Your Worst Nightmare
Imagine answering the doorbell some Saturday morning only to be met by a process server who is prepared to deliver a blow that has the potential to wipe out your life savings and create havoc and stress for months or even years to come.
You open the registered envelope and find yourself faced with a lawsuit on a property you sold 18 months ago while under a broker who has since sold his company. No problem. You paid your Errors and Omissions (E&O) insurance premium on that transaction so you’re looking at the most maybe a $1,500 deductible. You contact the current Broker/Owner of the brokerage you were working for when you participated in the transaction and ask that legal counsel be provided, as detailed under your E&O insurance – and the answer is:
“Sorry, you’re not covered. The past owner did not purchase an Extended Reporting Period (ERP) policy and all prior transactions are no longer covered. I’m afraid you’re on your own.”
What if you were a top producer and had hundreds of transactions with the same broker? What if that broker has filed bankruptcy? Unfortunately this is a TRUE story that affected a real agent and his entire family. But the bigger picture is even worse.
By not purchasing the ERP insurance necessary to cover prior acts, the Broker/Owner has left over 20,000 transactions open to lawsuit without any coverage for the agents involved.
And the worst part - there is no requirement that agents under that broker be informed of their “uninsured” status.
How could this happen?
Unfortunately this is not an isolated case and there are literally thousands of agents across the country that are potentially in the same position. Consider a few of the facts:
· There is no grace period for renewal of an E&O policy.
· If the broker is negligent in renewing their E&O policy, doesn’t purchase prior acts coverage or doesn’t renew the policy, all prior acts are not covered.
· In non-mandated states the E&O carrier can choose to discontinue coverage and it is not mandatory for agents to be notified of any changes in the policy or scope of coverage, even though the licensees are paying for the policy and the loss of coverage may financially impact them.
With the fallout of the subprime debacle we can be certain that there are folks out there that have lost their home and are looking for someone to blame. If you consider the fact that somewhere in the neighborhood 1 in every 452 homes in the country is in some stage of the foreclosure process you begin to see the magnitude of the potential problem. And after the initial shock of foreclosure is over, where do you think they are going to start looking for satisfaction? I seriously doubt the mortgage broker is the first name on their list.
The potential expanse of this problem in the industry is staggering as the number of brokerages sold, merged or closed continues to grow every day and tens of thousands of agents are being affected – most without even knowing it. You need to know where you stand.
In Trend #10 of the 2009 Swanepoel TRENDS Report – The Good The Bad & The Ugly – we took a long hard look at this potentially devastating issue and provided some background information as well as some suggested action to take. This problem is not going away and only the foolish will choose to ignore it. You can obtain your copy of this years Report by visiting www.Swanepoel.com – you need to know the facts.
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This is mind boggling! I think many agents just felt the hair stand up on the back of their neck after reading this!
Pretty timely post for me. My company of 20+ years just sold to a competitor and today I signed to transfer my license to the new brokerage. One more thing to check on. Thanks so much!
Well… guess this is a moment when ignorance is not bliss. I was sitting in my office yesterday reading this out loud to one of my associate brokers who actually brokered a local company and she had no idea that this could happen.. If our Brokers don’t know…then how are agents supposed to know??? There isn’t much defense for blatant ignorance when you are responsible for the education and possible financial ruin of agents under your leadership. Brokers and agents… stay on top of this especially with all the offices closing etc.
All you Associate Brokers who were not owners of your companies but “stand-in” Brokers who reviewed files and stepped in for legal issues… be sure you are covered on all the files you brokered. Responsibilities lie on your shoulders first.
Does a departing agent or broker have the option of purchasing extended coverage to cover their transactions?
Yes, the past owner has the option to purchase an Extended Reporting Period (ERP) policy, also referred to as Trailing Insurance coverage.
Candis, now that I have had time to write more, here is an extended response to the discussion.
An individual agent and/or the broker can purchase E & O insurance. Not all insurance companies offer the same programs and some do not offer “prior acts” coverage at all. Most agents, in non mandated states, don’t know they can purchase their own policy. It has, in the past, been a bit cost prohibited to do so but you certainly can buy one.
There is a distinction between establishing a new policy for an existing organization, transferring a current policy to a new owner and extending coverage on past acts. The only way to truly know what options are available to you is to speak directly to the current insurance provider and to research what other providers are offering in your area.
Unfortunately, there are no “standard” coverage programs. Much like health insurance, you could be turned down due to your personal or brokerage past business health history or they could increase your premiums based on the risk they may incur.
As an agent, now is the time to get all the details from your broker and their provider. As a broker, be sure you are clear on the transfer of coverage if you are selling, merging or closing your brokerage.
It’s difficult to know where the gaps in your liability coverage are until you encounter a liability situation and by then, it may be too late.
So it always boils down to getting the facts from your local leader and insurance carrier.
Stefan Swanepoel
This illustrates a good reason that agents purchase their own E&O. When I first started in the biz, my broker told me about E&O and actually charged $30 per transaction for the “coverage”.
I later found out that the policy only covered the broker, not the agents.
E&O is realatively cheap for $1 million in coverage
That is just plain scary! I think we all should look into extended E/O insurance in these tough times. We need to thank Stefan for bringing this to our attention. I will pass this article on to my friends and help get the word out!
Time to check with the broker in charge. Thanks for letting us know about ERP’s.
I bet most people don’t know what, if any personal liability is covered under their homeowner’s insurance, and what it might apply to, if a lawsuit should pop up. Where’s my umbrella?….E&O coverage is the professional’s best friend.
Because people are relying on your expertise, special training or skills, it may also pay to take some professional development courses in your industry. If you tell the judge, “oh, I didn’t know,” the last thing you want to hear back is that you “knew or should have known.”
Thank you so much for your timely article. It is scary. I am going to print out your article and bring it to my manager. Our company was just sold.
This is GREAT Information! I’ll be following up on it, but believe I am covered as I pay for my own E & O Insurance.
I forwarded this article to our corporate offices. This certainly is a scary situation…one that we should all take notice with. I appreciate your sharing this article.
Thanks;
Lynne A Shapiro,PC,BA,CRS,GRI
West USA Realty
I had something VERY similar happen to me as well.I hired a great attorney in Miami who had them take my name off the lawsuit as it was a “frivoulous lawsuit”. Desperate people doing desperate things.I was livid to say the least.
Zona
Glad you were able to not get stuck with the claim in the end.Pity you had to revert to using an attorney to correct matters. Another sign that agents should please go and check their E&O policy especially if their broker recently sold or closed down the firm.
Stefan
For the successful execution of a project, effective planning is essential. Those involved with the design and execution of the infrastructure in question must consider the environmental impact of the job, the successful scheduling, budgeting, site safety, availability of materials, logistics, inconvenience to the public caused by construction delays, preparing tender documents, etc.
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manoj
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blogging for a living-blogging for a living
Say!, i’ve watched this story in a primetime series in abs-cbn, I never thought it was happening in real life.
-denny
Have you heard? This Errors & Omissions Insurance Program can reduce your E&O Insurance premiums anywhere from 20% to 50%.
E&O Insurance for Life and Health Agents
Wowza, can’t believe more agents and brokers haven’t taken notice. I have heard of some very interesting cases involving E&O in our industry. Thank you Stephan for getting the word out. I hope it helps many.
Robyn
Great post Robyn!! I will pass this on to agents I work with. I had no idea…
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