Most real estate professionals understand the need for property and
general liability insurance to protect their investment portfolios from perils
such as fires, thefts, floods, earthquakes,
construction defects or slips and falls. Few
however, appreciate the importance of purchasing a comprehensive, well-structured
errors and omissions (E&O) policy to
cover the services they perform for others.
As the Southern California real estate market has grown and matured, firms have
become much more diversified. Moreover,
their businesses have developed complex
organizational structures to address sophisticated tax and liability strategies, and to
allow for participation by third-party
investors — many of whom are large institutions. This growth has created the need
for more advanced risk management and
insurance coverage design, particularly in
the area of errors and omissions/professional liability exposure. With the financial
stakes higher than ever, the probability of a
claim by a third party alleging financial damages arising out of the performance of professional services has increased dramatically. The range of risks could include negligence in anything from simple accounting
errors related to the collection of rents, to
significant failures to perform in construction or development management activities.
Smart Business spoke with Jim Lopiccolo
of DLD Insurance Brokers about the importance of including an E&O policy as part of
a risk management program.
Why is E&O coverage so important for real
estate service firms?
The healthy Southern California real estate
market has been fruitful ground for the
growth of firms with diversified service
offerings. In our experience, very few firms
are solely involved in property management
any more. Many now offer a full range of
services such as property management,
asset management, construction management, development management, real estate
sales and leasing, appraisal, consulting,
notary, and even architectural and engineering. What this means is that fully integrated
real estate firms today also are subject to a wide array of potential liability exposures
from each of their business lines. This calls
for a well-designed E&O insurance program
to protect their assets, their investors, and
personal assets of the individuals.
Traditional general liability insurance will
only protect against claims alleging bodily
injury and property damage, but will not
offer protection for a claim alleging economic damages resulting from a failure to
perform professional services.
How do insurance agents assess risks that
real estate services firms face?
The first course of action is for us to thoroughly understand all the various services
a firm performs — whether they perform
these services themselves or subcontract
them to others. We do this by interviewing
the client and reviewing customer contracts in detail. An understanding of the full
breadth and depth of the organizational
structure is also required in order to properly tailor the coverage.
Are they organized as a C Corporation or
S Corporation, a Limited Liability Company,
or a partnership, for example? Are they
involved in joint ventures? How are their
project/ownership entities structured, and how does the ownership of these entities
flow back through the rest of the organization? This process often entails a review of
LLC operating agreements and partnership
agreements.
What are some of the ‘hot buttons’ to watch
out for in these E&O policies?
There really are a whole host of coverage
issues to address, but several can be easily
overlooked. For example, an E&O policy
typically only covers the professional services that are expressly listed on the declarations page. As such, before coverage is
bound, the proposed service listing should
be reviewed with the client in detail to
ensure the full scope of services they provide are included.
The policy wording also needs to be carefully analyzed to make sure it will pick up all
of the entities throughout the organizational
structure, since each of them may be named
in a lawsuit. It is not sufficient to just name
the parent or main operating entity. Of
course, ownership in the property managed
or developed always presents a concern,
since many E&O policies specifically
exclude coverage for claims arising out of a
property in which the insured has over a certain ownership interest.
Are there any others you’d like to specifically
mention?
Yes. Most standard E&O policies exclude
coverage for any claims based upon, arising
out of, or in consequence of, bodily injury or
property damage. Given the fact we’re dealing with real estate-related services, this
exclusion can have a serious impact on the
scope of coverage provided in the event of a
claim. While the intent is not to make the
E&O policy into a general liability policy,
modifications can and should be made to
this exclusion to ensure true E&O claims
are not inappropriately precluded from coverage.
JIM LOPICCOLO is the vice president of Executive Liability &
Financial Products at DLD Insurance Brokers, Inc. in Irvine.
Reach him at (949) 553-5681 or at [email protected]