Errors and Omissions (E&O) Insurance should be a vital component of any business, such as real estate or mortgage practice, as a risk management tool. If you have a professional service business, errors and omissions insurance coverage is integral to protecting your business. Even if you or your associates have not made a mistake, accusations of negligence or the failure to perform professional services can be alleged and the basis of a costly lawsuit.
In today’s marketplace, there are a large number of carriers that sell a variety of errors and omissions insurance products. An individual seeking E&O coverage is often confused and ends up with questions and some common misconceptions about insurance coverage. Let’s take a look at some of the misconceptions and issues.
Issue: You will lose your past transaction coverage (prior acts) if you move to a new carrier. This concern, in most situations, simply is not true. Moving your-claims made coverage from one carrier to another will not result in losing coverage for prior acts (past transactions). Provided that there hasn’t been a gap in coverage, the new carrier should transfer all prior coverages with the same prior act or retroactive date from the existing policy. This should be the case regardless of how many times you change carriers. As a caution, you should verify that your new policy will include coverage for past transactions and include the prior acts date from your expiring policy
Issue: All E&O policies are basically the same and, as a result, you should buy the least expensive policy available in the market. Price does not dictate whether an E&O policy is tailored to meet the specific needs of your business. There are many coverage options, many of which deal with today’s technology-based business environment. When shopping for an E&O policy for your business, try to consult with a competent agent who is knowledgeable about errors and omissions coverage options to find a policy meeting the specific needs of your business.
Issue: Obtaining prior loss history from your prior carriers is a difficult task so you should stick with your current carrier. Many businesses put their errors and omissions policy out to bid each year. The bidding carriers will require a prior lost history. You should be able to acquire your loss history information from your carrier in a few days, as well as from your prior carriers. Loss details are usually universally maintained and should be easy to get. However, you as the insured will have to make the request since carriers will not release information to an unauthorized party.
Issue: Once you have errors and omissions insurance, you can cancel it or let the policy lapse and still be covered for acts that occurred during the term in which the policy was in place. This is totally incorrect. The claim must be made while the policy is in force, even if the claim relates to prior acts. All prior acts claims, to be covered, must not have been committed before the retroactive date. Most E&O policies are written on a “claims made and reported” basis. This means that claims must both occur on or after a retroactive date and be reported in the policy period or, in some cases, during an extended reporting period (usually 12 months), which is purchased separately. Coverage for claims occurring before the first date you were insured typically are not covered and claims occurring after the policy period are also typically not covered. The carriers want policyholders to maintain continuous E&O coverage.
Issue: If you conduct your business as a corporation, you are not shielded from personal liability for your negligent acts or those of your employees. Professional liability risk, unlike credit risk, is a personal liability tort. This means that a corporate shell cannot insulate you as an individual from litigation relating to your own negligence or the negligence of those you supervise. As you are probably all too well aware, today’s rapidly changing real estate and mortgage markets are increasingly under scrutiny for failing to properly advise clients of their options, including, for example, the effect of changes in interest rates, ability to refinance and the ability of a property to sell in excess of a mortgage amount.
Issue: If you do not have errors and omissions insurance, it’s no big deal because the odds of getting sued are minimal. Although you may never have been sued before, you should not assume that you never will be sued. Everyone makes mistakes. And business today is conducted in a very litigious environment. As a result, you are always exposed to potential legal claims. You don’t even have to make mistakes to be sued – many lawsuits are brought when the professional has not even made a mistake. As a risk management tool, errors and omissions insurance is a critical tool to ensure that your firm is not a risk for expensive legal fees to defend an action or against potential judgments or indemnity payments due to a lack of insurance coverage.
Don’t be caught without errors and omissions insurance coverage. Your business is too valuable to put at risk when such insurance coverage can protect your business from either warranted or unwarranted legal claims. It provides protection from both the legal costs associated defending an allegation and from the cost of an ultimate indemnity payment based on a financial loss of another party. Either one of these costs alone has the potential to bankrupt you or your company.
As a final thought, you and your insurance advisor should identify the areas of risk that are particular to your industry. For example, a real estate broker as a part of their risk management program would want insurance coverage for such issues as in addition to typical error and omissions coverage:
Appraisals or CMAs
Leasing and rental activities
Consulting on real estate issues
For example, a mortgage broker, as a part of their risk management program, would want insurance coverage for such issues as in addition to typical error and omissions coverage:
Coverage for innocent insureds (dishonesty coverage)
Coverage for independent contractors
Coverage for pollution-related claims
Coverage for claims relating to discrimination
Ability to purchase an extended reporting endorsement
OnlineEd blog postings are the personal opinion of the author and not intended as legal or other professional advice. Be sure to consult the appropriate party when professional advice is needed.
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