(November, 2013)

The following analysis is a general discussion of the sections commonly found in a Real Estate Brokers Policy. We will, where possible, include examples and relevant court cases.

For insurers and brokers that have access to coverage for a variety of professional situations, refer to the section on Professional Liability in The Insurance Marketplace, published by The Rough Notes Company, Inc.

WARNING STATEMENT

Some insurers may use such a statement at the beginning of a policy to emphasize that coverage is provided on a claims-made basis and/or include a notice that defense costs are provided as part of the policy’s liability limits.

WHO IS AN INSURED

The named insured in a real estate brokers professional (errors and omissions) liability policy is the organization or individual described in the declarations page.

When the named insured is designated as an independent contractor, coverage applies to its current and former agents, salespersons and employees, but only while those persons are acting on behalf of and within the scope of their duties for the named insured.

When the named insured is a corporation, insurance applies to any current or former executive officer, director or stockholder while acting for the named insured and within the scope of their duties. If a partnership, then any current or former partner is included for coverage with respect to work performed for the named partnership.

Others who are automatically considered as insureds by a real estate brokers professional liability policy are identified in either a persons insured or a definitions section. Many policies include heirs, administrators and executors among insureds. Some provide protection for franchisers, named partnerships and joint ventures. Each carrier will have its own definition of insured, so the applicable policy’s wording should be carefully evaluated to see how it compares with the any potential replacement coverage.

COVERAGE AGREEMENTS

The coverage agreement obligates an insurer to pay for damages that an insured causes through a negligent act, error or omission related to his or her real estate brokerage services. Any payments are subject to the specified limit of insurance and deductible (retention). The insurer also provides legal defense of a covered suit and pays for claim expenses.

It is important to be aware of how a particular professional liability policy handles claim expenses. While in some policies this cost is paid in addition to the stated insurance limit, other policies deduct the costs FROM the stated limit. This can have a substantial effect on the amount of coverage available for serious losses.

Note: This is one reason why a real estate brokers professional liability policy may include a warning statement (see above).

Related Court Case: Defense Arrangements By Insured Required Notice To Insurer

The policy definition of professional services and policy exclusions set the boundaries for covered activities.

Related Court Case: Real Estate Agents And Brokers Policy Held To Cover Claim By Former Employer For Theft Of Business By Former Associates

CLAIMS-MADE COVERAGE TRIGGER

Insurance protection is generally provided on a claims-made rather than on an occurrence basis. In other words, coverage applies to eligible incidents that are reported to an insurer during a current policy period. However, coverage may not apply if any person defined as an insured had knowledge of the reported claim prior to the current policy period. This takes care of a critical matter when dealing with claims made policies. When the coverage is written, did an insured already know of a claim or would a reasonably prudent person recognize a situation that would likely result in a claim? The wording is meant to avoid providing coverage for a claim that an applicant or insured already knows exists. In other words, insurers use policy language to prevent persons from buying insurance specifically to get coverage after a loss has occurred.

Insurer forms typically exclude prior acts. In other words, a professional liability policy written on a claims-made basis may use a retroactive date before which any acts that result or are likely to result in a claim are excluded. This action helps to insure that the new policy only handles claims that are made within a defined period of time. The underlying assumption is that previous losses should be the responsibility of previous coverage.

Note: Under certain circumstances, arrangements can be made for limited coverage for prior acts.

All claims made policies require that claims be reported to the insurer within the policy period or a specified time, such as 60 or 90 days, after the policy’s expiration or termination. An endorsement for extending the loss reporting period is available from some insurers.

Related Court Cases:

Law Firm's Failure To Give Notice During Policy Period When Claim Was Made Negated Coverage

Retroactive Date Identical To First Day Of Policy Effectively Eliminated Coverage For Prior Acts

LIABILITY LIMITS

Real estate brokers professional liability policies are subject to an aggregate limit of liability (appearing in the declarations). It is identified simply as limit of liability in policies that are not also subject to an each claim limit. The aggregate or single limit is the total amount that the company will pay for all covered claims made during the policy period and reported during the policy period or, if applicable, during an extended claim reporting period.

Some insurers incorporate a separate limit of liability in their policies for each covered claim in addition to the aggregate limit. Whether or not an each claim limit is included, two or more claims arising out of a single act, error or omission are considered a single claim.

Primary liability limits are offered by most insurers in amounts ranging from $100,000 to $5 million. Additional limits are available from some underwriters, on an excess basis, in limits up to $10 million.

The applicable limits represent the maximum the insurer will pay, regardless of the number of insureds involved or named in a lawsuit, individuals or organizations that make a claim, or the number of claims that are made.

Depending upon the insurance company, defense costs are provided either within the liability limit or in addition to the limit of liability. These costs are often equal to or greater than the amount of damages being sought by a claimant. This fact is a compelling reason for insureds to take advantage of any option that would handle such costs without affecting the maximum insurance limit. Otherwise, the effect of substantial defense costs should be considered when selecting a limit of insurance.

Note: Some insurers provide coverage under the basic policy which may be defined differently than professional services. If so, limits information for that coverage will also be explained in this section.

DEDUCTIBLE

The insured must pay all claims and expenses up to the amount of a deductible (retention), specified in the policy declarations, as a condition of payment by the insurance company. The deductible applies separately to each claim and is payable as claim expenses are incurred or a payment for claim is made.

Most insurers are currently writing real estate brokers professional liability policies subject to a minimum deductible such as $2,500. Options are available for selection of higher amounts, typically up to $25,000.

Alternative Dispute Resolution (ADR) – it is common for insurers to encourage insureds to take advantage of arbitration or mediation by offering either a full or partial deductible waiver when an incident via such methods. ADR usually results in substantial savings in time and expense when compared to litigation.

Related Articles: Alternative Dispute Resolution – Mediation

SUPPLEMENTARY PAYMENTS

Some policies may offer coverage supplements such as:

·         Loss of earnings due to appearance at trial, or disposition (usually subject to a per day limit and an aggregate) Coverage for legal fees and related costs due to investigation involving state licensing boards or local realtor boards, etc.

·         Coverage for expenses related directly to responding to allegations or statements which may harm the insured’s reputation (though such coverage may, instead, be offered as an option).

These coverages are usually provided in relatively modest amounts. Typically they:

·         Do not affect (reduce) the policy’s applicable liability limit(s),

·         Include per incident and policy term aggregate limits

·         Are not subject to the policy’s deductible/retention

EXCLUSIONS

Exclusions in real estate brokers’ professional liability policies are not uniform, but certain exclusions are found in the policies of most insurers; these exclusions may be considered fundamental. In general, there is no coverage for:

·         Bodily injury or property damage (including any resultant illness, disease or death).

·         Dishonest, fraudulent, criminal or malicious acts or omissions.

·         Discrimination on the basis of age, sex, race, religion, national origin or sexual preference. Some companies will provide defense and pay claim expenses for such alleged behavior until a specified sub-limit (such as $50,000) is exhausted.

·         Pollution (including testing, monitoring, clean-up or other remediation).

·         Real property developed, constructed or substantially owned by an insured. The exclusion generally does not apply to property acquired under a guaranteed sale contract, not held for more than a year and continually offered for sale.

·         Professional services for entities that are not listed/defined as insureds.

·         Activities involving property syndication, real estate investment trusts, limited partnerships or similar investments.

·         Activities of the insured as a mortgage banker (or broker or counselor), business broker, independent third party escrow agent, construction advisor, property developer, insurance agent or broker.

·         Federal ERISA or securities act violations and of rules, regulations or amendments related to them; violation of similar state or federal statutes or regulations.

·         Loss or damage involving any incidents of contamination, such as asbestos or mold (including testing, monitoring, clean-up or other remediation).

Other exclusions are applicable to policies written by various insurers, such as exclusions for claims arising from hold harmless agreements, personal injury related to advertising activities, failure to maintain proper insurance, money handling, insured vs. insured disputes and exclusions for payment of punitive or exemplary amounts.

It is essential that exclusions in a policy written for a real estate office be carefully checked with respect to exposures that may be encountered and that they be discussed with and understood by the insured. Additional coverage may be optionally available if needed. A carefully completed application is helpful in this regard.

Related Article: Real Estate Brokers Professional Liability Optional Coverages - Endorsements.

DEFINITIONS

There is repeated use of certain terms in real estate brokers’ professional liability policies which, because of their importance and specialized meaning, are emphasized in bold face type and defined. Some of the following are terms that may have special policy definitions.

Note: Please review the actual, applicable policy for defined term. The definitions used here are only illustrative.

Alternative Dispute Resolution─means an insured’s participation in either arbitration (typically non-binding) or mediation.

Asbestos─refers to asbestos, fibers, dust and other mineral wools.

Claim─means the receipt of a demand for money or services, naming one or more insureds and alleging a wrongful act.

Claim (defense) expenses─means fees charged by an attorney designated by the insurance company and other fees, costs and expenses incurred or approved by the company in the investigation, defense or appeal of a claim. Salary charges and expenses of the insurer's employees and officials are not included; neither are fees and expenses of independent adjusters.

Damages─means awards, judgments and settlements that are compensatory in nature, but does not include exemplary fees, fines or other punitive amounts.

Guaranteed sale listing contract─means a contract between the insured and the property seller, in which the insured agrees to purchase the property if it is not sold under the listing agreement within a specified time frame.

Personal injury─means false arrest, detention or imprisonment, wrongful entry or eviction, other invasion of private occupancy, or malicious prosecution; also the publication or utterance of a libel, slander or other defamatory or disparaging material, or a publication or an utterance in violation of an individual’s right of privacy.

Policy period─means the time period from the policy inception date to the specified expiration or cancellation date.

Potential claim─refers to incidents that have characteristics that will likely result in a claim or lawsuit and, therefore must be separately reported to the insurance company.

Professional services─means services rendered by the insured as a real estate broker, agent, appraiser, consultant, counselor or property manager. The term includes an insured's incidental service as a notary public or on a formal real estate accreditation, standards review or similar board or committee.

Salesperson─refers to natural persons performing duties as a realtor, agent or employee of the named insured. Such a person must be properly licensed to perform such work according to the applicable state’s laws.

Suit─means a civil (not criminal) proceeding held in a court of law. It often includes alternative resolution procedures.

CONDITIONS

Though there can be significant differences in actual terms and wording, typical real estate brokers professional liability policies include general provisions similar to those found in general liability policies. Here we list some common provisions, making note of several that are NOT usually found in general liability forms:

Actions Against the Company

Changes (Endorsements)

Claim Defense – Acts as an insurer claims-related rights statement combined with a Defense Obligation and Cooperation condition. Typically states that company has right to defend claims as it sees fit, but that obligation is ended by a settlement or exhaustion of limits. Further, it advises policyholder of his or her obligation to assist fully with defense efforts.

Appeals – States that the insurance company has a right to seek an appeal, but it does not have a duty to do so.

Note: It should be of interest to know that some lawsuits have been springing up that focus on an insurer having an obligation to appeal as an extension of its duty-to-defend obligation.

Examination of Books and Records

Other Insurance

Assignment

Cancellation or Nonrenewals

Renewals

Notice of Potential Claim – Some policies include a specific obligation to report incidents that may develop into a claim. Typically such policies may also have a matching defined term in their definitions section.

Policy Disputes – Requires that, prior to filing a lawsuit, the policyholder and insurer must participate in, generally, mediation and/or arbitration to settle a dispute. The provision will outline whether the parties are bound by any resulting decision and what rules or procedures apply. Some forms may provide full rules while others may refer to use of rules or procedures of a given jurisdiction.

Pre-Claim Assistance – As a mitigation effort, an insurer may wish to investigate a given incident that has not reached the level of a claim. If it does so, this provision indicates that any related expenses are borne by the insurer and does not affect claims defense coverage.

Loss Information – Obligates the insurer to provide the insured with copies of that insured’s loss activity (payments, reserves, expenses, etc.) upon the insured’s written request.

Related Claims – Advises the policyholder that all claims or reported incidents involving the same loss or situation will be treated as a single incident and that the first notice will be considered to be the controlling reporting date.

Conformance to Statute

Premium Payment

Recoveries

Liberalization

Territory