BROKER RISK MANAGEMENT WEEKLY PRACITCE TIP
Recently, Broker Risk Management (“BRM”) held a webinar with a guest speaker, Brad Butlin of Austin & Austin, to discuss professional liability errors and omissions (“E&O”) insurance policies. Important issues that were addressed included how E&O insurance works and why notices of claims or potential claims should be important to agents. Consider the following scenarios:
SCENARIO NO. 1: I am a listing agent. The buyer retained an attorney and sent me a letter demanding compensation. I did not think I did anything wrong and therefore I ignored the letter. I was subsequently sued, as was my broker. Unfortunately, my broker has now told me we do not have insurance because I failed to tell my broker or report the prior correspondence. Is this accurate?
RESPONSE: A real estate E&O insurance policy is a “claims made” policy. This means that if notice of a claim is received during a policy period, the claim must be reported to the insurance company during that policy period. If not, the insurance company is not required to cover it. It is likely irrelevant when the transaction occurred. Therefore, if you receive a demand letter from a client, other party or an attorney, and you do not tell your broker and/or the broker does not notify the insurance company during the policy period and the policy expires, you may not have insurance coverage.
SCENARIO NO. 2: I represented a buyer in a transaction. After the close, the buyer asserted a claim against the seller and requested that I attend the mediation with the buyer. To support my buyer, I attended. I did not tell my broker and it was not reported to the E&O insurance company. The E&O insurance expired and a new policy was issued insuring my broker and myself. I was then sued alleging that I was negligent and breached my fiduciary duty to the buyer. The new insurance company has denied coverage claiming that I had prior notice of a claim and did not advise the insurer. Is this accurate?
RESPONSE: It is likely accurate. While different insurers may view notice differently, some may consider the mere request that an agent or broker attend a mediation as a demand for money or services, which constitutes a claim and should be reported by your broker or manager to your insurance company. In addition, you should never attend mediation without the approval of your manager and without legal representation.
SCENARIO NO. 3: I represented a seller. The buyer canceled the contract and the buyer and seller are in a dispute over the deposit. The seller has requested that I provide a chronology of events and speak with their lawyer, which I did. The buyer and seller mediated; however, the case did not settle. The buyer subsequently filed a lawsuit against me and the seller. The insurance company is refusing to provide coverage claiming that I prejudiced its rights to defend the case and that my handling caused the lawsuit. Is this correct or is there anything I can do?
RESPONSE: Unfortunately, you created a risk to you and your brokerage by not reporting the situation to your manager and your brokerage’s legal counsel nor following their advice. If you provide your client’s lawyer with information that you were not authorized to provide, the insurance company could take the position that it was prejudiced by your doing so. As soon as you receive a request for information and/or documents from a party to a transaction or their attorney you should immediately report this situation to your manager. Your broker or manager can contact Broker Risk Management and we can advise as to which information and/or documents are permissible to provide. Also, if the insurer denies coverage, we can evaluate the situation to determine whether the insurance company is acting reasonably.
DISCUSSION: Professional liability insurance is considered a claims-made policy. This means that it is irrelevant when the escrow closed or when the alleged wrongdoing took place. Claims must be reported in the same policy period in which notice of the claim was received. For example, if a transaction closed 10 years ago, but you receive a lawsuit or a demand letter now, it must be immediately reported to your manager who can work with BRM to report it to your insurance company. If you or your broker do not timely report a claim, you are risking losing your insurance coverage.
What is a Claim? A claim is generally defined by most insurance policies as a demand for money or services. This means that if your client or the other party to a transaction or their lawyers are asking for compensation or any action on your part, including remediation of a condition at the property (i.e., repair), that likely constitutes a claim under your broker’s E&O policy. You should speak with your manager or broker who will decide whether to notify the insurance company. A letter, email or text from a party expressing dissatisfaction with your handling could be considered a claim by some insurers.
Please note that simply notifying your E&O insurance company of a potential claim should not affect insurance renewal nor increase the insurance premium cost of renewal.
PRACTICE TIPS:
- If you receive any of the following, do not handle it yourself:
- Any communication from a party to a transaction or their attorney whether oral or in writing (e.g., a demand letter, email, text, etc.) expressing dissatisfaction with your services and/or demanding compensation.
- A summons, subpoena for records, request for file documents, request to appear at a mediation, arbitration or other legal proceeding.
- Information that the parties to a transaction where you represented one or both of the parties are, or plan to, proceed with mediation, arbitration or litigation.
In the above situations, immediately contact your manager or broker for advice and handling.
- Unless you have the approval of your manager, broker and/or brokerage legal counsel:
- Never attend, or agree to attend, any mediation, arbitration or any other legal proceeding or hearing, even “just as a witness.”
- Never provide any documents, summary, chronology or other information to any party to a transaction or their attorney.
- Never sign any documents, statement or affidavit if requested by any attorney other than your brokerage legal counsel.
3 We at BRM are willing to review any of the above communications to provide assistance with handling and making a determination as to whether your insurance company should be notified.
This Weekly Practice Tip is an attorney client privileged document and is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.