E&O Insurance: Good Investment or Wasted Profits?

I wouldn't go without errors and omissions insurance, some brokers say.

Those brokers firmly believe the cost is worth the protection they get against huge losses or even bankruptcy from a lawsuit gone bad.

Other brokers, however, don't think E&O is worth the cost. And some even say that being uninsured is a deterrent to lawsuits--few lawyers sue brokers who aren't insured and who can't afford to pay a judgment themselves.

To understand why some brokers wouldn't live without the shield of E&O and why others haven't--literally or figuratively--bought into the concept, TR Inc. interviewed two brokers on each side. Here are their stories.

Don't Sell a Home Without It

Greg Reynolds
President, Cascade Inc., REALTORS®
Sarasota, Fla.
Company data: We have three offices and 60 salespeople.
Carries E&O___X____ Doesn't carry E&O______

We pay $7,400 each year in premiums, and we charge our salespeople $25 per transaction to cover the cost.

Ever been sued?

Absolutely. In the '80s, we had three to four lawsuits a year. Most were what I'd call nuisance suits. They weren't big, generally less than our deductible, and they had to do with an air-conditioning or a refrigerator breakdown after closing. The suits have been settled or dropped when the party at fault was identified through discovery.

E&O as sales tool: I use E&O as a solicitation tool for new salespeople. We have an occurrence-based policy, which means that if you leave the company, you're covered for past transactions under our policy. Under a claims-made policy, you must still be affiliated with that real estate company to be protected. So going with another company and then leaving could be devastating in that case. Salespeople aren't as likely to leave our office.

Ever considered dropping coverage?

Those who operate without E&O are shortsighted, very shortsighted. One of my salespeople was involved as a buyer in a suit that went on for three years and cost $60,000 in attorney fees.

One suit could bankrupt you. We've been here 28 years, and I won't let one lawsuit run me out of business.

Bob Comerford
Vice president, ERA--Teachers Inc.
Herndon, Va.
Company data: We have 85 salespeople.
Carries E&O___X____ Doesn't carry E&O______

It's just a cost of doing business, and it's a protection for all parties. It protects the consumers, salespeople, and the company.

We probably pay about $5,000 in premiums each year. We do a lot of things to try to prevent claims. Our new salespeople aren't really writing contracts by themselves. They're overseen by veteran salespeople. And whenever there's a seminar on liability, we go, make copies of everything, and give them to our salespeople.

Ever been sued?

We've had people say they'd sue us, but we've never actually been sued in our seven years in business. But even if we had only one salesperson, I don't think not having E&O is in the best interest of the consumer or the company. What if your company actually did something wrong, and there was a major, major lawsuit? I'd hate to have a situation where we were negligent, and because we didn't have insurance, somebody wouldn't be compensated. Is that fair to the consumer? And what happens to the company? It just goes under.

What about this argument: E&O coverage makes you a deep pocket. Without it, you avoid lawsuits because attorneys know you can't pay a big judgment? I wouldn't follow that reasoning—I couldn't.

It's logical, but it's not worth the risk.

I Believe in E&O—for Others

John A. Johnson, CRS®
Owner, Johnson Realty
Huntington, Ind.
Company data: We're a very small company--my son and I. We sell primarily residential real estate, though in a town like Huntington, where there are 16,000 people, you have to be a jack-of-all-trades.
Carries E&O_______ Doesn't carry E&O___X___

I had it years ago when I had six salespeople. I dropped it after attending a conference where another broker said that he'd recently stopped carrying E&O insurance after weighing the possible cost of a lawsuit against the tens of thousands of dollars he was spending on premiums.

I came back and looked at my books. We were doing about 140 transactions, and our average sale was $40,000-$50,000. We were paying $2,500 a year in premiums, but we'd never had anything close to a lawsuit.

I thought the cost was absolutely ridiculous, but I kept it. When two of my top producers left to start another company, and I got rid of my part-timers, and my son joined me in the business, I dropped it because I believed, and still do, that brokers, especially those with small independent companies, were being overcharged for the risk involved.

Risk management philosophy: Everybody in this business makes mistakes. If something has happened, an omission of some sort, we take care of it immediately in writing. We try to face the consequences. I've never been sued.

Our state association also has a legal information services hot line, and I have an attorney I call and ask questions. Most important, consistent educational updates provide the best insurance a broker can have.

The future: I'm not opposed to E&O insurance. One carrier offers coverage that's enticing. But I've vacillated as to whether I want to pay $1,000 a year for the two of us.

Right now, it's very controllable between my son and me. But if we ever get beyond having just a couple of salespeople, there's no question I'll have E&O, because I can't always determine what salespeople will be doing.

Jerry Sagen
President, Sagen Co. Inc., REALTORS®
Eugene, Ore.
Company data: We currently have 10 salespeople.
Carries E&O_______ Doesn't carry E&O___X___

I know you don't have to be wrong or negligent to have a lawsuit against you and incur great expense. But my feeling is that if you have deep pockets, like an E&O policy, you're probably more apt to be sued than if you don't.

The real answer is diligence in the way you do your business. That's how you really can mitigate the problems and expense. And for smaller companies, it's easier to know your salespeople and stay on top of your transactions.

Ever had E&O?

Never. I've been in business since 1978. I was sued only once, but not for a transaction. It was for a property we'd listed that had a septic hole on it. The hole had just been dug and flagged, and an uninvited person walked across the property, fell into the hole, and broke his leg. His attorney sued the owner and named our company, too.

The judge threw out the case against us. We had $1,800 in legal fees. But, oddly enough, our office policy that covers slips and falls on our walkway covered those costs. The property was viewed as an extension of our office.

E&O philosophy: There's risk in not having it, but there's also a great expense. My guess is that not having it for 18 years probably puts me pretty well ahead of the game if I ever do have to pay a judgment.

I'm not anti-E&O. It's not as if I wouldn't ever consider it. But I don't really know very many horror stories of being sued--that's not to say it couldn't happen. So maybe the paranoia of lawsuits and all the things insurance companies tell brokers appeal to people a little more risk worried than I am.

Shopping for E&O? NAREndorses Program

If you're in the market for errors and omissions insurance, check into the REALTOR® Guard Professional Liability Insurance Program, endorsed by the NATIONAL ASSOCIATION OF REALTORS®.

Who's Covered

The policy provides claims-made coverage for negligent acts, errors, and omissions for which practitioners are legally liable while acting in these capacities:

• Agent, broker, or assistant
• Appraiser
• Auctioneer
• Business broker
• Consultant
• Leasing agent
• Loan originator
• Notary public
• Property manager

THE BASIC COVERAGE

• Prior acts--Unlimited coverage for qualifying companies with two years or more continuous E&O coverage and acceptable loss experience
• Defense costs--Paid in addition to the limits of liability
• Personal injury--Coverage included for libel, slander, and invasion of privacy
• Lockbox--Property damage up to $25,000

OTHER STANDARD FEATURES

• First dollar defense deductible waiver--If salespeople take four precautionary steps on each transaction, your deductible is cut in half and applies only to losses paid, not the cost of defending the claim.
• Aggregate deductible--Your out-of-pocket expense on all claims each year is limited to three to five times your deductible, depending on your company's size.
• Dishonest acts--Those not participating in or ratifying dishonest acts are covered for the dishonest acts of employees.
• Discrimination and steering--Basic coverage includes $10,000 for loss payment and $10,000 for defense costs; an optional $100,000 limit is available.
• Pollution--Except for radon, coverage is included for single-family residences and multifamily residences with nine or fewer units. Coverage is excluded for commercial properties.
• Principal residence--Salespeople who want to sell their own home can ask another salesperson in their office to handle the transaction, and that other salesperson and the company will be covered.