Editor's Note: This story is published with permission from Working RE magazine (www.workingre.com). It explains Claims Made insurance and how to avoid inadvertently losing your E&O coverage for past work and being left unprotected should a claim arise. The consequences to your business and personal life could be disastrous.
Understanding Your Errors & Omissions Insurance
What to Consider when Cutting Expenses
by David Brauner, Senior Broker OREP
As business slows, you may be considering cutting expenses by either letting your E&O policy lapse (not renewing) or by canceling mid-term. This is what you ought to consider before canceling or non-renewing your E&O insurance for any reason.
Most professional liability insurance for real estate professionals is written on a Claims Made basis. A Claims-Made policy protects an insured against covered claims or incidents that occur and are reported during the policy period. What does this mean? It means that if you face a covered claim today on a report you completed while insured in the past, you should have protection as long as the policy is in force.
Switching insurance companies typically is not a problem because most provide "prior acts" coverage to qualified applicants. As the name implies, prior acts maintains coverage back to the start of the original policy. The key is maintaining continuous coverage, which means having no lapse in coverage. If you make the switch before your current policy expires and can provide acceptable proof of coverage to the new carrier, in most cases, the new carrier will provide "prior acts." It's always best to ask your agent.
If you let your Claims Made policy lapse, however, it no longer covers past work, even if you were covered at the time. Think of yourself in this scenario: you receive a threatening letter from an attorney regarding a transaction completed two years ago while you were insured. A year ago, however, you dropped your E&O thinking you didn't need it or because you didn't want the expense. Now the claim is no longer covered and you are on your own.
Important Note: This discussion is about annual insurance policies. If you have "per transaction" coverage, you should contact your agent for specifics.
Continuous Coverage is Key
Switching carriers is not typically a problem, as most insurers provide coverage for "prior acts" to qualified applicants. However, if you let your current policy lapse before binding with a new insurer, prior acts is not guaranteed. Each carrier has its own guidelines regarding the issuance of prior acts to new insureds but most allow only a short window or grace period in which to bind new coverage after the original policy has expired. If you wait too long, you'll be out of luck.
The same rules apply when renewing with your current carrier. If you let your policy lapse by not renewing on time, you run the risk of losing all back coverage when your policy expires.
Dos and Don'ts for E&O Insurance
1. If you're renewing your insurance, make sure you do so before your current policy lapses. It is not a good idea to wait until the last minute to renew for the reasons stated. Most agents mail renewal notices months in advance and make attempts, prior to expiration, to ensure that policy holders do not expire unintentionally. If your agent does not, you have to be especially vigilant.
2. If you are changing carriers, give yourself enough time to do so before your current policy expires and make sure that your new carrier is aware you have insurance. Most applications ask whether you have current coverage for this reason.
3. When corresponding with your insurance company, always follow up to make sure your fax, email or letter was received by their office.
Conclusion
If you don't have E&O, today's climate should give you pause to consider it. As more and more homes suffer foreclosure, more and more deals are scrutinized closely for mistakes. Even if you do everything right, it does not prevent a lender or homeowner from trying to get their pound of flesh from everyone connected to the deal.
If your business is slowing, think twice about canceling your insurance to cut expenses. It may be a penny wise and a pound foolish should you face a claim from the past and have to bare the burden of your own defense costs. If you don't have insurance, the current climate makes it worth considering. OREP's minimum premium for appraisers and agents is around $455 annually (minimum premiums vary by state).
Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.
About the Author
David Brauner is Senior Broker at OREP, specializing in E&O insurance for agents, appraisers, home inspectors, mortgage brokers and other real estate professionals. Coverage in 49 states. www.orep.org (888) 347-5273. info@orep.org
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