we hope they are using them."

"We are looking at the whole real estate risk in deciding if they are going to be our customer," says Sargenti. "Of course they are going to say they comply. Our pricing structure matches the risk, and there are discounts, for lack of a better way to put it, for good loss control and quality employees.

What can brokers do to limit their exposure to lawsuits and pay lower premiums?

"Give up this notion of transactional brokerage," says Schmalz.

Agrees Sargenti, "There is an inherent conflict of interest from a risk management perspective on a dual agency transaction, that's the sum of it. So I would advise brokers to be up to date on state-mandated disclosure forms, hire quality agents, and to be involved in every transaction."

To lower risk to their brokers, agents can attend risk management seminars, use third-party transaction coordinators, or call us if they have a question, says Sargenti. "We also give continuing education credits - like a good driver discount in automobile insurance."

"That is relatively new to us to give a discount to single agencies," says Sargenti, "It is the insurance policies that are rated in a variety of ways, and the way ours are rated, they capture dual transactions more expensively than single agency transactions."

When deciding pricing, Sargenti says his company looks to the characteristics of the business, whether it is residential or commercial brokerage or property management, how many losses the account has had, how long the broker has been licensed and how long they have been a client.

"The key is loss experience," says Sargenti, "if you run a good clean shop, and you haven't had any claims, chances are you won't have claims and that will help keep insurance costs down.

All the insurers featured for this article agreed that to date, insurance claims depend on the facts of each case, including the way different states apply law. While insurance companies won't pay for fraudulent claims, it is more of a grey area when a broker and agent have been found to be fraudulent in their actions toward consumers. Some insurers will pay these claims, while others will not.

"We are still on the hook," says Yacono. "It is not going to change, we in the insurance companies know that - the brokers will come to us and say we don't want to offer coverage on dual agency, yet a typical firm is doing 20 to 30 percent on both sides selling their own listings, so it is going to happen."

But brokers can only expect the insurance market to tighten. "The whole insurance market has hardened with the economy and stock market," says Yacono. "Insurers used to run with high loss ratios over 100 percent. They could live with that because premium dollars were invested in the stock market, but we all know that is gone and they can't get that investment income.

"Real estate has not had good loss ratios," he says. "Real estate programs out there have had higher losses than their premiums brought in. The programs survived because they were able to make it up, and that is no longer possible. The programs have to stand on their own, they are either tightening coverage and/or raising rates."

While insurers may continue to pay claims for agents who fail to properly disclose, those days are numbered.

"We just won't renew a firm that has several or high-dollar claims," says Yacono.

Published: October 22, 2002

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