Subprime Market Issues Affect Insurance

by Mike W. Smith, President

Two years ago I addressed a group of Professional Liability Underwriters in a panel entitled “E&O and the Real Estate Bubble.”  At that time I was criticized for predicting an insurance crisis related to real estate E&O.  In hindsight, I was not that far off.  The current mortgage meltdown and foreclosure issues affect more than just the housing market. Foreclosures are at an all time high, in many markets real estate values are on decline and E&O claims are on the rise.  These circumstances have an adverse affect on the Property & Casualty Insurance market as well as the coverage and pricing offered.

The current subprime crisis has created several insurance related issues among our clientele which I would like to bring to your attention.  As professional liability claims relating to falling real estate prices, foreclosures, investment sales and creative financing strategies increase, we are beginning to see signs of a hard market for real estate professionals, as it relates to Professional Liability Insurance (E&O).  On the surface, this appears to be a residential real estate issue, however it really affects all real estate professionals as carriers paint a broad brush in real estate E&O policies and underwriting guidelines.  I have highlighted some of the more significant issues below.

1   Carriers are adding exclusions for services previously covered.

In response to the credit/subprime/foreclosure crisis, we are seeing renewal policies which contain significant exclusions relating to predatory lending, subprime exposures, investment sales and high loan to value transactions.  These exclusions relate to both commercial and residential real estate professionals. The exclusions further extend to mortgage brokerages, title agencies and appraisers to name a few.  Many of our commercial real estate clients don’t provide such services, but are being brought into the related suits and these exclusions preclude coverage even if its only defense.

2   Claims reported under “claims made” policies will have coverage based on the current policy terms and conditions  which may exclude services previously covered.

This is the single biggest issue we are facing.  When carriers change policy terms, those terms apply to any new claims submitted regardless of when the professional service was rendered.  Take the example of a policy which covered subprime loans in 2007 and was renewed with the same carrier, but the new policy had an exclusion for subprime loans.  The new policy would not respond to the claim, even though coverage for that service was in place when the service was provided.  It is the nature of claims made polices.  You should be very careful and examine any changes in policy terms and conditions upon renewal.  Depending upon the state and type of carrier, they may not be required to give you advance notice.

3.   Carriers are exiting the market again.

Insurance carriers go in and out of markets in search of profitability.  This creates hard and soft markets. We are seeing many carriers stop writing real estate risks altogether as a reaction to the economy and the financial markets.  Other carriers are exiting specific markets such as California.

4    Premiums are beginning to increase after three years of stagnant or decreasing premiums.

Several years without national disasters combined with record profits for P&C insurance companies have created an influx of new carriers over the past two years.  This influx has helped to keep premiums at a relatively low rate, despite a significant increase in claims activity.  We are beginning to see carriers increase premiums as their professional liability profits must stand on their own. Additionally, some of these new players that tried to seize the market are now pulling back.

So what can you do?

1.  Work closely with your agent on your E&O renewal and discuss all your services and options.

2.  Send in your E&O application early (at least 30 days) so as to allow your agent to properly market and evaluate your options.  If you wait until the last minute you may not be able to obtain other options.

3.  Review your quotes and your policy very carefully.

4.  Report any known matters or incidents to your current carrier as soon as you are made aware of them, and in all circumstances prior to your policy’s expiration date.  Some policies allow you to report incidents as claims before you are actually brought into a suit. You should check your policy to determine the proper claims/incident reporting procedures.

5.  Consider purchasing an Extended Reporting Endorsement if warranted.

Extended Reporting Endorsements

Most claims made policies provide an option to purchase an additional amount of time for which to report claims which occurred during the policy period, but are not reported to you until sometime in the future.  It is possible that given the market, the only way to cover certain prior services will be through the purchase of an Extended Reporting Endorsement (Tail Coverage).

Different carriers have different provisions regarding this.  Often you can purchase a minimum of an additional 12 months up to 36 months of extended time to report a claim.  A few carriers will allow for a longer period under certain conditions.  The premiums for an extended reporting endorsement are based on the expiring premium and range from 75% to 100% of the expiring premium for 12 months and up to about 250% of the expiring premium for 36 months.  This premium is in addition to any new premium you would have on the new policy

Summary

As with any E&O policy we encourage you to work closely with your agent to decide what coverage options are best for you. Please take the time to review your E&O renewal very closely and consider your options both relating to past and to future professional services.

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