Switching to a Firm E&O Policy - A Guide for Brokers

From individual to Firm E&O

In the states where errors & omissions (E&O) insurance is mandatory, many real estate brokerages are looking at the option of a "firm" E&O policy to replace the individual and excess real estate E&O policies their brokerage and agents have purchased before.

If you or your firm is making the switch to a "firm" real estate professional liability insurance policy, this blog describes some of the most important E&O insurance tips and best practices for brokers (and also agents) as you make this transition.

If you are unfamiliar with the pros and cons of individual, excess, and firm E&O policies, check out our blog article defining and comparing these coverages. If you are looking for a more general guide to E&O, you'll probably want to take a look at our comprehensive resource on E and O for real estate broker/owners.

Explain Coverages

Many brokers simply tell their agents that the firm provides E&O coverage without fully explaining what coverages they have, what that means in the event of a claim, etc.

We recommend that you call a team meeting to have your firm E&O policy insurance agent answer questions about the policy. This is also a fantastic opportunity for your insurance agent to share risk management tips and claims examples to help agents avoid claims throughout the year.

If the brokers/owners of your firm have made the decision to increase fees because the firm is now providing/paying for E&O coverage, those questions usually come up in these discussions as well.

Be sure to let agents know they have coverage under a firm-wide policy only for transactions they perform on behalf of the insured entity. 

Send necessary Certificates to the state/Franchise

Many mandatory states for E&O (like Tennessee or Kentucky) have a dedicated process for sending proof of E&O coverage to the real estate commission when using a provider other than the state group program.

When all of the agents at a brokerage are covered under  a single firm policy, the broker typically sends a certificate or spreadsheet to the real estate commission. So know your state's process, put it on the calendar for each year before renewal, and keep the relevant forms handy throughout the year as you onboard new agents.

Of course, if you are a real estate franchisee, you'll want to send your E&O certificate of insurance to your real estate franchise.

Let your agents know they might need tail coverage

If you are moving from individual E and O insurance policies to a firm E and O policy, your firm policy (if done correctly) will likely retroactively cover all transactions performed on behalf of the insured firm back to inception. Once again, if done correctly, this should provide retroactive coverage at least up to your previous E&O limits if you previously maintained continuous E & O coverage.

That said, your firm policy will not cover transactions done at a different firm in the past that your agents might have worked at when they had their individual policy. In order to be able to report claims in the future that might arise from those past transitions at a different firm those agents will likely need to purchase "tail coverage" from their individual errors & omissions insurance provider.

The same is true for agents coming to your firm in the future if they 1) previously had an individual E&O insurance policy, and 2) were an agent at a different firm prior to joining yours.

We recommend that brokers outline this basic E&O information in their handbook or procedures manual.

Report Claims

The most common reason why real estate errors and omissions claims are denied is that individuals fail to comply with the reporting guidelines for claims.

Keep these facts in mind for reporting E & O claims:

• Don't attempt to settle a claim on your own. If you fail to report the claim within the specified timeframe or try to settle something before reporting it, your insurance company will probably deny the claim.
• If you're unsure whether a situation constitutes a claim, consult with your principal or managing broker, and/or insurance company and insurance agent.
• An E & O claim does not necessarily equal a lawsuit. Threats, demands, and other similar situations may also qualify as claims under the reporting requirements outlined in your policy.
  
  

Deductible waivers

Several quality firm real estate professional liability insurance policies have a deductible waiver written into the policy language. Generally, policies will outline several conditions such as a home warranty being signed/waived or an inspection performed/waived. If those specified conditions are met on a transaction and a claim comes up, you can provide evidence to your insurance carrier and they will waive the deductible up to a certain amount.

Be sure to communicate those requirements to your agents so that as many transactions as possible meet the requirements for a deductible waiver.

Don't forget about cyber insurance

While this isn't specific to firm E&O, it is always important that real estate E&O of all types generally does not cover cyber claims. The best of real estate E&O policies still only have limited coverage.

While making the transition to a firm policy, this is a great time to go over cyber coverages real estate firms need. You can also start creating a budget category for a stand-alone cyber insurance policy. 

If you want to learn more about cyber liability coverage, you might like our comprehensive guide to cyber insurance insurance.