E&O Risk Manager: Company Decides Against ERP Endorsement

A Real-Life Situation on How This Could Hurt Your Business

Situation:

pearl-insurance-logoA realty company, which had been in business for about fifteen years, routinely renewed its real estate errors & omissions (E&O) insurance policy. The company developed an excellent reputation in its local market and consistently produced a steady stream of revenue. This caught the attention of a commercial brokerage, which offered to acquire the business in order to expand into residential sales. However, when the realty company closed the deal, it opted not to purchase an extended reporting period (ERP) endorsement on the E&O policy upon its expiration.

Problem:

Because the realty company’s policy did not have an ERP endorsement, claims arising out of services before the acquisition of the business would not be covered once the policy expired. Furthermore, the acquiring company’s policy could not respond, because it only provided coverage if services were rendered on its behalf, or after the acquisition. Unfortunately, a lawsuit was brought by a consumer who believed negligent representations were made when he purchased his home a year earlier.

Mistake:

Deciding against an ERP endorsement on the policy, the realty company believed that the possibility of being the target of future claims was unlikely.

Result:

The E&O insurance company denied coverage because the policy had long been expired. Coverage is triggered under most, if not all E&O policies when a claim is made—not necessarily when services are provided.

Prevention:

Although the prospect of being acquired by another brokerage may never be in your future, you may still be faced with the decision on whether or not to buy an ERP endorsement. For example, if you shutter the business due to retirement or illness, an ERP endorsement will give you the comfort of knowing you’ll be protected by an E&O policy for claims arising out of services rendered while you were in business. It will also protect your agents and employees who would otherwise have no insurance. Litigation can be a very expensive and time-consuming event, so it’s best not to take the risk of having to pay out of your own pocket.

The recommendations in this article may differ from state and local practices. Greenwich Insurance Company and Indian Harbor Insurance Company Coverage is not available in all jurisdictions.

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