Professional liability insurance isn’t mandatory in Illinois, but there are rumors that soon it will be. At a recent speaking event, the Illinois Department of Financial and Professional Regulations (IDFPR) hinted at making professional liability insurance mandatory in Illinois.
Currently the nation is split among states that require firm to carry professional liability insurance (also known as Errors and Omissions or “E&O”) and states that are silent on the matter. The IDFPR – the department that regulates the real estate industry in Illinois – is scheduled to open the Real Estate License Act of 2010 for revisions later this year. Part of those revisions could include a major policy shift on insurance and have implications for even the smallest firms.
E&O insurance provides firms with coverage for allegations of professional misconduct. Broadly speaking, it covers defense costs and damages assessed against a firm for allegations of misconduct, errors, mistakes or omissions in the rendering of professional services. This differs from General Liability insurance since general liability covers firms against bodily injury and property damage – the standard “slips, trips and falls” protection most firms purchase. In fact, general liability policies specifically exclude any claim related to a professional service – making E&O vital to a complete risk management program.
While real estate claim examples are as diverse as the number of claims that come in, some of the more common claim revolve around a few key areas:
- Disclosures. When an agent fails to properly disclose information to a buyer or seller, this can lead to claims
- Data Integrity. Inputting improper information such as square footage or school districts can upset buyers
- Documentation. A lack of adequate documentation of home warranty offers, inspections, negotiations and the like can leave large gaps of evidence when defending against a claim
- Referrals. Making a referral to a third party that is not qualified or who does a poor job can cause the client to come back to you for compensation
Remembering that E&O insurance covers mistakes and oversights of an agent makes the possible claim scenario list very broad and highlights the importance of such coverage.
Illinois currently doesn’t require this insurance, but many clients expect – or even demand – firms to purchase it. A sophisticated client of any size will ask to see proof of insurance and banks listing a REO property through a firm will require it. However, most small shops still do not purchase.
It has been our experience that sole practitioners view the risk of mistakes within their control and they decide to self-insure. Typically, once licensees are sponsored or when the broker realizes that some things are out of his or her control, they begin to look closely at a policy. However, if the IDFPR regulation does change, this will cause real estate firms of all sizes to buy it – regardless of the number of transactions or whether the firm sponsors licensees.
While the prospect of a forced purchase may sound daunting, professional liability insurance can be cost effective, as well. Policies start around $500 for a sole practitioner or a small firm. By decreasing the limit or increasing the deductible, firms can tailor their coverage to a price point they are comfortable with. Other factors that impact policies are revenues, professional count, types of service (transactions, property management, auctions, etc.), and whether firms handle residential properties or commercial properties, just to name a few.
As the IDFPR reviews the current law and debates making insurance mandatory in Illinois, it is prudent for firms to begin familiarizing themselves with the insurance landscape. One of the most important items for all firms to note is that the insurance companies that offer this type of insurance do not offer the same coverage. While the base coverage is similar (coverage for errors or omissions in the rendering of professional services), the policies quickly broaden from there. Some policies don’t cover property management. Others exclude property that is damaged or stolen at an open house or due to a lockbox that an agent fails to secure properly. Mold disclosure claims and coverage for discrimination and fair housing violations also vary greatly. Finally, when an agent sells a property he or she owns part of, this may or may not be covered under a policy, depending on how it is structured.
Since coverage not standardized across markets, price is not a final determinant of the policy to buy. It is important to review the coverage carefully and partner with an experience insurance broker who can access multiple markets and review the coverage on your behalf. In light of the possibility that E&O insurance becomes mandatory in Illinois, understanding the policy dynamics become all the more important. If you are looking for a quote or simply have questions about this insurance, please contact us today.