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The financial crisis' effect on real estate-related business is being felt in errors and omissions liability coverage.
Banking and diversified financial firms that told their clients to invest in risky credit default swaps or subprime mortgages now face some big claims “and a lot of them are still open,” said Phil Norton, Chicago-based president of the professional liability division at Arthur J. Gallagher & Co. In many cases, defense costs have already hit $10 million, he said.
Any risks with direct exposure to the financial crisis are typically harder to place, said Gene Mason, senior vp and head of professional lines for Endurance Specialty Holdings Ltd.'s U.S. wholesale insurance operations. This includes title agents, appraisers, escrow agents and some property managers.
Title agents, for instance, “historically did not have a lot of claim activity,” Mr. Mason said. But during the recent real estate crisis, they may have run into problems by failing to go beyond checking online to see if there were any liens on the property and local officials may have been backed up in inputting this information.
James L. Rhyner, Warren, N.J.-based worldwide manager for lawyers professional liability insurance and miscellaneous professional liability insurance at the Chubb Group of Insurance Cos., said what title agents, as well as collection agents and related professions, have in common is “the volume of work that they had during the boom time and with refinancing. There was a tremendous amount of work and it needed to be done quickly; and oftentimes, protocols weren't in place for there to be proper oversight to make sure everything was compliant.”
Other difficult risks within the financial segment include banks, security broker dealers, investment advisers and mortgage brokers, Mr. Mason said.
Also affected have been “accounting firms and law firms who have clients that are directly tied to the crisis,” Mr. Mason said. “Whether it's subprime, whether it's the economics, they still have exposure.”
Mitigating these risks is a “question of management control and oversight,” said Mr. Mason.
For instance, he recommends that consulting firms bill monthly rather than quarterly. A monthly bill is “really going to be your first line of defense when the client comes back and says, "Hey, I didn't know you were doing” certain work, he said. “It's hard to argue you didn't know what was going on if you get a bill once a month.”
Firms should also have a “clear, well-defined” engagement letter “that defines the actual services that you will perform on behalf of the client,” the time frame and when to start billing the client, Mr. Mason said.
“What we're seeing is, on a lot of renewal business, E&O underwriters are asking more questions.” Standard applications “don't necessarily cover a lot of the issues that are out there that they want to address,” he said.
Getting the best coverage is a matter of entities “being able to demonstrate to the underwriters that they have protocols in place to ensure that all of the work product is being reviewed and handled appropriately,” Mr. Rhyner said.
“It's important that those entities in the underwriting process demonstrate to the carriers that they have particularly good protocols in place, and that will help differentiate them from their peers,” he said.
Errors and omissions risks once characterized as hard to place now are merely challenging due to ongoing soft pricing, many observers say.