Errors and omissions insurance is one of the key coverage types the real estate industry relies upon to help it manage claims. When weighing different insurance carriers, many real estate companies will undoubtedly compare premium pricing and services rendered of various providers, both of which may help them make informed decisions about which carrier to choose. However, companies can gain a more comprehensive picture and choose the best carrier for their needs by first understanding how insurers set premium prices and determine which services to extend. Through this greater understanding, today’s real estate companies can make improvements to their businesses to raise their chances of securing a competitive premium rate.
Many factors play a role in an insurance carrier’s (hereafter referred to as “carrier”) development of premiums and coverage offerings. For real estate errors and omissions insurance in particular, the first consideration a carrier will weigh is whether a real estate firm’s (hereafter referred to as “firm”) services and credentials fall within the guidelines of the program. If this guideline is met, carriers will examine several factors to make its premium and coverage determinations, which include but are not limited to the following: the firm’s total gross commission income -before splits with agents, types of services provided (i.e. residential or commercial re-sales and/or new home sales, property management or leasing, etc.), agent/broker experience, internal controls and risk management practices and claims history.
In order to assess these factors, the carrier or designated program administrator requires the insurance agent-broker who is conducting business with them to submit a completed application. This point is important because, generally, carriers will not accept an application submitted directly from the firm. Once a completed application is received, the carrier’s underwriter is able to begin a thorough review to determine the premium and coverage lines that can be provided.
The development of a firm’s premium for the carrier’s base policy coverages are determined in the underwriting review process, which involves both fixed and discretionary attributes. Fixed attributes are those that must be strictly adhered to by the underwriter, as they are pre-established factors or rates that are applied to the firm’s gross commission income (total revenues), prior acts years and type of services provided. Therefore, in theory, if two firms were identical in terms of gross commission income, prior acts years, type of services provided and claims history, their developed base policy coverage premium should also be identical before the underwriter applies discretionary attributes. However, this is rarely the case unless the firm is small (less than $100,000 in revenues), whereby the premium would likely develop out to the carrier’s minimum premium regardless of whether the positive discretionary attributes apply.
Discretionary attributes, on the other hand, are those in which underwriters are able to utilize their judgment to apply credits (or debits) in the rating process based on the firm’s internal controls, risk management and claims history. Firms that have strong internal controls and employ sound risk management to mitigate the likelihood of claims will receive the greatest premium credits. Alternately, those with poor or marginal internal controls and risk management will receive no premium credits or debits. Unfortunately, the application does not truly allow the firm to distinguish itself by simply answering boilerplate questions related to its internal controls and risk management practices.
However, there are other steps firms can take to improve their chances of securing the best premiums rates.
Best Terms Tip 1: Take the time to write a detailed narrative describing your firm’s internal controls and risk management practices. This is not a mandatory component in the application process; however, it does allow the underwriter to better understand what separates your firm from others. Firms employing the best practices related to internal control and risk management tend to sway (and justify) the underwriter’s decision to apply premium credits to these subjective attributes.
Large firms, including many of those on RISMedia’s distinguished Power Broker list, are also likely to have a claims history, as it typically comes with the territory. Since large firms generally have a significant presence and market share in the communities they serve, they are also viewed as having deep pockets. Even if the firm and its agent did everything right, there’s no shortage of plaintiff attorneys willing to listen to a firm’s former client if they feel something was amiss in the transaction. In other words, not all claims are the result of something the firm or its agent actually did wrong! Underwriters understand that, yet they are also taught to follow the insurance axiom of “frequency breeds severity,” which simply means the more claims a firm has had, the higher the likelihood that a severe claim may be just around the corner. Since claims history is both a fixed and discretionary attribute in the underwriter’s rating review process, it’s extremely important that the underwriter has sufficient details on the nature and facts of the claim(s) to ascertain whether the firm or its agent actually made an error or omission.
When a firm discloses that they have had claims and is required to provide their prior carrier(s) loss runs, more often than not those loss runs do not provide sufficient details. In most instances, carrier loss runs only provide dollar values for paid or reserved (anticipation of what will be paid) claims. If any description of the claim(s) is provided, it is usually minimal at best (such as failure to disclose, misrepresentation, negligence or fraud). Therefore, in the absence of sufficient details, the underwriter is left to conclude that an error or omission was actually made and effectively removes the underwriter’s ability to apply any (positive) discretionary attributes in their evaluation.
Best Terms Tip 2: If your firm has had claims during the past five (5) years, make sure the underwriter has the complete understanding of their details, particularly those with paid or reserve amounts of $25,000 or greater. Providing a narrative gives the firm an opportunity to tell its side of the story and also allows underwriters to utilize their discretion to weigh more than loss values in their evaluation of the claim. Be sure to articulate the claimant’s allegations (against the firm and/or its agent) and provide a rebuttal if you feel that the firm or its agent did nothing wrong. Underwriters appreciate integrity, even if an error or omission was made. Be up front about the details and explain any additional internal controls or preventative measures the firm has since instituted to mitigate the likelihood of similar claims in the future. When underwriters have only minimal information to work with when evaluating a prior claim(s), they are unable to justify applying positive discretionary attributes (i.e. discounting its value shown the loss runs).