Understanding real estate-related risks

Throughout California and other states, there has been an incredible increase in the number of professionals involved in or related to real estate. When thinking about real estate risks, the first to come to mind are real estate agents and brokers, mortgage brokers, and bankers. There are, however, a number of other real estate professionals and related activities that need to be accounted for, such as property managers, appraisers, title agents and abstracters, inspectors (home, commercial and industrial), escrow agents, insurance agency operations, land development, real estate investment trusts, and real estate consulting.

Writing professional liability for real estate risks can be twofold, meaning with a real estate organization (REO) professional liability form or a miscellaneous professional liability policy (MPL) endorsed to accommodate the operations (or as many of them) of the insured. Claims made forms are the norm. And depending on the activities of the insured or its related companies, there may be a need for more than one policy.

It’s important to remember, however, that not all risks –especially in this class — are insurable because some of those risks may be speculative or business in nature. Additionally, it’s worth noting that while some states mandate that real estate agents and brokers purchase professional liability and a particular carrier may be endorsed for such purposes, Realtors can choose their professional liability carrier. Legal expense reimbursement policies are available to supplement an errors and omissions policy, or to at least offer reimbursement of defense expenses.

Whether the policy is an REO professional liability form or an endorsed MPL, it is typically beneficial to have “pay on behalf” and “duty to defend” wording. The latter may be an issue because most carriers have a panel of designated lawyers that they use and the insured may have a corporate lawyer they would like to use in the event of a claim, but that person may lack the real estate coverage defense expertise.

The “consent to settle” may be unilaterally in favor of the carrier, may require the insured’s consent prior to settling a claim, or may include a “hammer clause,” either hard or soft. Defense costs are normally within the limits of liability. However, the underwriter is often agreeable — for an additional premium — to offer defense outside the limits (DOL) or claims expense outside the limit (CEOL).

Deductibles may apply per “wrongful act” or “per claim” — both terms are defined under the policy and require careful review. The definition of “claim” (written demand, demand, received by the carrier or received by the insured, includes an Incident or circumstance, among others) is critical because these policies are normally written on a claims made form. Those items may be negotiable, especially when dealing with surplus lines, non-admitted markets that have the flexibility to manuscript forms. Flexibility is what makes non-admitted carriers so attractive — despite the fact that they are not part of a state guarantee fund.

While on the subject of “claims,” it’s worth noting that the policy conditions with respect to the reporting of claims must be followed faithfully to avoid a denial of a claim.

Furthermore, professional liability policies can be “named perils,” meaning every service rendered by the insured is specifically listed. Or, the policy can have an “all risk” approach, meaning that coverage applies to the usual and customary services associated with the particular profession, in this case a Realtor’s services, or the practice of law, accounting services, etc.

The named insured must include all entities owned, as long as they are all real estate-related and an insurable interest exists. Often, a Realtor neglects to include his or her appraisal operations rendered under a separate company, leaving him or herself uninsured in the event of a claim. Named insureds, as well as services rendered, must be carefully reviewed.

Real estate risks typically use the services of independent contractors. It’s important to determine whether the policy includes those contractors under the definition of insured or employee. The insured normally is covered for vicarious liability, but the contractors themselves may not be covered at all. Furthermore, the insured may be at risk if the independent contractor is moonlighting; the insured may be brought into a lawsuit when a claimant infers that the independent contractor was representing the insured but in reality, he or she was not. In that case, there may be no indemnity once the situation is clarified, but defense costs would be incurred.

Also in the area of named insured and insured, there now are frequent requests from clients to be added as “additional insureds” under the Realtor’s professional liability policy and other professionals’ errors and omissions policies. It is critical that both the insured and its client are made aware of the consequence of such a request.

Granting additional insured status to the client will literally negate any coverage for him or her (now the additional insured). Virtually all professional liability policies contain an insured vs. insured exclusion, so the client will be unable to sue the service provider. Secondly, by becoming an insured under the policy, the third-party status is changed to first party, thus eliminating any options for recovery under the policy because the contract’s intent is to protect the insured against claims by third parties.

Rocio L. Orta is a professional liability specialist with Western Security Surplus Insurance Brokers in Pasadena, Calif. E-mail: rorta@wssib.com.

Topics Agencies Claims Contractors