Insurance and Claims Issues

Alert – Agents Should Be Cautious During Open Homes

Recently, one of our broker/clients contacted us and advised us that after an open house, the vacant home that he had staged was burglarized. Several of the staging items, such as the television, were taken. The burglar may have cased the home during the open house and returned and broke through a window after the open house concluded.

A California appellate court also recently published an opinion arising out of burglaries from open houses, wherein the defendant stole jewelry. (While the appellate court opinion is irrelevant to a broker’s practice, the fact that the burglaries occurred at an open house is of concern.)

Agents are advised to take precautions during open homes. Agents should advise sellers to ensure that all valuables are safely stored. Agents should also stay alert during open homes for anyone out of place or suspicious.

Brokers are also encouraged to review their insurance policies to evaluate coverage for these instances. Some insurance policies include protections during stolen items during open homes or lockbox violations.

Transfer Disclosure Statement Has Been Amended

Effective July 1, 2014, the Transfer Disclosure Statement has been amended to require a seller to disclose if a seller is aware of certain construction defect claims under SB800.

The revised TDS inquires whether a seller is aware of any of the following claims threatening to or effecting the property:  1) claims for damages by the seller based on construction defects; 2) claims for breach of warranty; or 3) claims for breach of an enhanced protection agreement, including any lawsuits or claims for damages under Civil Code §910 or 914 alleging a defect or a deficiency in property or common areas.  These changes relate to claims arising out of SB800 including Civil Code §895-945.5.

SB800 was a Senate Bill that was previously passed by the legislature.  The legislation was supported by the building industry to minimize construction defect litigation.  While it is a quite detailed set of statutes, in general, it allows a builder to require a homeowner in new construction to notify the builder of any potential claims or construction defects prior to filing suit.  The builder then has an opportunity to correct those defects.  The builder may also require buyers to mediate and/or arbitrate.

The purpose of the change of the TDS is to require any homeowners who have claims against a builder under SB800 to disclose those claims to new buyers.  The California Association of Realtors has posted an updated version on Zip Forms.

Question and Answer Regarding Workers’ Compensation Insurance

Question:  Is a broker responsible for providing workers’ compensation insurance for agents, given that agents are independent contractors?

Answer:  Yes.  By law, all employers in California are required to maintain workers’ compensation insurance for their employees for injuries occurring during their employment.  While independent contractors are generally excluded from coverage, the California Labor and Workforce Development Agency has taken the position that a real estate salesperson is nearly always considered an employee for workers’ compensation insurance purposes.  Therefore, it is recommended that brokers obtain workers’ compensation insurance for agents.  If there is a violation of workers’ compensation laws, the penalties can be significant.  The California Labor and Workforce Development Agency can close a business for failing to provide workers’ compensation insurance.

Important Considerations of Selecting Errors and Omissions Insurance

When procuring errors and omissions insurance (“E&O”), most real estate brokers do not consider the implication of what occurs if a claim arises. There are two (2) important issues to address:

1. What coverages the insurance policy provides; and

2. What law firm will represent the broker/agent, if a claim arises.

These are significant considerations for the broker and must be considered when evaluating policies.

Generally, when evaluating quotes for E&O insurance, brokers look at the premium and the deductible. They fail to consider the importance of the scope of coverage and selection of counsel. Unfortunately, these items are evaluated after a claim arises and the broker is not being properly represented or coverage is denied altogether. To avoid these unfortunate circumstances, brokers should consider these issues at the time of procuring an insurance policy. What is the point of insurance, if it does not provide brokers with the appropriate protections when a claim arises?

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E&O Restrictions

Errors and omissions insurance, in simplest terms, is a pooling of money by a group of professionals in an effort to share the risks associated with malpractice claims.  The pool is funded through premiums which are paid to an insurance carrier who administers this pool of funds.  In the event of a malpractice action, a member of the group can draw upon the pool, by way of a claim to the insurance carrier, to pay for the costs of defending the claim ("Defense Costs") and the cost of the claimant's damages ("Indemnity Costs").

The amount of money which each member must contribute to the pool by way of premiums is a direct function of the amount of money which is being paid out in connection with claims.  In an effort to control the amount of premiums which members must pay, E&O Policies contain certain restrictions.  Some common restrictions and their rationale include the following:

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Insurance Game

Almost everyone maintains various types of insurance.  These include health insurance, automobile insurance, property insurance, life insurance, and numerous other types of insurance.  One form of insurance that is of particular importance for members of the real estate industry is errors and omissions insurance.  This form of insurance is intended to provide protection in the event a consumer files a claim against a member of the real estate industry in connection with the services rendered by that member.

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Cost of a Claim

Based upon the cost of litigation, as compared to the amount typically in dispute, approximately 90% to 95% of all claims against real estate brokers and agents settle without going to trial or binding arbitration.  Unfortunately, the settlement of most claims involves some payment to the claimant, along with some attorney fees and costs.  Often the amount paid in attorney fees and to the claimant consumes a good portion, and potentially all of the broker and agents’ insurance deductible.

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Top 10 Considerations Related to E&O Insurance

1.    Recognize that All Insurance Policies are Not the Same
It is a good idea to look at buying your errors and omission insurance policy in the same manner you would look at buying a car. You may be able to get a very inexpensive car, but will it make it from the car lot to your home? Will it be safe in the event you and your family are in a collision? While it is not necessary to get the fanciest car, or insurance policy, it is generally a poor choice to buy the cheapest.

2.    Work with a Broker who has Your Interests in Mind
Some insurance brokers make decisions based upon their relationship with a carrier. In this case, you may get steered to a carrier without regard to whether it is the best choice for you. Sometimes they simply try to get the lowest priced policy because they don’t know enough or care enough to offer the best coverage. You won’t know how important this is until you have a claim.

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