Do you need professional liability insurance?
Feeney, John
Until recently, the liability concerns of property managers were focused primarily on injuries at the property. Professional liability concerns were relatively minor, with only a few disgruntled tenants or dissatisfied owners to contend with. But for several reasons, this environment has begun to change:
* Commercial property securitization and more sophisticated property investors.
* The ever-increasing technical knowledge needed to manage complex building systems.
* Expanding tenant needs and expectations.
* An increase in the number of nontraditional property management duties.
For example, the securitization of commercial properties has resulted in much closer scrutiny of industry practices and an expansion in the number of lawsuits challenging traditional business practices. These legal challenges are based upon attempts to establish strict standards of conduct for day-to-day business operations that were not previously in force. Such developments have made professional liability insurance, also known as errors and omissions (E&O), an important tool to address the potentially catastrophic effects of this litigation.
Basic Coverages
Professional liability insurance is designed to protect property managers against litigation that challenges the quality of professional services that plaintiffs allege they were entitled to receive. Professional liability insurance covers property managers against allegations citing negligent acts, misleading statements, or representations committed in the course of their business. It also protects against failure to act in similar circumstances, as “failure to act” can often create significant liability damage exposure. These exposures are often overlooked because property managers mistakenly believe their general liability policies will respond to claims.
While there may be significant differences between E&O policies (principally exclusion and definition related), the intent of coverage is to protect against wrongful act allegations, which are generally defined as a negligent act, error, or omission. A well-designed policy will cover the defense costs and liability judgments in excess of a predetermined deductible level.
Professional liability policies are designed to insure the parent company and directly related subsidiary operations along with their employees, directors, and officers (while functioning in an employee capacity). In addition, independent contractors may be covered when under the direction of an insured company’s management. Under certain circumstances, affiliated entities, joint ventures, and partnerships may be insured under the same policy When Does Coverage Begin?
Professional liability policies traditionally cover litigation arising from a wrongful act committed by an insured party after the policy period begins (or back to the date a comparable policy was originally purchased). The amount of time covered by a policy increases through subsequent policy renewal periods. For example, in the second year of coverage, a policy will protect against wrongful act litigation committed from the point in time that the initial policy began onward. This structure establishes what is termed “prior-acts coverage.”
What Services are Covered?
The scope of coverage afforded to protect an insured company is directly related to the policy’s definition of professional services. The policy typically reacts to property management activities specifically listed in the definition. For example, property managers may function as consultants, leasing agents, appraisers, real estate agents, asset managers, investment advisors, and construction managers. This variety makes the professional-service definition perhaps the most important aspect of the policy, since it is directly linked to the scope of coverage afforded for wrongful act allegations.
While insurance companies often differ significantly in their interpretation of covered property management professional services (primarily through policy-contained exclusions), insurers generally include the following functions:
* Development of management plans and budgets.
* Solicitation, evaluation, and securing of tenants and management of tenant relations, collection of rent, and processing evictions.
* Development, implementation, and management of loss control and risk management plans for real property
* Development, implementation, and management of contracts and subcontracts (excluding property and liability insurance contracts) necessary to the daily functioning of the property.
* Record keeping.
At the same time, the definition of property management professional services may be broadly interpreted to exclude the following activities:
* Monitoring property values.
* Identifying or recommending real estate assets for acquisition or disposition.
* Planning and constructing renovations, new construction, alterations, or additions that may be required by owners.
* Identifying the properties’ or premises’ insurable risk and recommending or monitoring coverages for the owner.
* Investing excess funds accumulated by the property manager.
Policies may need to be expanded to include asset management, construction management, property appraisal, real estate sales, business brokerage, mortgage brokerage, asset management, insurance brokerage, and escrow agent professional services.
Benefits of Coverage
Lawsuits are expensive to defend against and can be a time-consuming drain on key company resources. By purchasing professional liability insurance, property managers gain access to the skill and experience of insurance companies to respond promptly to such lawsuits, regardless of the complexity of the litigation and the capabilities of a plaintiff’s counsel. In many cases, a strong, rapid response will convince the plaintiff to drop the lawsuit rather than invest the time and money required for litigation.
John M. Feeney is the executive vice president of Re-Plus, an underwriting division of Financial & Professional Risk Solutions, Inc., located in Chicago. Mr. Feeney has been associated with the insurance industry since 1979.
Copyright Institute of Real Estate Management Jul/Aug 2000
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