We are asked, frequently, whether a client should tender a claim to the client’s errors and omissions (E&O) carrier.  The answer has many parts, and we thought it would be helpful to outline some of them for you in this Advisory.

It is important to understand what E&O protection is and how you are able to avail yourself of that protection.

First and foremost, E&O is insurance – and, like all insurance, it requires that there be a “claim” before the insurance will come into play.  That is why your E&O carrier will not pay for a broker to attend continuing education classes, or have supplemental risk management programs in place.  An E&O carrier might reduce premiums if a broker does these things, but since no claim has arisen, the carrier has no duty to pay for these ‘preventative measures.’

Second (and equally foremost?), an E&O policy is a contract – and like all contracts, has fine print.
You need to understand that fine print.

There are several types of insurance policies, three of which are called “occurrence,” “claims made” and “claims made and reported.” Most E&O policies fall into the last of those categories, “claims made and reported.”

In a claims made and reported policy, there is NO insurance if a claim is not “reported” within the policy period. So, for instance, if you have a policy that runs from October 12 through midnight October 11, and at 4:40 pm on Friday, October 11 you get a claim about a transaction that happened way back in January, you must “report” it to the insurance carrier that day, or you will have no coverage. If the claim is made on Tuesday, October 15, you would not have coverage under the old policy at all – but, presuming you renewed or replaced E&O coverage with a new policy, you would have coverage under a new policy, even though the transaction closed almost a year earlier.
(Don’t get caught in the trap of failing to tender potential claims in the last week of your policy. Tender everything [even claims you’ve been working on resolving informally for weeks or months], no matter how big or small in that last week. It’s called “laundry listing.” You never know what will turn into something huge.)

Some E&O claims made and reported policies have a provision that states you must report the claim within 30 days of receiving it. So, if you hold onto a claim, because you’re trying to ‘work it out’ you could lose all coverage if you reported it to the carrier on the 31st day.

What does “report” mean? It means you have advised the Insurance Company (not the insurance broker!) of the claim.  If the claim is a letter or email that you received from an unhappy client – send that letter or email to the Insurance Company.  Your policy states exactly how and where to send a claim to the Insurance Company. Do exactly what it says to do. Many brokers have lost coverage because they sent the demand letter to the insurance broker.  Telling your insurance broker is not what the Policy says to do, and real estate brokers have lost E&O coverage because they did not advise the Insurance Company of the claim; or because the insurance broker delayed in doing so.

Some real estate brokers are very concerned that tendering a claim will create a “loss run” that will make replacement or renewal much more expensive.  While there are always exceptions, advising an Insurance Company of a potential claim will generally not trigger an increased renewal premium.  In fact, tendering as many as five potential claims may not have any impact at all on your renewal premiums.  Certainly there are factors that influence an Insurance Company’s premium decision – and the number of claims is one of those factors.  But, it is not “automatic.”

Remember that a “potential claim” is not the same as a “lawsuit.”  There’s nothing “potential” about a lawsuit – that is a claim. Tender that to your Insurance Company without delay.

A “potential claim” may be that nasty email a customer sent you at 3:00 am.  You may try to informally address it the next day or the day after (once you’ve had a chance to review the file).  If you think you have a problem, you might want to tender that claim to the carrier, and get the carrier’s consent to continue to try to work it out.  After all, you have a deductible to pay, and if you settle the matter by spending less than the deductible – the carrier doesn’t really care.

If you have five claims that you buy your way out of by paying less than the deductible, the carrier might, and probably will, care; because the carrier is looking at the way you conduct your business and assessing its potential risk that a lot of claims may come up that you can’t buy your way out of.

Keep in mind that whatever you spend to prevent a claim from growing into a problem or settling a claim does not count against your deductible – unless you have already tendered the potential claim to your Insurance Company.  So, while you are free to hire attorneys and do all kinds of things to work out a solution to a customer’s problem, none of that money will count toward your deductible unless you have already tendered the claim, and advised the Insurance Company of your activity.  How come?  Simple: The Insurance Company is exposed when you do something that it isn’t aware of; after all, you might apologize for making that mistake – thus proving the liability of the claim!  And that is a ‘bad thing’ to an Insurance Company that will have to pay the bill later.  Besides, your Insurance Policy is a contract – and one of those contractual provisions is for you to do nothing without the Insurance Company’s consent.

Don’t forget to send those claims to HLF at the same time.  As your attorneys, we can start preparing a defense from the very beginning, and be sure you get the E&O coverage you’re entitled to.

The issues surrounding E&O claims are as varied as the kind of claims that are made.  There are any number of additional cautions you should think about as well.  When you have questions, give us a call.  An ounce of prevention, can save a pound of gold later