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.
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.
are tips for reviewing and selecting a real estate services E&O policy.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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
Stark-Hood, JD, CFP, is president of the Hood Group, Inc., and serves as a
consultant to the CCIM Foundation. Contact her at firstname.lastname@example.org.
This article is sponsored by the CCIM Foundation @