Whether you explicitly perform Property Management services, or you provide property management services as part of a transaction, there are significant exposures to E&O claims resulting from bodily injury or property damage. Keep in mind that if you are working with REO properties, Foreclosures or Short Sales, you are performing property management services.
Most Real Estate E&O insurance policies include some coverage for bodily injury and property damage claims, but the scope of that coverage varies from policy to policy. Some E&O policies only cover bodily injury and property damage claims resulting from an open house or bodily injury and property damage resulting from the use of a lockbox. The broadest of policies provides bodily injury and property damage coverage that applies to all covered services.
Examples of bodily injury and property damage claims are frozen pipes in a foreclosure property. The bank asked you to turn off the water and now you must replace the floor. Items that a former tenant says that you threw away during a trash out that are now incredibly valuable. Bodily injury claims can result from a rental property with mold infestation or a client that falls through the rotten deck.
In many instances, these types of claims will be covered under the property owner’s insurance policy, but in the absence of the homeowner’s policy, you will be held responsible for the claim. Your General Liability policy excludes coverage for claims arising from the performance of professional services, so coverage for bodily injury and property damage claims is a very important part of your E&O policy.
BI/PD stands for Bodily Injury and Property Damage. Most Real Estate E&O policies include some measure of BI/PD coverage, such as limited lockbox coverage or open house coverage, but the broadest E&O policies include BI/PD coverage across the policy form. So in addition to coverage for your use of a lockbox or hosting an open house, the BI/PD coverage extends to property management services, REOs, foreclosures and relocation services, as well as residential sales.
The reason the E&O policy extends to provide coverage for Bodily Injury and Property Damage is that most General Liability insurance policies exclude coverage for claims arising from professional services. That said, most E&O policies do require you to have a General Liability policy in force before your E&O BI/PD coverage will respond to a claim.
So if you are listing a foreclosure and don’t turn off the water, and the pipes freeze, the General Liability policy won’t respond and there is no homeowner’s policy to make a claim under. The same applies if you lease an apartment and the tenants then become sick due to mold in the unit. Everyone is familiar with the nightmare scenario when the agent fails to advise the buyer of the rickety stairs and the buyer ends up injured or the foreclosure cleanout that occurred at the wrong house. The inclusion of BI/PD coverage in your E&O policy addresses these situations before a lawsuit is filed so when you are reviewing your E&O insurance policy be sure to check the coverage terms that apply to the BI/PD coverage.
What should you do if a convicted sex offender, out of jail for 10 years, applies to rent one of your listings? Ask the owner of the property?… but what if he/she does not give you a clear decision To Rent or Not to Rent? Does approving this application create additional liability for yourself and your agency?
We know that the Civil Rights Act (Fair Housing Act) of 1968, Sec. 804. [42 U.S.C. 3604], and all subsequent amendments, does not identify sex offenders as a protected class like race, color, religion, age, gender, but does that mean you are cleared to disqualify the candidate? Does the public registration requirement of sex offenders provide adequate notice to the community to obviate any liability? All 50 states require convicted sex offenders to register their residency. Many states have laws that restrict residency within a certain distance of a school or daycare based on their conviction tier. Here are the 3 levels:
Tier 1 offenders: Must update their whereabouts every year with 15 years of registration
Tier 2 offenders: Must update their whereabouts every six months with 25 years of registration
Tier 3 offenders: Must update their whereabouts every three months with lifetime registration requirements.
Stay tuned for the conclusions on this topic…we are working to figure out an E&O insurance coverage position on this topic but in the meantime here are some links to educate yourself on this topic:
Construction/Development coverage extends the E&O policy to provide coverage for the sale of residential property that has been built or developed by an insured agent or broker. The practice of building spec homes has become common in the real estate industry and purchasing Construction/Development coverage will address the specific risk involved in the sale of this type of property. Defending an E&O claim where the agent is also the builder is challenging at best.
The basic E&O policy excludes the sale or property in which an insured agent or broker has an ownership interest, and includes several exceptions to the exclusion, with specific caveats that must be satisfied for coverage to apply. With Construction/Development coverage to apply, the policy usually requires that there must be a specific separate business that does the construction, so an individual cannot be the builder. The policy will also require a specific written disclosure of the relationship of the agent, insured and builder/developer. Keep in mind that every insurer words the coverage a little differently, so read the policy thoroughly.
Keep in mind that while many agents will say that that are not builders, but they sell the houses that their husband or wife builds, they own the construction company as community property. So when you are completing the E&O application and you see the question regarding the sale of property built or developed by an insured, be sure to consider the agents that are selling spec homes and whether or not that agent has an ownership in that construction company.
There really is no such thing as a “Hammer Clause”, but that is the common term for the Consent to Settle Clause in your E&O policy. The Consent to Settle clause dictates what the insurance company will do when the company and a party making a claim against you agree on a settlement, but for whatever reason, you decide not to settle. Remember, the insurance company cannot settle a claim without your agreement, so there is a provision in the policy that determines what happens if this situation occurs.
There are various reasons why this might come up. The insurance company is interested in settling claims with the least amount paid in attorney’s fees and damages and that is not always what is best for you as an insured. Think about a transaction where you did your job perfectly and your client turned around and sued you for some nonexistent undisclosed defect in the property. The insurer might want to offer the claimant $5,000 to sign a waiver and drop the suit rather than hire an attorney and defend you. Some agents, in the interest of time and aggravation, may agree to settle. But you have the option to fight the claim. This is where the Consent to Settle clause comes into play.
When an insured refuses to agree to a settlement, the policy dictates the amount that the policy will pay over and above the amount that the claim could have been settled for. A standard Consent to Settle limits the insurer’s liability to the amount that the claim could have been settled for plus legal fees up to the time the settlement offer was made. Some policies have what’s known as a “Modified Hammer” in that the insurance company agrees to pay up to what the claim could have been settled for plus 50% of the damages in excess of the original settlement offer. The important thing to remember if you are faced with this situation is that, by refusing to settle, you are taking on the chance that a court or arbitration may find in the favor of the claimant, and you could end up paying out of pocket for damages that could have been avoided.
One of the options you have when buying E&O insurance is Defense Outside the Limit (DOL) or Defense Within the Limit (DWL). It is important to understand this option clearly because this will impact coverage under your E&O policy significantly as well as the premium charged.
Defense Outside the Limit, which is sometimes referred to as Claims Expenses Outside the Limit provides substantially more protection than Defense Within the Limit which can also be referred to as Claims Expenses Inside the Limit. The difference is how the expenses incurred defending you or your agent against an E&O claim impacts your limit and what you have available to pay in damages, if any, when that claim is resolved. Under either option, DOL or DWL, any costs incurred defending a covered claim will be paid by the E&O policy, after any deductible is paid, but with the DOL option the payment of these costs will not reduce the limit of liability that you have available to pay damages that may be awarded to the person making a claim against you. If you choose DWL any costs incurred will reduce the amount you have available under your policy to pay damages.
As an example consider a claim involving a buyer that claims an agent failed to disclose a leaky basement. The insurance company hires an attorney to defend the agent and between information discovery and depositions the attorney’s fees and costs amount to $100,000. It becomes apparent that the agent should have known and disclosed previous water infiltration problems with the house and the claimants are awarded $200,000.
Assuming the agent’s policy has a $250,000 limit, the E&O policy that is written with Defense Outside the Limit will pay $100,000 in attorney’s fees and $200,000 in damages. Under this same claim example if the agent had a DWL policy the $100,000 in attorney’s fees would be covered under the E&O policy but only $150,000 in damages would be covered. The difference is that with DOL the attorney’s fees are covered IN ADDITION TO the limit of liability available to pay damages.
It is also important to note that the aggregate limit of liability is the maximum amount available to pay damages for any one policy period. So, while unlikely, it is possible to have one or more claims during a policy period that exhausts your policy limit