Review E&O Policies ~ What Questions should real estate licensees ask?

December 10, 2015

A few years ago VanEd added a space for real estate professionals to track the expiration of their Errors and Omissions (E&O) policies in order to assist them in the maintenance of their licenses. Since that time we have noticed both a rise in licensees who ask questions about what E&O Insurance covers and an increase in people who price shop for the cheapest price for minimum coverage.

During that same time period we noticed a rise in investigations of Property Management and Commercial real estate brokers by a number of regulatory agencies. This has led to an ongoing question: Are those licensees covered for errors and omissions under their current policy? If not, could they have been?

While we do not have concrete data, the answer to both questions may be critical to a real estate licensee when they submit a claim for coverage and in how much the licensee will be paying "out of pocket" to settle any financial claim against them.

In related news, this past fall the California Association of REALTORS® was presented a new guide on Errors and Omissions Insurance (click here to view) that is designed to help licensees understand the coverage and options and learn what questions they should be asking when selecting a policy. It is worth a look since after reviewing the information presented and then comparing a number of policies, we learned a startling fact: once the coverage is as aligned as much as possible in order to compare apples to apples, as it were, the pricing became almost as aligned. In other words, for the same levels of coverage from different providers, the real estate licensee would pay almost the same price. (Note: Your mileage may vary)

In our "quick-test" we reviewed three policies from three carriers in one state. To get as close as possible to equal coverage, we assumed that the licensee will cover personal property transactions (Agent owned) and will participate in some form of property management so a property management endorsement needs to be included in the policy. Here were the results (Again, only a quick review, and only "A" rated insurance agencies were included)

Policy A: $295 with endorsements. All licensees eligible, optional ERP coverage available

Policy B: $295 if licensee is a "member" of sponsoring organization, $335 if not. All licensees eligible, optional ERP coverage available

Policy C: $225 with endorsements. Commissions must be less than $150k. Other conditions apply.

After our quick search we learned that if price was the only factor, Policy C was the obvious and quick choice. However, keep in mind that we did not review electronic reporting, other optional endorsements (such as commercial property or appraisal coverage) or claims history reporting. And while Policy B was a similar price for optional extended coverage, members of the sponsoring organization received no price break on the policy and non-members pay higher premiums.

All policies also offered higher limit coverage for higher risk areas at an additional cost, and all policies appear to cover the exact same possible claims. Policy A was offered with immediate electronic reporting and direct access to legal counsel, or the ability for the licensee to select their own counsel (up to certain limits). This was not explicitly stated up front for the other policies. So if the licensee wants to select their own legal representation, then the choice might need to be Policy A. And if supporting a member organization was critical, then Policy B would have been selected.

In summary, we suggest a licensee review and consider multiple policies against the business services that the licensee provides before deciding which policy will give the highest coverage for the best possible price. It may be that after a final review all of the policies will cost the same and offer similar coverage, but you won't know until you truly compare apples to apples.

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