The Need to Know About E&O
Greg Floyd
As a community manager your job can be incredibly rewarding, but it is not without risk. You play accountant, payroll specialist, landlord, inspector, policeman, rental agent, and a host of other roles all at once. Sound familiar? All the while, you’re looking to simply take care of the communities you serve and not to worry about small mistakes coming back to haunt you in the form of lawsuits. Well, that’s where E&O (Errors & Omissions) insurance, also known as Professional Liability comes into play, and if you ever need it you’ll be thankful you have it.
So let’s look at some of the basics of the coverage and how it works. In its most broad definition, E&O insurance is meant to protect insured businesses in the event a client alleges a “wrongful act” in relation to their professional services. That said, there is an incredible amount of nuance in these policies and not all coverage is created equal. A mantra one must maintain when considering all aspects of the insurance industry! But I digress, back to E&O. The term “wrongful act” will be a defined term in the policy and a broad definition of such should be sought to maximize protection. Additionally, most E&O policies are written on what’s called a “claims- made” form. This means that the policy will only respond to claims first made against the insured and reported to the insurer during the policy period or extended reporting period (if applicable). Or, said another way – E&O policies trigger based on when the loss was first known, not when it occurred which is opposite of how most general liability responds. There are also specific reporting requirements in the policy that impact how and if coverage will apply. It is important to consider that delayed reporting of E&O claims can jeopardize coverage so it’s always best to err on the side of caution by reporting incidents to your broker upon first receiving notice of a demand to do or refrain from doing something.
What are some of the most common E&O claims that impact the industry? By far, in our experience, the most common claims being brought against association managers is for discrimination,
harassment, libel,
brings forth many claims of this nature. Other exposures, just to name a few, may include:
• Inaccurate record keeping or tax preparation for a managed property.
• Failure to adequately perform due diligence before hiring subcontractors.
• Inadequate budgeting for property managed. • Failure to timely report insurance claims.
• Abuse of discretionary authority provided to a community association manager with regards to capital improvement or repairs.
That said, there are also a number of misconceptions regarding E&O insurance and it’s always important to read the fine print, check the exclusions, and compare options closely when evaluating with your broker. Remember my earlier mantra about inequality in insurance policies? A common exclusion in a manager’s E&O is “contingent bodily injury and property damage”. This specifically refers to bodily injury or property damage sustained by a unit owner resulting from alleged mismanagement. Although typically excluded, coverage for this can be added back in with certain carriers. Other common exclusions include “failure to maintain adequate insurance”, “disputes relating to your management fee’s” and any claims related to “asbestos abatement”. Cyber Liability, Crime/Embezzlement, Employment Practices Liability and Misappropriation of funds are all separate coverage’s as well, and should be sought in addition to E&O.
slander, and
alleged “selective enforcement” of the rules. Community associations, by nature, host a variety of personalities. In addition, a well-established management company may very well have 10,000+ doors under management. This volume combined with the heightened level of owner engagement that inherently comes with managing permanent residences
8 Community Associations Journal | September 2018
As you’re probably realizing at this point, going through the headache of an E&O claim is not likely to be a fun endeavor. So what can be done to mitigate losses and help hedge the odds in your favor? In my opinion, it’s all about staff training, maintaining a consistent process, and documentation of communication. Train staff to recognize exposures to E&O early and try to maintain neutral and un-bias positions when dealing with owner/board conflict. Build a consistent back end process for accounting, bill pay, meeting attendance, insurance renewals, and dealing with complaints. Developing precedent for all of the above helps in properly setting client expectations and also helps the business stay organized. And always try to have your communication memorialized in the form of an email, especially when your radar is up for a potential E&O exposure.
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