Protect yourself

What you need to know about E&O.

by Marty Kramer   When Charles de Wetter contacted his errors-and-omissions insurance provider about decreasing the deductible on his firm’s policy, the initial response was favorable. The insurance company quoted a premium increase of only 3% to make such a change. The situation then unraveled. Six weeks later, the company sent a letter of nonrenewal to de Wetter, president of Coldwell Banker de Wetter Hovious in El Paso.

"In the last five years, we’ve had about 9,000 transactions," says de Wetter, "and we’ve had to defend five lawsuits during that time. I thought that was a pretty clean record."

Like many other real estate professionals throughout Texas recently, de Wetter found himself scrambling to find decent coverage that the firm could afford.

In a recent Internet-based poll, 68% of TAR members surveyed replied that their premiums increased the last time they renewed their E&O policies. About a quarter of respondents said their deductibles had risen. De Wetter was facing both scenarios. His original E&O provider rescinded its letter of nonrenewal and sent a quote that would raise the premium more than 50% while quadrupling the deductible. After applying with half a dozen carriers, de Wetter was finally able to obtain a policy with a premium slightly above his existing cost and a much higher deductible. "It’s a real reduction in the type of coverage we were able to get previously," he adds.

What’s going on here?

One reason for the jump in premiums has little to do with insurance itself. "Insurance companies reinsure almost every exposure they have," says Ken Capelle, state director for Real Estate Support Systems Inc., a company that represents real estate firms looking to purchase E&O insurance. "The reinsurance industry has caused a great deal of havoc to coverages and rates we’ve had in the past because they are trying to recoup their losses." Capelle explains that while many of the losses suffered by reinsurers stem from recent natural disasters and the events of Sept. 11, a great deal of the shortfall comes as a result of reinsurance companies’ investments held in the slumping financial markets.

To turn their fortunes around, the reinsurance providers are raising rates, reducing coverage, and increasing deductibles. "More importantly, they are only writing those risks perceived as good risks," says Capelle. And to many companies that provide E&O, the entire state of Texas is seen as a poor risk. "In January, I used eight insurance companies," Capelle says. "We’re down to four. The others have left the state."

Capelle believes that the Deceptive Trade Practices Act and tort laws in Texas do not make it a favorable place to write insurance. De Wetter agrees. "I know we had DTPA reform a few years ago, but I think there’s a ways to go," he says.

Capelle has seen numerous cases he considers frivolous dragged out by attorneys. "If you can resolve a case within a year, you’re doing very well," he says. He asserts that most of the money paid by insurance companies goes to legal defense—not to claimants. "That’s why the insurance is so expensive. The system is broken." Capelle notes that policies in New Mexico and Oklahoma carry more coverage for lower premiums. He thinks the situation in Texas will worsen unless the legislature addresses the problem.

What to do?

As the market for errors and omissions continues to change, real estate firms are taking measures to make the best of a difficult situation. "It’s a much more detailed and focused effort on our part to measure policies against one another than ever before," says Robin Mueck, president and CEO of Heritage Texas Properties in Houston. "You have to do a lot of homework to understand how those policies change from year to year."

Mueck, who has been involved in risk reduction not only for her firm but also with the Houston, Texas, and national associations of REALTORS®, recommends that anyone shopping for E&O insurance make certain they obtain a policy with components that mirror the activity of the company and its agents. For example, a residential real estate firm that also handles some commercial transactions should find insurance that will cover damage amounts and types of exposures—like large environmental claims—that are possible with commercial deals.

She also stresses the importance of examining policies for items that previously were but no longer are covered. Environmental, fair-housing, and ADA claims are examples of areas that many insurers now provide only as add-on endorsements to policies.

Other important coverages to consider are prior-acts coverage, which protects you from events that occurred prior to the beginning of the current policy; coverage on sales of agent-owned properties; and innocent-party coverage, which would defend a firm in an instance where one of its agents made an intentionally false statement that the company didn’t know about.

Another important factor that de Wetter points out is who will actually represent you in a claim. "Make sure you can use the lawyer you want to use," he says. "When you’re dealing with a lawsuit, you’d rather have someone you have a personal relationship with whom you can call and talk to whenever you get paranoid, which is not that infrequent."

After his latest renewal experience, de Wetter also recommends starting early. "I would communicate with your existing carrier at least 90 days out—maybe sooner."

To insure or not to insure …

Texas does not mandate that brokers or agents carry errors-and-omissions insurance. Most franchisors, however, require their franchisees to obtain and show proof of specific levels of E&O insurance. Owners of independent companies who choose not to have the insurance feel they are either sufficiently self-insured or are willing to assume the risk. And the risk can be great. A lawsuit can force a business into bankruptcy, and, depending on how a business is structured, the principals’ personal assets may also be in jeopardy.

Agents can purchase their own errors-and-omissions insurance if their brokerage does not carry any or the agent feels the need for higher levels or different types of coverage. Capelle recommends that an agent discuss his situation with an attorney to determine how to best protect assets and whether an E&O policy makes sense.

Some agents and companies that don’t do a high volume of business purchase E&O insurance on a per-transaction basis. Anyone using this type of insurance must be diligent about reporting every transaction to ensure coverage.

Don’t just insure risks—avoid them

Heritage Texas has taken an aggressive position in educating agents and employees. "We offer a number of courses specifically where we see potential pitfalls," says Mueck. Not only does that help the firm avoid lawsuits, but additional education and designations has helped them qualify for a discounted premium.

Coldwell Banker de Wetter Hovious also believes strongly in education, including an in-house course with risk-management topics that firm Vice President Rob Hovious teaches, as well as bringing up the topic at most sales meetings.

Communication, de Wetter says, is key. The more open the lines of communication are with customers and clients, the less often problems would grow into lawsuits. Of course, proper use of forms and contracts also reduces risk. "We use a notice to purchaser that’s a separate document our attorney created that deals with a significant number of issues a buyer should be aware of in purchasing a piece of property," he says. "We’re in the process of creating a notice to seller as well. …We’re doing everything we can to cover ourselves."

Another key facet of risk-management for brokers and agents is establishing a clear understanding of their relationship. Mueck suggests that an agent and broker discuss how a claim would be handled should one occur and make clear how the parties will split premium costs and payments of deductibles and damages. "In the absence of an agreement, you’re going to come up short," says Mueck.

Capelle adds that brokers and agents should document as much as possible of their business activities and relationships. "You can rely very heavily on documentation for your defense," he says.

Photo © PictureQuest.

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