Firm Vs. Individual E&O Coverage

Real Estate E&O: individual, firm, or excess?

Real estate E&O is a complicated insurance product that many real estate agents (& insurance agents) do not fully understand.

You'll see errors & omissions insurance called different things: real estate "professional liability," "errors and omissions," "E&O," and "E and O". Just know they are all different terms for the same thing.

That said, the terms "group E&O", "firm coverage", "excess coverage", and "individual E&O" are not all the same.

So what are the pros and cons of the different types of real estate errors & omissions, and which one is best for your agency? Let's start our answer by defining the terms.

"firm" E&O Coverage

A real estate "firm" errors & omissions policy covers the legal entity, as well as all of the agents, brokers and independent contractors doing business on behalf of that firm. Everyone is covered under a single policy for transactions performed at that firm.

This type of E&O policy is widespread in states that do not require real estate agents to carry E&O. That said, even in mandatory states like Tennessee, Rhode Island, or Colorado, firm E&O policies are still common. 

Firm policies traditionally have a $1 million limit per claim, and $1 million aggregate limit. For agencies that must carry 1 million dollars in E&O coverage limits because of a franchise requirement, this can be an attractive option.

Firm coverage should not be confused with "excess" E&O coverage. We'll discuss excess coverage below, but the short version is that an E&O excess policy serves as an umbrella as it were to individual errors and omissions policies. True firm coverage does not have underlying policies.

"individual" E&O Coverage

15 states currently require that real estate licensees carry E&O coverage. These states are Louisiana, Idaho, Montana, New Mexico, Nebraska, Tennessee, Mississippi, Rhode Island, Wyoming, Alaska, Iowa, Colorado, South Dakota, North Dakota, and Kentucky.

States that require E&O must offer E&O. That is one of the purposes of these state's group programs: to offer to every real estate agent what the state requires. This coverage is in the form of an individual E&O policy, that covers the licensee. There are a couple of other insurance companies other than the state program which also offer individual E&O policies. Individual policies generally have liability limits of 100k per claim, although increased limits are often available.

An excess policy is an umbrella policy on top of the individual underlying policies. Firms often purchase an excess policy to meet franchise or contract requirements (usually $1 million limits). The individual underlying policy is primary, meaning the limit is essentially a large "deductible" for the excess policy. You want to make sure that your individual policies are with the same insurance company as the firm's excess policy. There might not be coverage under the excess policy if you don't have policies from the same insurance company.

A quick note: sometimes a firm will purchase an "individual" policy on the legal entity of the firm. This is not to be confused with a firm policy. The firm's "individual policy" covers the firm only, and often has lower limits. In contrast, a true firm policy will cover not only the legal entity, but also all agents, brokers & independent contractors doing business on behalf of that firm.

Pros & cons: Choosing your Best E&O option

Which E & O policy is better? It depends!

Pros of Firm policies

Generally speaking, firm policies are more robust in coverage than an individual policy. Firm coverage does vary greatly, depending on the insurance carrier, policy definitions, endorsements, and exclusions. But many firm policies have broad coverage and higher limits.

Because E&O policies of all types vary so widely, do check and see if your policy has adequate coverage for contingent bodily injury & property damage, the sale or purchase of agent-owned properties, or property management (a few of the most important examples).

With a firm policy, the managing/principal brokers & brokerage owners can choose the policy they believe best covers their agency. Many principal brokers prefer being able to fully research and purchase coverage so they can sleep better at night with so many transactions going on under their brokerage's roof.

The total cost of individual policies for dozens or hundreds of agents in a mandatory state is often higher than the cost of a single firm policy. For agencies in this situation, a firm policy can be quite attractive.

In mandatory states, agencies can send certificates to the state certifying that licensee's have the state's required coverage through the firm policy. Firm policies generally will also satisfy franchise or contract E&O requirements.

cons of Firm policies

E&O policies are generally claims-made policies. If a firm is switching from individual/excess policies to firm policies, many firm policies will provide prior acts coverage, either back to the inception of the firm, or back to a retroactive date. So far that is a pro, not a con!

If an agent joins a brokerage that has a firm policy, they now have coverage for transactions they perform at the new firm. But they don't necessarily have coverage for transactions they performed at an old agency if they used to have an individual policy. An agent in this situation might want to purchase tail coverage from their individual E&O insurance company. Tail coverage, or an extended reporting period (ERP), allows agents to report claims arising from real estate services they performed at another agency while they carried the individual E&O policy.

Though agents should be made aware of this, it does make sense. No brokerage would want their firm policy to cover just any transaction an agent did years ago at a different firm.

The great news is that if an agent leaves an agency that has a firm policy, they are still covered under that agency's firm policy for any real estate services they performed while at that firm.

pros of individual policies

Individual policies are often more cost effective for very small agencies that cannot afford the minimum premium of a firm policy (usually around $1,000). That said, if these small agencies are part of a franchise, they might be required to carry million dollar limits. In that case, a firm policy might be most cost effective.

With an individual policy, you also don't have the issue of tail coverage when changing firms, since individual policies follow the agent.

In mandatory states, the state program offers coverage to all licensees in the state regardless of claims history. For an agent with a lot of claims, an individual policy with the state guaranteed issue program might be the only option. Guaranteed issue means the policy is available to all agents without denying coverage based on underwriting questions. This is great for those with a history of claims, but other companies that are allowed to ask underwriting questions are often able to offer better rates & coverage to those who have not had claims.

cons of individual policies

Many individual E&O policies have many coverage exclusions and low limits. Some companies offer an array of endorsements that can be added for additional premium. These can be expensive by the time each agent at a given firm each buys the needed coverage endorsements. If you end up renewing with your individual E&O insurance company, we've put together some best practices and tips in this blog.

For firms with dozens, hundreds, or thousands of agencies, a firm policy might be less expensive, and will probably offer much broader coverage. Firm policies are generally rated based on a firm's gross commission income rather than agent count.

For firms doing property management, auctions, appraisal, leasing, commercial real estate, selling property they or a spouse developed or constructed, or if agents are selling property in which they have an ownership interest, a firm policy will likely have much more adequate coverage. Coverage for contingent bodily injury & property damage (BI/PD) might also not be available with adequate limits on an individual policy. 

Your agency!

All this means that the the type of E&O coverage your firm needs depends on your revenue, agent-count, coverage wants and needs, and the types of real estate services your firm provides.

As you can see, with so many variables and nuances, it is critical to have a knowledgeable agent in your corner who works with real estate E&O insurance policies every day.

Want to schedule a conversation to see if we are that partner for your real estate agency?