Business Issues

Liability Solutions

Commercial real estate practitioners need to be concerned about liability issues that can result from handling complex transactions. Claims have been filed for various reasons, including failure to deliver leased properties on time because construction was not completed; misrepresentation of square footage and usability of a commercial space; involvement in drafting a purchase agreement for industrial property with known environmental issues; failure to investigate prior use of a property that was a marijuana facility; improper valuation of triple net leases; and failure to properly calculate common area maintenance charges that are tied to taxes.

The list above excludes even more areas of potential exposure. As a result, a comprehensive real estate errors and omissions policy is a necessity. In general, E&O insurance provides coverage for an act or omission in the performance of professional services.

Choosing a Policy

Following are tips for reviewing and selecting a real estate services E&O policy.

Understand the coverage. There is not a standard policy form. The terms and conditions of policies vary from one insurance company to another. Comparing policies and coverage requires understanding them or engaging an independent insurance broker.

Know the limits of policy coverage. The policies will cover the performance of professional services by those insured, but some exclusions apply. An understanding of the exclusions is crucial.

Some common exclusions include claims arising from bodily injury, personal injury, property damage, and fraudulent or criminal acts by the insured; environmental issues; misappropriation or commingling of funds; dealing in properties owned by the insured; construction management services; mortgage banking; renovation management services; syndication; and violation of various securities laws.

Determine limits of liability. The liability limit will be stated, but it’s important to differentiate per claim limit and/or an aggregate limit for all claims during the policy term. Many policies contain both limits.

Also determine whether the limit includes both claims expenses and damages. When claims expenses are within the limit, it reduces the limit of liability available to pay damages.

Choose a deductible level. The amount of the deductible affects cost and must be decided by the firm. Self-insuring at the lower end may make sense depending on the financial circumstances of the firm. Policies have different deductible applications. Typically, the deductible applies to both damages and claim expenses and applies separately to each claim.

Understand your involvement in the decision to settle or litigate. Groundless, false, or fraudulent claims are sometimes filed, and it may make economic sense to quickly settle them. If brokers are opposed because it could generate more claims or make the brokerage firm appear to be a bad risk, consent to settlement generally may be withheld.

It’s important, however, to understand the ramifications of this. If the broker rejects a settlement suggested by the insurer, there may be caps on subsequent amounts the insurance carrier will pay for damages or defense costs.

Determine who is covered. There will be a named insured (specific brokerage firm) and a definition of insureds/additional insureds for whom coverage is provided. These may include employees, independent contractors, personal assistants, and even related companies. Clarify who is covered to have a complete understanding of the extent of the coverage.

Note relevant dates such as the commencement and expiration date of policy. Most E&O policies are sold as “claims-made” policies. A claims-made policy covers claims that are filed during the policy term. There may be a special provision dealing with coverage for claims that arise from events occurring prior to the effective date of the policy.

The event must have happened during a specified period of time before the initial effective date of the policy. Also, the insured must not have known of the potential claim at the time the policy was issued. At the end of the policy, there may be an extended reporting period during which claims can be filed if the event giving rise to the claim occurred during the policy period.

Compare quotes. To get the broadest coverage at a competitive premium, compare quotes from several companies. Identify the companies offering E&O insurance in the marketplace and those including the firm’s specialty. If using multiple insurance brokers to obtain quotes, be sure to avoid duplication of insurance companies.

These steps start the due diligence review of the available E&O insurance policies. There are additional sections in each policy to evaluate, which include dealing with supplementary payments, exclusions, other insurance, cancellation and non-renewal, and notice requirements. Using the services of a knowledgeable insurance broker to provide a comparison spreadsheet may be very helpful for making an informed decision.

In states with mandated E&O insurance requirements, the scope of the policy’s coverage may be a part of the statutory or regulatory requirements. Before selecting any carrier’s policy, compare the policy’s coverage with that of the state’s requirements.

Mary Stark-Hood, JD, CFP, is president of the Hood Group, Inc., and serves as a consultant to the CCIM Foundation. Contact her at maryshood@comcast.net.

This article is sponsored by the CCIM Foundation @ www.ccimef.org .

Mary Stark-Hood, JD, CFP

Mary Stark-Hood, JD, CFP, is president of the Hood Group, Inc., and serves as a consultant to the CCIM Foundation. Contact her at maryshood@comcast.net

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