Special Insurance Coverage
Glick, Philip K., Journal of Property Management
Editor's note: This article is the second in a series. The May/June issue of the Journal of Property Management provided an overview of the basic property and liability coverages needed by building owners and developers. This article presents a description of the additional specialty insurance coverages.
While most building owners and their property managers purchase general liability and property insurance for their buildings, not all are aware of the rising need for special coverage in several areas. Today's litigious times may call for a re-examination of the following areas of possible special coverage:
Professional liability insurance
While property owners and managers purchase general liability insurance, oftentimes the same owners and managers will not purchase professional liability coverage for real estate "malpractice" claims.
This coverage provides protection for the costs of providing defense and potential awards against the property manager for lawsuits brought by third parties, such as a competing building owner or tenant, based on alleged errors and omissions in the services the manager provides. Coverage would apply for money damage losses, not bodily injury or property damage losses.
For example, this coverage would apply if a tenant sues the property manager and the building owner alleging that the property manager or its agent misrepresented the square footage of a lease, the handling of common area maintenance (CAM) or other expense pass-throughs, or the ability to sub-lease the premises.
Other examples would include lawsuits being brought against the property management firm by a building owner that allege that the firm has been negligent in its leasing strategy or management of the building resulting in a loss of tenants and rental income and a corresponding reduction in the building's market value. Claims have also been brought by leasing agents and competing property owners against adjacent building owners and their managers who have allegedly unfairly competed by "stealing" tenants from the other owner's building.
Broad errors and omissions insurance should be purchased at adequate limits for these types of exposures. In designing errors and omissions coverage, a number of important items should be addressed.
The first involves the need to provide coverage for any property which is managed or in which the building owner/developer has an ownership interest. Unfortunately, many errors and omissions policies written for real estate managers and/or developers limit coverages to properties in which the building owner and/or manager has no more than a nominal ownership interest, typically 10 percent. This means that in a situation in which the property manager or owner may have more than a 10 percent interest, there would be no coverage even for claims brought by third parties, such as tenants or competing owners.
In addition, many errors and omissions policies will exclude coverage for any property that was developed by the insured owner or manager. Again, this would eliminate coverage even for claims brought by tenants or other third parties.
Coverage must also be provided for the full range of services offered by a property manager, owner, or other professional real estate firm. In addition to property management, leasing, and brokerage services, coverage could also include:
* assistance in obtaining financing, whether as a mortgage broker or financial consultant;
* services as a construction manager, including assistance to tenants in completing the fit out of their tenant space;
* escrow services;
* space planning, design, and layout work; and
* other real estate consulting services.
All of these services can give rise to claims that should be covered. Unfortunately, many standard errors and omissions policies written for real estate companies exclude these additional types of claims. …