Just Say NO to E&O!



What I’m about to share with you is going to get me a ton of email telling me that I’ve finally stepped over the line.  That I’ve lost my mind.  That I’m just plain nuts.  That’s okay — I’m going to share it anyway.  Here is a great tip:  Just say NO to E&O!

But before you fire up your computer and email to tell me how crazy I am, let me explain.  I’m very much in favor of risk management… just not by using E&O insurance.  There are two much better ways to limit your risk that are both cheaper and do a better job.

First, practice real estate as a corporation as I mentioned earlier in this series.  I have a corporation (corporation 1) that owns my real estate firm.  It has a very low net worth.  In fact, it keeps no money in the bank, and it doesn’t own any assets.  The only asset it owns is its real estate license.

I have another corporation (corporation 2) that is our holding company.  That company owns the furniture, fixtures, equipment, computers, brand, etc. and leases and/or licenses them to the corporation 1.  That keeps the assets in corporation 2 and the liabilities in corporation 1.  But corporation 1 is the entity dealing with the public.

The idea is that the corporation that practices real estate has no net worth, so there is very little risk, should it ever be sued. It’s what some people refer to as being “judgment proof”, referring to the fact that there is no “pot of gold” to go after in a lawsuit, should they manage to win a judgment.  If there are no assets to go after, a potential civil judgment doesn’t really matter that much.

Not only does it limit your risk, but it also works as a built-in lawsuit deterrent. Let’s face it, when the plaintiff’s lawyer finds out there are no assets, they will have little motivation to file a lawsuit.  Of course, any good attorney will surely attempt to pierce the corporate veil so your record keeping better be good.   What is piercing the corporate veil?

Usually a corporation is treated as a separate legal person, which is solely responsible for its own actions and liabilities (in this case, the practice of real estate).   Common law countries usually uphold this principle of separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil.  Piercing the corporate veil describes the legal decision to treat the liabilities of a corporation as the liabilities of its shareholders or directors.

That’s why if there is not a clear-cut distinction between you, the broker,  and the corporation, it is possible that a court would say that the corporation is just a “sham”, or a “alter-ego” and would look beyond the “legal fiction” to the reality of the situation: you the broker hiding behind the corporation.

In other words, the company has to be real and not just a sham.  That means you have to go through the steps of keeping it legitimate and not just an alter-ego.  Specifically, that means keeping corporate records, separate bank accounts, and actually treating the corporation as a separate legal entity.  But if you do that, you will be protected from the liabilities of the corporation.

The second thing you should do is purchase an umbrella liability insurance policy.  Often you can buy it from your homeowners insurance provider.  A policy for a million dollars can generally be purchased for $200-$300 per year.  That policy will not only cover you against any claims against you personally, but it will extend the existing protection on both your vehicle and homeowners insurance coverages.

What is umbrella liability insurance?  An umbrella policy is to E&O coverage what life insurance is to credit life insurance.  In other words an umbrella liability policy is a lot cheaper and it covers more than an E&O policy.  More importantly, E&O companies have a long tradition of not paying legitimate claims by hiding behind technicalities.  So, when you consider their claim payment history and their high price of coverage, you have a great reason to just say NO to E&O!

Let me give you one personal example.  When I was a new agent and had begun to grow a team, our company had E&O insurance.  One of my team members was out showing houses to her clients in her brand new Land Rover.  On the way to view a home, while driving on a country road at highway speed, someone pulled in front of her.  She slammed on the brakes and swerved, ultimately rolling her SUV.

Everyone in the vehicle was injured.  We assumed that all would be fine since, after all, we had E&O.  As it turned out,  E&O would not pay for the agent’s liability.  Neither would her automobile liability policy, since the wreck occurred while she was using her vehicle for business.  Thankfully, she had an umbrella liability policy, and it did paid the claim.  Lesson learned.

But I’ll go one step further.  As I speak and train agents across this country, I am often asked about E&O, and I always have the same response.  I ask them if they have ever had first-hand experience where E&O actually paid a claim.  Not that they heard about it from a friend, but that they, personally, were involved in a situation where E&O paid out.  Not a single one of those thousands of agents has ever had a first-hand experience of E&O paying a claim.

So I’ll make you the same challenge:  If you’ve had first-hand experience where E&O actually paid off, then post a comment to that effect.  If they didn’t, post that too.  I’m betting there won’t be many, if any, that collected.  So, I say just say NO to E&O!  And that’s Max-Bang!

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Matt

I give away about 99% of all my technology and digital training content, completely free of charge, because I want to see other agents have the same kind of success that I've had. But one thing I charge for is my Ultimate Website technology. This is the web technology I created for myself that turned my real estate practice around overnight, and now I license it agents everywhere. But right now it's too popular and is currently waitlisted. Click here to get on the website as soon as possible and I'll notify you as soon as new invitations become available.

Comments 18

  1. author Tweets that mention Max-Bang Series: Just Say NO to E&O! « Blog, Matt. Blog! — Topsy.com posted April 11th 2010. 8:40 pm Reply

    […] This post was mentioned on Twitter by Matt Jones. Matt Jones said: Max-Bang Series: Just Say NO to E&O! – http://tinyurl.com/yd77h46 […]

  2. author Cathie posted April 12th 2010. 10:12 am Reply

    My business was successfully defended by an attorney for my E & O company. We are a corporation. We have a 5k deductable on our policy and we didn’t have to pay anything to be defended. I was pleased with the service.

  3. author Diane posted April 12th 2010. 12:06 pm Reply

    1) In Colorado, all agents are brokers. Each agent must have individual E&O, required by the Colorado Real Estate Commission.

    2) Many years ago my E&O settled versus fighting a claim (agreed to pay $14,000) and I paid the $1,000 deductible.

    3) Thank you so much for your explanation of your corporation status. I like it a lot and will see how to implement it from an associated broker status.

  4. author Brenda Sours posted April 12th 2010. 12:26 pm Reply

    I love your articles and especially appreciate this one. So many people are trying to blog these days to increase their SEO but not many have the expertise to offer real value. Thank you

    • author Matt Jones posted April 12th 2010. 7:09 pm Reply

      Thank you for your kind words and for reading! Lots of folks are blogging for a variety of reasons… I’m trying to help agents to become more successful during one of the roughest patches we’ve ever had in our industry. As the scriptures say, “Freely I have received, freely give.”

  5. author Rainer posted April 12th 2010. 12:34 pm Reply

    Matt, I’ve heard of cases where judges will consider related corporations a single corporation. For instance, there was a case where a taxi company listed each of its taxis in a separate corporation, much like investors do with properties. When the company was sued, the judge ruled that the individual corporations were effectively one company; the smaller ones were a “sham” company, as you mentioned.

    I’d be wary that if your second lease back company only leases those assets to your license company, that a judge will rule it as a alter-ego company, and effectively the same. This may be even more true due to this admission in your blog.

    Secondly, the E&O policy is never designed to protect clients in a vehicle. It’s for errors and omissions of information in a professional transaction. If she had notified her auto insurer that she used her car for business, or carried commercial insurance, then she should have been covered by the auto carrier.

    However, I’d also be interested to hear from those who had E&O claims. I haven’t heard of one. Just be careful with advice on insurance (I used to work in auto insurance); you ALWAYS hear about the claim the insurer didn’t pay, but never about the 10,000 other cases where they did pay. And the people who claim the insurer didn’t pay either didn’t pay their bill, didn’t follow the rules, or aren’t telling you some embarrassing secret about why they were denied. They only blame the insurer. Maybe that isn’t true about E&O, but I know it to be true in auto, home, and health sectors.

    This is an interesting idea to consider, though!

  6. author Patty Clark posted April 12th 2010. 2:14 pm Reply

    Colorado requires us to have E &O insurance or they will inactived our license. The umbrella ploicy you mentioned is the cost of the E & O insurance and who wants to do so much extra record keeping?

  7. author Eileen Blocker Milam posted April 12th 2010. 4:48 pm Reply

    I have had very good experience with CNA as an errors and ommissions provider. The legal representation they provided was excellent. I am the broker and with over 250 agents (two years ago. 180 now)… and quite a few years in the industry… only two lawsuits. They were frivilous in my mind and yes the company settled. But not without fighting, as I requested – and would have continued if I had not realized that the settlement amount was reduced to the point that any additional effort would cost more. You do raise some interesting points. I am not sure if we are just “lucky” in Florida, but I have seen suits that are against the corporation but also against the individuals. Everyone needs liability. E and O only covers industry related activities and not auto or accidents of any kind.

  8. author Andrew posted April 13th 2010. 11:10 am Reply

    Recommending setting up a corporation for your real estate practice is a good idea, especially for tax purposes .

    Recommending a practicing real estate agent not having Professional Liability Insurance (E and O) is not a good ideal. For a single office agent practicing traditional real estate (buyer/seller agency) an E and O premium would cost $400 per year average. For a single office agent that handles foreclosures sales etc as a large part of their practice, coverage would average $700 plus a year to start. Keep in mind since I am in Georgia these premium amounts would be an average for my state based on a risk, with no prior loses etc.

    If you are part of a larger broker’s office your cost could be lower. Keep in mind that an E and O policy also pays for your legal defense cost. So even if you are accused of wrong doing and have to go to court and are found not guilty your attorneys fee’s are paid from the E and O coverage. The last time I checked most defense attorney want $3000-$5000 as a retainer just to take your case.

    The personal umbrella policy could exclude liability arising out of a business pursuit – unless it is covered by your homeowners or auto insurance. If your homeowner’s policy covers some business pursuits (i.e., an office at home), the umbrella will also extend coverage. Some policies also provide coverage to persons who are involved in civic activities, other than a person’s regular employment, that may prompt lawsuits. Also excluded is liability arising from your rendering (or failing to render) professional services. This typically excludes malpractice, which is better covered by malpractice insurance.

    So it seems to me if I am making money selling real estate and someone says, give me $8000 and I will protect you against lawsuits arising out of your real estate practice, frivolously or not, for the next 20 years , up to $1,000,000 liability per year and I could pay the $8000 premium divided over the 20 year period , I would take it. ($8000/20 years = $400 per year annual premium)

    Anyway that’s my opinion and yes I am an insurance agent that also holds an active real estate license. I really don’t like to sell single agent E and O because the commission is not that good, but none the less I think agents should still have it.

  9. author Jim posted April 22nd 2010. 4:51 pm Reply

    I’m the broker for a small company, and I decided to go without E&O about 8 years ago. I spent a little bit on legal fees here and there, but far less than the E&O premiums we would have paid. I agree with Matt, there are better ways to protect yourself.

  10. author Rick posted April 24th 2010. 3:28 pm Reply

    1) In Colorado, all agents are brokers. Each agent must have individual E&O, required by the Colorado Real Estate Commission.

    2) Many years ago my E&O settled versus fighting a claim (agreed to pay $14,000) and I paid the $1,000 deductible.

    3) Thank you so much for your explanation of your corporation status. I like it a lot and will see how to implement it from an associated broker status.

    • author Matt Jones posted April 24th 2010. 5:23 pm Reply

      Thanks for reading and for your comment, Rick. I think (you might want to check) that the real estate commission requires that you have insurance coverage. I am pretty sure it doesn’t require “E&O” coverage.

      I had an agent contact me last week asking for advice. He is a broker in CA. He had an assistant that was on the listing side of a transaction where the buyer ultimately defaulted on a mortgage (foreclosure) and is being accused of mortgage fraud. They are coming after him. He had E&O at the time, and he currently has E&O coverage, but there was a lapse when he changed companies several years ago. Because there was a technical lapse, E&O denied coverage.

      I was not surprised as this is quite typical of E&O companies. Anyway, I believe in protecting yourself… I just think there are some much better ways to do it. Thanks again for reading and for your comment.

  11. author Jeff posted April 24th 2010. 9:01 pm Reply

    My business was successfully defended by an attorney for my E & O company. We are a corporation. We have a 5k deductible on our policy and we didn’t have to pay anything to be defended. I was pleased with the service.

  12. author Steve posted April 25th 2010. 6:41 am Reply

    I’m the broker for a small company, and I decided to go without E&O about 8 years ago. I spent a little bit on legal fees here and there, but far less than the E&O premiums we would have paid. I agree with Matt, there are better ways to protect yourself.

  13. author Alan posted April 25th 2010. 2:08 pm Reply

    Thanks for reading and for your comment, Rick. I think (you might want to check) that the real estate commission requires that you have insurance coverage. I am pretty sure it doesn’t require “E&O” coverage.

    I had an agent contact me last week asking for advice. He is a broker in CA. He had an assistant that was on the listing side of a transaction where the buyer ultimately defaulted on a mortgage (foreclosure) and is being accused of mortgage fraud. They are coming after him. He had E&O at the time, and he currently has E&O coverage, but there was a lapse when he changed companies several years ago. Because there was a technical lapse, E&O denied coverage.

    I was not surprised as this is quite typical of E&O companies. Anyway, I believe in protecting yourself… I just think there are some much better ways to do it. Thanks again for reading and for your comment.

  14. author Patrick posted April 26th 2010. 9:47 am Reply

    […] This post was mentioned on Twitter by Matt Jones. Matt Jones said: Max-Bang Series: Just Say NO to E&O! – http://tinyurl.com/yd77h46 […]

  15. author Randy Elliott posted June 12th 2010. 7:14 pm Reply

    1. The best deterrent for using our E&O is best practices in real estate!

    2. Each corporation that one owns cost a min of $800 a year. 2 X $800 is $1,600 plus an umbrella policy of $300 – most likely more than we pay a year for E&O. And this is if you only have two corporations.

    No E&O – no one to defend us – we would have to hire lawyers to defend us. The cost of the E&O that we have is very low. ( We do good business so not to need it )

    • author Matt Jones posted June 12th 2010. 7:27 pm Reply

      Randy, I totally agree that the best defense is best practices. That being said, unfortunately, any fool with $50 can file suit, and his lawyer will be more than happy to keep you spending money defending yourself as long as he is getting paid by the plaintiff.

      Last year I won a civil suit, but it cost me $30,000 to defend. The other poor fool spent $60-70,000 only to lose. All it takes is one frivolous lawsuit and you’ll be spending at least $20,000 just to be right. God forbid you are found wrong (whether you are or not) by a jury.

      By the way, the corporations cost me $50 each per year, and between the corporate entities and the liability coverage, it is a small price to pay. Thanks for reading and for your comment. Best practices is always the first line of defense!

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