One of our students submitted the following:
I talked with an insurance guy who has a pretty good handle on what is going on in insurance in this state and he is very skeptical that they will be able to pull off this master policy, especially at the $250.00 max premium per licensee.
Anyway, here are my thoughts:
1. The regulation does not state what the requirement for a minimum term of a policy would be. These types of policies typically renew annually. Annual RFP's will require significant Department or Division staff resources. If the insurer changes from year to year, then the staff would need to coordinate new enrollment forms.
2. Will there be any underwriting done to qualify licensees for acceptance into the master policy? The Minimum Standards does not state that the insurance carrier must take all persons licensed by the AREC. What if a licensee is rejected by the insurance carrier due to claims history or anticipated claims that have not yet been filed but issues raised?
3. Is the maximum amount of premium $250.00 per licensee (12 AAC 02.570) for the base policy coverage? Would they allow the insurer to charge more to a licensee with undesirable claims experience?
4. Would the regulations allow the insurer to charge a fee above $250 for prior acts coverage (12 AAC 02.510(a)(7)) or is this intended to be included? The regulation does not state how far back the prior acts coverage must go or what the standard would be to determine how far back, i.e. date first licensed.
5. The regulation allows a licensee the option to purchase an additional 3 years extended reporting provision and for higher, excess or additional coverages (12 AAC 02.510(but does not put a limit on the cost. This could be a loop hole for the insurer to gouge a licensee to make up for premium lost on the base policy.
6. In 12 AAC 02.520. Exceptions to coverage at (3), would the insurer have a duty to defend even if these types of actions are claimed? Just because a claimant alleges an offense such as these does not mean the licensee is guilty and the licensee should have the right to expect the E&O insurance to defend against such claims.
7. The proposed regulations do not describe what the E&O insurer is required to provide in the case of a claim. They should be required at a minimum to provide, up to the policy limits, a defense, pay defense expenses, pay settlement costs and awards, pay awards to the claimant made by the court, and the like. The Division of Insurance should be able to provide help with this language.
8. What about claims processing? The insurer should be responsible to receive and process claims and establish a system for such.
9. What about confidentiality? Would the insurer consider the AREC it's client since it is obtaining the group policy or would the insurer recognize the individual licensees who buy into the group? Since the AREC is a regulatory commission that regulates and disciplines the real estate industry, the industry would not want the AREC or the Department's investigative staff to be able to access claim's information. I see in 12 AAC 02.510(c)(5) that the proposed regulation is requiring that the insurance carrier report claims experience, date of claim, amount paid, nature of claim and claims information on an annual or bi-annual basis. The Act does not give the Commission the authority to obtain claims information from the insurer, however, the proposed regulation appears to be reaching into that area. Many claims are frivolous and/or are settled for a nuisance amount without admitting fault.
10. Will the policy be a "claims made" policy or an "occurrence" policy?
11. The proposed regulations 12 AAC 64.620 and 12 AAC 64.630 discuss what happens if the Commission is notified that a licensee has not paid a premium. Would these actions also apply for every other reason that a licensee does not show proof of insurance? Also, how is a Broker to know that the Commission has inactivated a licensee? How will a Broker be able to manage its responsibilities to its clients and customers when the licensee working with the public could be licensed one day and not the next and then activated again? The process of how licensees are disciplined when they do not maintain their insurance needs to consider that it will affect the public and the brokerage as well.
12. If a licensee is inactivated due to not complying with the requirement to have E&O insurance will the clock start all over for the 2-year requirement to have an active license in order to qualify to take the broker test?
13. The proposed regulations 12 AAC 02.510((a)(4) discusses an option for an additional 3 years extended reporting provision for an additional premium. Tail insurance should be required. If a person formerly licensed was involved in a claim made for a transaction the person was involved in while licensed, there would be no E&O coverage without tail insurance. I think the statute of limitations to bring a claim is 2 years from the date of discovery.
14. The statute to rename/redefine the Surety Fund appears to be independent of the mandatory E&O. The statute in 08/88.172(e) says that if the Commission is unable to obtain a master errors and omissions insurance policy that meets the terms and conditions established, the requirement that a real estate licensee carry and maintain errors and omissions insurance is void during the period that the Commission is unable to obtain the insurance. It does not say that the Recovery Fund will revert back to a Surety Fund if errors and omissions insurance cannot be obtained. What would be the impact of having the Surety Fund redefined into the Recovery Fund without being able to enforce mandatory errors and omissions insurance? Has this been considered?
15. Would the minimum policy limits of $100,000/$200,000 include defense costs or would the defense costs be provided by the insurer outside the policy limits? This can be a very important factor. If a claim cannot be settled and goes to trial the legal fees can quickly eat up $100,000 leaving nothing to pay to a plaintiff if an award is made. Higher limits for these policies need to be considered.
16. Will the licensees be able to include their broker and/or brokerage company as Additional Insureds? Independent Contractor Agreements between a licensee and broker/owner require the licensee to indemnify the broker/owner and to pay all costs of defense for claims made against the licensee. The broker/owner will likely be brought into a lawsuit to make sure there are "deep pockets" at the table. Brokerage companies will need to look at excess coverage for claims if the limits provided in the group policy remain low and will want to pass that cost on to the licensees as well. Licensees will not want to pay any additional costs to a brokerage company for excess coverage.