E&O insurance claims are complex and vary from case to case, insurer to insurer. While each situation is unique, there are certain scenarios that tend to result in more claims and more denials. Let's explore some common pitfall and hopefully get a better understanding of E&O insurance.
Top Reasons for E&O Insurance Claims Denials - Large Title
Agent Leasing Their Own Property
Explanation: Agents who lease their own properties without informing their brokerage are essentially performing licensed activities without the brokerage's oversight. Real-World Example: Sarah, a real estate agent, leased her own rental property to a tenant without informing her brokerage. When the tenant filed a complaint, her E&O insurance denied coverage, stating she acted outside of her role in that professional capacity without the knowledge of her broker.
Agent Selling Their Own Property
Explanation: It's challenging for insurance companies to determine what is covered when agents sell their own properties, as the roles of seller and agent can conflict. Real-World Example: Mike, an agent, sold his own property. After the sale, the new owner discovered a plumbing issue and sued Mike. His E&O insurance found it difficult to determine coverage due to the complex nature of the case.
Crossing the Line into Property Management
Explanation: Agents who take on responsibilities like arranging repairs can find themselves facing claims. Real-World Example Property Management: Emily arranged for some repairs to be done after her client moved into a rental property. When one of the repairs led to further damage, her E&O insurance denied the claim, stating she acted outside of her role in that professional capacity without the knowledge of her broker.
Crossing the Line into Construction Management
Explanation: Agents who take on the role of overseeing construction or repairs can find themselves in hot water if something goes wrong, as this falls outside the scope of a real estate license. Real-World Example: John, a real estate agent, took it upon himself to manage a home renovation for his client. He ordered work, reviewed work completion, and managed the contractors. When the renovation went over budget and faced multiple delays, the homeowner filed a claim against John. His E&O insurance denied the claim, stating that he had acted outside the scope of his real estate license by managing construction work.
What Insurance Companies Look For
Once a claim is opened, insurance companies primarily look for a complete Transfer Disclosure Statement (TDS), Seller Property Questionnaire (SPQ), home warranty, and home inspection. Additionally, insurance companies are increasingly considering giving favorable credit for higher usage of transaction coordinators, with a range of 50-75% TC usage being viewed positively.
Definitions in E&O Coverage
Prior Knowledge
If you have prior knowledge of a potential claim, your current insurance provider may deny the claim.
Example: The insurer finds in the transaction file an email from the agent to their manager stating "I know the buyer is mad about this, I hope they don't sue."
Hammer Clause
A provision in E&O policies that allows the insurance company to settle a claim for a certain amount, even if the insured disagrees.
Cooperation
The obligation of the insured to actively participate and assist in the claim investigation, settlement discussions, and defense procedures initiated by the insurer. This may include providing all relevant documents, attending hearings, or giving testimony, among other actions. Failure to cooperate can result in the denial of the claim by the insurance compny, as it hampers the insurer's ability to adequately defend, settle, or investigate the claim.
Claim Definition
A claim is defined as a demand for money or services.
Damages
The monetary compensation awarded to an individual who has suffered loss or injury due to the unlawful act or negligence of another party. Damages are intended to restore the injured party to the position they would have been in had the harm not occurred.
The Importance of a Good Insurance Broker
A good insurance broker is vital for understanding the nuances of your E&O policy.
Conclusion
Understanding the complexities of E&O insurance claims can help agents mitigate risks and better prepare for potential legal challenges. Increasing usage of transaction coordinators can also be beneficial, as it is an item that more and more insurance companies are considering for favorable credit. Transaction coordinators are professionals trained to manage the details and paperwork of a real estate transaction. Their meticulous attention to detail ensures that all aspects of the deal, from contract to closing, are handled efficiently and accurately. This reduces the likelihood of errors or omissions, which are common triggers for E&O claims.
By utilizing a transaction coordinator, agents can significantly improve the completeness and accuracy of the transaction file. A well-documented file is crucial when a claim arises, as it provides a strong defense for the agent and the brokerage.
In addition, maintaining ethical standards in a transaction is not just good practice but also essential for insurance coverage. It's crucial to have transparent and honest processes throughout the transaction. Any form of intentional fraud or deceit is not only illegal but is also never covered by any E&O insurance provider. Being truthful and maintaining good processing protocols not only builds trust but also minimizes the risk of legal complications that could lead to a denied insurance claim.
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