In today’s litigation-prone society, Errors & Omissions (E&O) insurance is no longer thought of as luxury protection for the largest real estate firms or those highvolume, “superstar” agents. Over the last few years, E&O insurance has become one of the necessary costs of doing business in the real estate field, and only those with a gambler’s nature are choosing to go “bare” when it comes
to this essential coverage.

However, even if you’re not the type to tempt fate through non-coverage, there are additional circumstances that could result in gaps in your E&O program. As is true of almost any insurance coverage, there are aspects of E&O insurance that can be confusing. In order to shed light on
several often misunderstood E&O terms and features, Pearl & Associates, Ltd. offers the following Q&A, which includes answers to the questions that seem to pop up most frequently
during loss control seminars, conventions, and E&O discussions.

Q. If I leave my firm or the real estate business altogether, what happens to my E&O coverage?
A. If you’re covered under a firm’s policy and then leave the firm or the business entirely, the policy continues with the firm. The policy should be reviewed, however, to determine if the coverage will apply to any wrongful acts that occurred while you were with the firm, even if a
claim is filed after you are gone.

If coverage is provided for this situation, it would normally be found under the definition of “Insured” in the policy. Some policies state that the Insured includes “any former partner, officer, director, employee, or independent contractor of the Named Insured, solely while providing
Professional Services on behalf of the Named Insured.” Should the definition of “Insured” not include this type of phrasing, you may have no coverage under the policy once you have left the firm.

If you are the only REALTOR® covered under a policy, such as a broker with no associates or an independent contractor, and you leave the firm, the policy must be cancelled. This means there is no coverage after the policy is cancelled unless you purchase an “Extended Reporting Period,” an option that allows the insured to purchase coverage for a period of time after the policy is cancelled. In other words, the policy will respond to claims made against you for professional services rendered before leaving the firm, provided the claim is filed within a certain
period of time after the policy is cancelled.

A typical Extended Reporting Period (sometimes referred to as “tail” coverage) is for a term of one, two, or three years. The cost of each period option is usually stated in the policy. For example, a one-year Extended Reporting Period normally costs 100 to 150 percent of the annual premium paid the last year the policy was in effect; while the cost of the two-year period is normally 125 to 200 percent of the last year’s premium. The policy should be reviewed for options available under the Extended Reporting Period.

Another situation that can occur is when a broker lets the E&O policy lapse because the firm is insolvent. When this happens, everyone insured under the policy will lose his or her prior acts coverage. Often, REALTORS® do not realize this until they apply for coverage at a later date.

At that time they discover they cannot obtain Prior Acts Coverage because of a gap in coverage between the date their previous firm’s policy lapsed and the date their new policy takes effect. When in this situation, the best solution is to contact the present administrator of your E&O
program and arrange to purchase an Extended Reporting Period option for as long a period as possible. Normally, this must be done within 30 days from the date the policy is cancelled or coverage lapses.

Q. What is a Prior Acts Date?
A. This is the date listed on your policy as either “Prior Acts Date” or “Retroactive Date.” If a claim is made against you, the wrongful act must have occurred after the Prior Acts Date in order to qualify for coverage under the policy.

If you have no previous E&O insurance coverage and apply for a REALTOR® Errors & Omissions policy, effective September 1, 2005, the insurance company will most likely include a Prior Acts Date of September 1, 2005 in your policy. This means that the policy will respond only to claims
made against you that refer to wrongful acts performed after this date.

Q. How is Prior Acts Coverage determined?
A. If you have never had E&O coverage or have let a policy lapse for more than 30 days, the insurance carrier will normally not provide any Prior Acts Coverage and will issue the policy with a Prior Acts Date the same as the effective date of the policy. The Prior Acts Date will show on each consecutive renewal as long as there is continuous coverage.

Thus, after the first year, you would have one year of Prior Acts Coverage, after the second year, you’d have two years. Additional premium may be charged for the first two consecutive years to compensate for the additional Prior Acts Coverage and will then level off.

If you have had continuous coverage and obtain a quotation from an insurance carrier other than the one you are presently with, the new carrier will most likely maintain the same Prior Acts Date as is listed on the present policy. If there is no Prior Acts Date on the present policy and you have had continuous coverage for a period of three to five years, the new carrier may issue the coverage
with no Prior Acts Date, depending upon their underwriting guidelines. This means the policy will provide coverage for a claim made for something that occurred in the previous years—perhaps one, two, or more years ago. Please remember, however, the Prior Acts Coverage is normally provided for the services performed by the Named Insured only; if the firm has changed its name during the Prior Acts period for which the policy provides coverage, the predecessor firm names should be shown on the policy in order to provide coverage for the prior entities.

Q. What does the term “Claims Made” E&O policy mean, and how does such a policy work?
A. Almost all REALTOR® Errors & Omissions insurance policies are written on a “Claims Made” basis. Claims Made policies are different than most other forms of coverage, such as homeowner’s or auto policies, which are written on an “Occurrence” basis. Occurrence policies provide coverage
for an injury or damage that takes place during the policy period, regardless of when the claim is reported. In other words, if you were involved in an auto accident in 1995 and an injured party brought suit against you in 1996, the policy that was in force when the accident occurred
would respond.

In a Claims Made policy, coverage is provided for any claims made and reported to the insurance company while the policy remains in force. The policy that is in force when the claim is made will respond no matter when the claim actually occurred. However, if the policy has a Prior Acts Date and a claim is made for an act that occurred before that date, there is no coverage available. If there is no Prior Acts Date, the policy in force at the time the claim is made will respond to the claim, no matter when the wrongful act actually occurred. However, if the policy is cancelled and no Extended Reporting Period is purchased, coverage will not be available for any claims made
after the cancellation date of the policy.

One advantage of the Claims Made policy is the limits you are carrying when the claim is made may be higher than the limits carried when the wrongful act actually occurred. For example, if a wrongful act occurred in 1998 when the limits of your policy were $100,000 per claim and you increased your limits to $1 million per claim in 2000, your $1 million per claim policy would respond to a claim made on that 1998 wrongful act.

For more information about the sponsored E&O programs for members of the Michigan Association of REALTORS®, call Lisa Scoble, Regional Sales Manager, Pearl & Associates, Ltd. (800) 289-8170 or send a fax toll-free (866) 817-9009. We also invite you to visit our Web site at
www.pearlins.com.