Most real estate errors and omissions insurance policies are insured via a “claims made and reported” insurance policy. The term claims made and reported can be difficult to grasp. Our goal is to help in explaining these types of policies so there is a better understanding of the advantages and disadvantages.
Claims made policies trigger or enact coverage based on when the claim is made, not when the error, omission, prior deal, etc. actually happened. All claims must be reported during the policy term in order for a claims made and reported policy to respond. This can be problematic as it could often be months or years before a suit or claim is filed.
To address this issue, there is a “retroactive date” added to the E&O policy. The retroactive date is the first date an E&O insurance policy was purchased and continuously maintained. By adding a retroactive date to an insurance policy, the insurance companies will generally then add prior acts coverage. E&O policies with a retroactive date listed and prior acts coverage will cover claims that arise during the policy period starting from the retroactive date until the end of the policy term. This makes it crucial for companies with an E&O policy to ensure that they maintain their retroactive date and prior acts coverage on these policies.
By allowing an E&O insurance policy to lapse or be cancelled by an insurance provider, you create a risk of losing the retroactive date and prior acts coverage. Most insurance companies will no longer honor a retroactive date and prior acts coverage unless there has been consecutive, uninterrupted insurance coverage.
While claims made and reported policies can be frustrating due to the way coverage is triggered and the need to maintain the retroactive date, they do have some advantages. One notable advantage is the limits of the current policy purchased will be applicable in the future as the insurance limit for claims that might arise from past transactions. This can be an advantage in that generally companies are purchasing higher limits today than they did several years ago. Plus, over time insurance companies have broadened the coverage they offer for errors and omissions policies. It is recommended to review the current E&O policy in place, looking for exclusions and restrictions in the insurance E&O policy.
Reprinted with permission of Arthur J. Gallagher & Co.
For more information on affordable errors and omissions insurance for low-risk real estate agents and brokers, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.
