TOP 10 QUESTIONS TO ASK YOUR INSURANCE AGENT

ABOUT REAL ESTATE ERRORS & OMISSIONS COVERAGE

Errors & Omissions insurance protects your livelihood.  Its purchase should be a critical part of your business plan.  Make sure you do not sacrifice the quality of coverage over price and make sure your agent is experienced in selling this product.

1.   What “professional services” are covered?

You’ll want to know that services provided as a real estate agent, broker, property manager, leasing agent, consultant or counselor, appraiser, auctioneer, business broker, mortgage broker, notary public are included. Some companies extend coverage to those that serve as a member of a real estate board or committee.  Depending on the insurance company, it may be possible to purchase extensions of coverage for insurance agent or title agent activities.

2.   How is an “insured” defined?

This definition should include past or present officers, directors, partners, stockholders, employees and independent contractors.

3.   Will the policy provide “full prior acts” coverage?

Companies vary on the years of prior E&O insurance required before they will afford full prior acts coverage.  Prior acts coverage means that the policy will address covered claims reported during the new policy period, even if the act causing the claim took place prior to the effective date of the policy, as long as the insured did not have prior knowledge of the situation.  If you allowed your E&O insurance to expire at some point, are getting the insurance for the first time, or have not maintained continuous insurance the required number of years, you will have a prior acts retro-date.  The retro-date means that any claim which might arise during the new policy period will be excluded, if it is the result of an act which occurred prior to the retro-date.

4.   Are legal defense costs outside the limit of liability? 

A “yes” answer is the way to go as any claim expenses incurred by the insuring company will be absorbed by the insurance company and will not be deducted from your limit of liability.

5.   Do I have “first dollar defense”?

When you have first dollar defense, you only pay the deductible in the event damages are paid or a settlement is made.  Without first dollar defense, you are responsible for damages and defense costs up to the deductible amount.  The companies do charge more for first dollar defense.  It may be worth your while to consider the difference in pricing and the fact that even frivolous claims need to be defended.

 6.  Does the policy have an “awareness provision”?

This provision allows you to report potential claims (sticky situations).  If a suit develops after the policy expires, the insuring company that the potential claim was reported to will address the matter.  This is important as a new insuring company could deny coverage for the suit claiming you had prior knowledge of a potential claim before you placed insurance with them. 

7.   How are law suits handled?

You want to know that the law firm the Company assigns to handle your claim is well known and experienced in real estate matters.  Ask if the Company has attorneys on staff, in the event you have a situation that can be resolved with a letter or two.  It’s also a plus if you have access to a toll free hotline where insurance company staff is available to discuss a troubling situation.

8.    What are the Extended Claim Reporting Period Options available under the policy and how much do they cost?

When you retire, sell or merge your business, you’ll need to give serious consideration to extending the claim reporting period of your policy.  Many people assume that once they retire, if a suit develops, the expired policy will protect them, but this is not the case.  You must have E&O insurance in force at the time a claim is made; otherwise you have no coverage.  The length of time available under an Extended Claim Reporting Period varies as does cost.

9.   Will you provide a copy of the policy’s exclusions?

Make the time to look these over and question any you do not understand or wish to have clarified.  Inquire about the extent of coverage available for environmental  hazards and discrimination issues.  Usually the policy exclusions pertaining to these risks are amended by endorsing the policy for an additional premium.  Companies are excluding coverage for claims caused by fungi/microbes (mold).

10.  What is the “A.M. Best” rating of the insuring company?

A.M. Best was the first rating agency in the world reporting on the financial strength of insurance companies.  You want to know that the company writing your coverage is financially secure.