Errors and omissions (E&O) insurance has stirred up consternation in the title insurance community, with agents citing higher premiums and more exclusions in coverage as big issues, but some of the problems agents have could be due to a lack of knowledge of just how E&O insurance works.
The key to understanding E&O insurance is in the nuances of the claims-made policy, which is what E&O is written on, as opposed to an occurrence-based policy. The short explanation of claims-made means a claim has to be reported during the policy period, with little to no wiggle room in that definition. Agents must be vigilant about when they make a claim.
It is important to note both a policy’s retroactive coverage date and when the current policy period expires. Adam Gwaltney, an insurance agent for Ritman & Associates Inc. based in Indiana, gave a presentation on the ins and outs of E&O insurance on a webinar for the Ohio Land Title Association. He has specialized in professional liability insurance with a main focus in legal professional, title agency professional, real estate and CPA for 15 years. He said this about coverage:
- A retroactive date is when your coverage begins. There will be no coverage for work prior to this date.
- There can be no gap in coverage. An agent must have coverage in force when the claim is made and coverage dating back to retro date.
- The retro date is most likely found on the declaration page, but it’s sometimes listed as an endorsement further back.
- There is no coverage after the expiration date of a policy unless an extended reporting period (ERP) endorsement exists.
“The important thing I tell all clients, we have no grace periods under claims-made,” Gwaltney said. “When the policy is on the expiration date, the carrier can walk away from the policy. There is no provision for a grace period.”
So, continuous coverage is the whole point of the claims-made policy. Any lapse in coverage, even if caused by a late application to the carrier, will result in a gap in a coverage and new retro date.
Policy highlights
Within the policy itself, agents need to pay attention to how professional services are defined. Gwaltney finds that some policies in the market can be vague in their definition while others can be extremely detailed. In this portion of the policy, an agent or an abstractor might discover language that does not apply to their business — like the inclusion of coverage for escrow or closing work, for example. Just like not all title agents understand the nuances of E&O, not all E&O carriers understand the nuances of title insurance. Finding a policy that more accurately matches the services you offer will then lead to better coverage, possibly at a cheaper cost.
Gwaltney gave the example of disciplinary proceeding coverage, which some agents might view as unnecessary.
“It’s not often that a title agent or owner may be reported or have a disciplinary proceeding issue with the state or licensing board,” he said. “Some policies include this coverage. In our critical review of policies this year in the market place, a number of E&O policies do not offer any coverage for disciplinary proceeding and some companies will not even offer endorsement for it. But if your policy does have this coverage, most of those will not have a deductible, which is good. So if you have a $5,000 deductible, a disciplinary proceeding coverage will probably not have the same deductible. It may not erode your limit of liability, which is also good.”
Who or what is insured under the policy is important. A common issue that agents run into these days is their policy not covering work from independent contractors. Gwaltney said there are a few carriers that will endorse independent contractors, but agents need to be careful with the language.
“A number of them say the carrier will provide for services rendered by an independent contractor, however, that contractor has to have its own insurance at the time the claim was made and at the time the error occurred. Some mandate what limited liability coverage they have,” he said.
Extended reporting periods
Perhaps just as important as the retro date, at least to agents looking to leave the industry or close their doors, is the extended reporting period. The ERP in an endorsement that attaches to a dead policy and acts as a tail to continues that coverage into the future for work done in the past. Gwaltney said ERPs are also used when a policy isn’t renewed due to a claim.
“The ERP is the only way to extend the reporting period provisions under an E&O policy for a future claim from a canceled policy,” he said. “It costs extra, but it’s the only way a carrier will respond.”
The ERP locks in the current coverage for a certain period of time. If an agent has a $1 million per claim limit, the ERP locks with $1 million for the life of the endorsement. If an agent has a three-year ERP, that $1 million is for the entire three-year period.
As crucial as an ERP is for agents, many carriers only offer them for one year. There are others that cover from three to five years, although the five year is rare. Most policies in the market will offer a standard, automatic ERP that kicks in 60 days from when an agent’s policy lapses, but this is not a grace period.
“It doesn’t say you can renew your policy automatically with the renewal premium,” Gwaltney said. “This is an ERP that says you get X number of days after the policy expiration date to report a potential claim, so if you have an expiration, you may have this small window to report a potential claim. But they will vary from carrier to carrier.”
ERPs are optional and they cost additional premium. The premium is figured using an agent’s current annual premium, multiplied by a rate factor that is determined by how many months it is extended. These also vary from carrier to carrier.
Gwaltney also cautioned owners with multiple companies to not insure all of them under one policy.
Claims
Claims-made polices are very specific and will tell you how to report a claim to your specific carrier. Some might say that you must report “as soon as you become aware” or “as soon as practicable” — but what do those mean?
Gwaltney said to report a claim as soon as you become aware. Sitting on information of a potential claim could lead to the carrier not covering it.
“If you are aware of a claim, and you sit on that potential claim hoping it will go away or hoping your underwriter will make it go away and three months later, after it doesn’t, you decide to report it, it could be too late because the carrier can easily fall back on policy language and send you a declaration of coverage letter because you did not report the matter when you became aware of it,” he said. “You must report it in writing to the carrier even though you’ve sent your agent a letter, notifying your agent of the potential claim. You should make it a standard operating procedure to send it to your carrier and CC your agent.”
Do not discuss the claim or attempt to mitigate it prior to reporting, according to Gwaltney. Don’t talk about the claim to anybody. Report it to the policy and to your carrier, but it doesn’t mean you want the carrier to pay it — maybe you pay the claim out of pocket in the end.
“Properly identifying a potential claim may save you coverage in the end,” Gwaltney said.
Another important note is that E&O claims coverage in all inclusive, meaning it includes defense costs.
Other exclusions
Equity interest exclusion — If an owner or agency has equity interest ownership in another business that it does work for, through the title agency — like ownership at a real estate agency that it does work for — there may be an exclusion on that work.
Employment practices liability — Wrongful termination, sexual discrimination, racial discrimination, and others that result in employment practices lawsuits are not covered under title E&O policies. That’s a separate coverage.
Other professions — Attorneys own title agencies and CPAs are embedded in title and real estate agencies as well. But if someone does legal or CPA work on behalf of the title agency, title E&O won’t cover that.
First-dollar defense
A nice endorsement to find, that isn’t common, is the first-dollar defense. It costs more in premium, but it means the deductible only applies if there is a lost settlement agreement or indemnity payout under the policy. The agent has to be liable in some manner or the deductible would not apply.
“This is important if you have a high deductible policy and you can buy it,” Gwaltney said. “I still run into some that have $10,000 to $25,000 deductibles, but we’re able to shop with lower deductibles and some of them offer first dollar defense coverage. It costs additional premium because it helps insulate you from a meritless matter that has defense only.”