Giving up prior acts coverage is risky business.
Don’t be fooled by marketing gibberish implying that you don’t need to maintain your prior acts coverage in your Real Estate Errors & Omissions Insurance policy. YOU NEED IT.
I realize that these are tough economic times, and with the downturn of the market, many real estate appraisers are struggling to survive. However, one of the most important business decisions you can make is to continue your Errors & Omissions Insurance coverage. No one ever thinks they are going to have a claim. However, as long as homeowners continue to struggle to meet mortgage payments and fall short of refinance requirements due to lowered property values, real estate appraisals will be scrutinized and questioned.
Many real estate appraisers assume that if they paid for an insurance policy, they have coverage under that policy forever. This is not true and this is not how claims-made policies work.
If your policy is written on a claims-made basis (most professional liability policies are), your prior acts date is typically the date of the first policy you purchased. Some carriers will offer what is called “full prior acts.” This means that there is no specific date in the past by which your prior acts are limited. Your prior acts date is carried forward each year if you renew your policy without a lapse in coverage. You are then covered back to your prior acts date in the event of a claim, subject to your policy terms, conditions and exclusions.
Let’s demonstrate how a claims-made policy works.
John Smith purchased a real estate appraiser policy February 1, 2000. He renewed his policy each year by February 1 to avoid having a lapse in his coverage. His current policy will have a prior acts date of February 1, 2000. Mr. Smith’s policy would respond to a claim that is reported during his current policy period for work he performed between that date and February 1, 2011, subject to the terms, conditions and exclusions of the policy form.
If Mr. Smith were to switch insurance companies before his current policy expired February 1, 2011, his new carrier should pick up his prior acts coverage back to February 1, 2000, and the new insurance company would respond to new claims reported during the policy period for work done between February 1, 2000 and February 1, 2012.
If Mr. Smith let his policy lapse and did not renew it by February 1, 2011, or went with an insurance company that did not offer prior acts – should he have a claim for work he did between February 1, 2000, and February 1, 2011 – he would have no coverage unless he purchased an Extended Reporting Period Endorsement.
Most claims or complaints are reported several years after the actual appraisal was performed. There are statutes of limitations that typically vary by state and by allegation, which may protect a real estate appraiser from being held responsible for damages. However, there is still the cost of defense, which can far exceed the cost of your insurance contract.
You can purchase an Extended Reporting Period Endorsement from your current carrier during a specified time period if you do not renew your policy, retire, or switch to another carrier who does not provide you with prior acts coverage. It is an extension of time to respond to a claim for work done between your prior acts date and your policy expiration date. Costs vary depending on the insurance company. Some may offer free options for retirees and Death and Disability, as well as options you can purchase for a one-, two- or three-year period of time. An Extended Reporting Period does not cover any services performed in the future. It only provides an extension of time in which to report a claim for work done in the past. It is a one-time option and cannot be renewed once the extended reporting period expires.
The long and the short of it: giving up prior acts coverage may be one of the worst business decisions a professional could make. All those years of maintaining adequate protection by renewing each year and keeping your prior acts coverage would be gone – just when you most need coverage. Maintain your prior acts coverage until you are no longer performing any professional services, then review your policy options and/or discuss with an insurance professional your extended reporting period options.
The terms, definitions and examples of insurance coverage are used here for demonstration only. Insurance policies and coverage can vary widely amongst insurance companies and you should consult an insurance professional and your policy for more information.