Errors & Omissions Insurance Policy for Ontario Real Estate Agents Explained
By Brian Madigan LL.B.
The Real Estate Council of Ontario (RECO) has mandated the participation of all of its registrants in an insurance program that includes among other coverages, an “Errors & Omissions Insurance Policy”.
This policy is designed to safeguard registrants from third party claims in the event of an act, error, omission or personal injury arising out of their activities as either a salesperson or broker.
So, there must be an aggrieved third party who initiates a claim against the registrant. The intention is to cover professional activities, as well as personal injury arising out of professional activities.
There are some additional limitations and requirements under the policy before a claim will be paid. The limits of liability are $1,000,000 for each claim and $3,000,000 in aggregate for each insured member, annually. There is a $2,500 deductible which is applied against each and every claim. Recently, the deductible has been increased to $5,000 in the case of the second claim and $7,500 in the case of the third claim within a rolling three year period.
While the policy is designed to provide protection, this only means financial protection within the policy limitations. If there is a Judgment against the insured that requires some act to be performed, or requires the insured to refrain from some act, then that will not be covered. The insured will have to comply. The policy only responds financially by paying a sum of money awarded by the Court as damages.
Let’s have a look at some of the insuring agreements under the policy. Here, the insurer agrees:
• “to pay on behalf of the insured
• all sums that the insured
• shall become legally obligated to pay
• as damages
• for professional services
• (1) by reason of any act, error or omission
• whenever or wherever committed
• in connection with or incidental to the insured’s activities as a salesperson or broker
• (2) because of personal injuries arising out of the insured’s activities as a salesperson or broker”
So, this is intended to be restricted to the business of real estate. A trip and fall at home would not be included, but a trip and fall at an “open house” would be*. Additionally, advice, opinions, directions, false information all within the scope of providing a professional service in the context of a real estate business would be covered. If it is not related or incidental to acting, either as a salesperson or broker, then it’s not covered.
Consider the case of an electrician who serves as a part time realtor. If some wiring were to be undertaken at a client’s home in the expectation of signing a listing, any error or omission here, would not be covered. The electrician should have insurance as an electrician. The only time coverage applies under this policy, is at the time that the electrician stops being an electrician and starts acting as a real estate salesperson or broker.
The term “damages” is defined to mean compensatory damages and includes the costs of repair, that is, placing the aggrieved party in the position they would have been in, had the error etc. not taken place. Pre-Judgment and Post-Judgment interest are both covered, but any fines or penalties are not.
There is one further and very important restriction; punitive and/or exemplary damages are not covered. These are damages sometimes awarded by a Court in special circumstances where the Court wishes to “teach the defendant a lesson”. In other cases, they might simply be used to “bump-up” the award somewhat. The issue here is quite clear. If they are described by a Court as either punitive or exemplary damages, then they are not covered.
You might also wonder what is covered under the term “personal injury”, and it’s not what you might think.
Under the policy, personal injury means:
• False arrest
• Detention or imprisonment
• Wrongful entry or eviction
• Invasion of private property
• Malicious prosecution
• Defamatory or disparaging material
• Publication or utterance in violation of an individual’s right of privacy
Actual physical harm is not covered. You would need a different insurance policy for that. This kind of personal injury is the type that might be sustained by reason of an act or omission on the part of the insured that causes harm to the person’s reputation or psychological well-being. It is not “bodily injury”.
Defence and Payment of Costs
The insurer has some obligations under the policy and agrees to:
• defend in the name of the insured any action
• against the insured coming within the policy
• even if the claim is groundless, false or fraudulent
• pay any appeal costs
• pay any costs awarded against the insured
• pay any interest accruing within the policy limits
• reimburse the insured for all reasonable costs including legal costs
There are some observations here. The defence and the costs associated with the claim are in addition to the policy limits. Reimbursement for an insured’s costs are those that relate to requests made by the insurer. Costs do not cover loss of earnings. So, this means “out-of-pocket” expenses only. For example, it is reasonable for the insurer to require that the insured attend at the trial of the action. The trial could take place at a location several hours away from the insured’s place of residence. Accordingly, the reimbursement would be for travelling expenses, meals and the hotel room during the two week trial, but the actual loss of income to the insured would not be covered.
You will also note that it includes “legal costs”. This is important. Not all professional liability policies include this provision. Let’s consider the case of two sales representatives in one brokerage acting in a multiple representation situation. One or the other may very well wish to point the finger at someone other than themselves. After all, professional reputations are at stake. There may be a conflict among the various defendants. The brokerage, itself, may also be at risk. Here, this policy will reimburse the insured in respect to independent legal advice, in such circumstances where that is required.
Naturally, the defence costs already include the payment of legal fees for the law firm retained by the insurer directly to defend the matter on behalf of the insured.
The policy provides coverage on a worldwide basis, but the requirement in terms of defence only extends to Canada and the United States. So, a salesperson could be vacationing in Australia or on a cruise ship in the Caribbean. If they offer bad advice, it will be covered, but only if the lawsuit takes place in those two jurisdictions.
Furthermore, the insurer has some rights with respect to the defence. It may investigate and negotiate any claim. However, it will not settle or compromise the lawsuit without the insured’s consent. If there is more than one insured, then the insurance company will try to reach a consensus among the insureds. If a consensus cannot be reached, then the insurer may act unilaterally.
The actual “named insured” in the policy is RECO. The insurance extends to both:
1) RECO, and
2) An insured member (a registrant to whom RECO has issued a Certificate).
The definition of insured member is extended and provides coverage to brokerages acting through a registrant (whether or not such registrant is an insured), the heirs, executors, administrators, assigns and legal representatives of an insured in the event of the death, incapacity or bankruptcy of such person.
For greater certainty, insurance contracts often include a list of exclusions. These are specific matters that are not covered under the policy. These include the following:
• Fraudulent, dishonest, criminal or malicious acts, errors or omissions
• Bodily injury, sickness, disease or death to any person
• Theft of any property
• Claims related to commission entitlement or fees
• Claims covered by other policies, except for the excess
• Claims in respect to transactions where the insured has a direct or indirect interest
• Claims for the return of money held on deposit
• Fines, penalties and taxes
• Property management
Policy Exceptions to the Exclusions
No insurance policy would make any sense at all to the reader, unless there was a section that dealt with exceptions to the exclusions. So, these are things that were out, but now they’re back in again.
Generally, theft is out, but it is contemplated that an insured may be looking after someone else’s property. So, this will be covered up to $25,000 provided the insured had the care, custody and control of a third party’s property that was damaged or destroyed. The insured will be responsible for the first $500. If something is stolen from an “open house” then the insured will pay the first $500, and any amount over $25,500.
Property management is generally not covered unless it represents less that 35% of the insured’s business.
There are some others but they are somewhat “esoteric”, and consequently I will leave those items to be reviewed at an appropriate time.
Other Insurance Policies
This policy is designed for a particular purpose. It provides professional liability insurance. It also includes additional coverages that might not be available elsewhere. However, it does exclude some fairly basic matters. And, for that you will find that other types of policies will commonly respond. So, add some additional riders and coverages to other insurance liability policies and you should be risk-free. Well, risk-free within limits!
This policy of insurance is “second payor”. That means that if there is any other insurance policy or other indemnity available to satisfy this loss, then, this policy will only come into pay the excess leftover (if any) after the first policy of insurance has paid out.
Conditions Precedent to Policy Rights
One of the key items in every insurance policy is the requirement to ensure the co-operation of the insured in the defence of an action. No co-operation, no coverage.
There also needs to be timely reporting of a claim. The keywords in this policy are “as soon as practicable”. The trigger to give notice will be the “claim itself” being presented as well as “any circumstance likely to give rise to a claim”. So, the insurer could deny coverage by reason of the insured failing to report an appropriate circumstance.
To guard against this, the right advice should be: report everything. There is a saving provision for the insured who was acting in good faith and was unaware of the claim under the policy. Here, the insurer must prove actual prejudice by reason of the late reporting. Oftentimes, the insurer need only prove that memories of the witnesses have faded .
Notices under the policy are to be given to the named insured, RECO.
Should a registrant enter voluntary retirement, coverage is automatically extended for three additional years, and after that for a further seven year period upon payment of a small premium. Such extended coverage is not available to registrants who retire if they were censured or disciplined.
The insurance company is subrogated to the rights of the insured. Subrogation is an insurance term referring to an “automatic assignment”. The insurer once it pays out under a policy has the right to sue in the name of the insured any party who might otherwise be responsible for the loss. So, the person who caused the loss doesn’t necessarily get off the hook. The insurance company makes a business decision as to whether it is feasible to commence litigation and recover the loss from the offending party. This, of course, includes any registrant whose dishonesty may have lead to the loss.
From time to time there are Latin expressions that find themselves entrenched in our laws. The expression “uberrimae fides” means “utmost good faith”. It is an inherent and fundamental part of every insurance contract. This means full disclosure, provide all details of every matter whatsoever, no confidential information, no restrictions. In fact, there is a specific positive duty to “tell all”. Any insured who fails to meet its obligations will relieve the insurer of any liability under the policy. This very fundamental term underlies the very nature of the insurer-insured relationship. This is not a simple contract with two independent contracting parties. This is a contract whereby both contracting parties will come together as one, so “no secrets”, or that would defeat the purpose of the relationship.
All in all, insurance maters can be tricky. So, please refer to an up to date copy of the RECO Errors & Omissions Policy for greater clarification and the specific wording. You might also wish to obtain legal advice.
* the trip and fall case is interesting. Coverage is limited and any actual bodily injury would be excluded. Other aspects of the trip and fall, save and except the bodily injury itself, may be afforded coverage under the policy. Please note, that a general third party liability policy would include coverage for the bodily injury aspect of this matter. Provided the insured maintained both policies, then the incident would be fully insured.
Brian Madigan LL.B., Broker