D&O Insurance in Real Estate: The Risks and Why You Should Be Covered
According to the 2021 Assurex Global Real Estate Benchmark report, fewer than 22 percent of real estate companies surveyed carry D&O insurance. Several questions arise with this data in mind. These include whether we should be concerned by this low percentage of covered organizations and if we should take comfort in knowing that most firms are thoughtfully evaluating their exposure to loss and making the prudent decision to save money. While only time will tell, management liability risks are real. The potential losses are substantial but perhaps remote, depending on the operations of the company and risk mitigation strategies utilized.
Management liability risks, or rather commercially insurable risks, may be lower in certain private closely-held real estate companies. However, these exposures should be closely and regularly reviewed, especially as firms expand operations into more heavily regulated areas or if operations grow to add third-party investors and minority owners.
Sources of claims against the directors and managers of a real estate company can include investors, tenants, building owners, creditors, local or state officials, state and federal regulators, and a variety of others.
Protection from these exposures is most commonly found in the form of a Directors and Officers (D&O) policy. Other management liability coverages include Employment Practices Liability (EPL), Professional Liability Errors & Omissions (E&O), Property Management E&O, Cyber Liability, and Fiduciary Liability. As defined by the 2021 Assurex Real Estate Benchmarking report, these coverages are "designed to protect board members and managers' personal assets."
While many real estate companies are privately owned and capitalized by the owners' equity and debt, some organizations actively solicit outside investor equity. It is more likely that some of these outside, passive investors will have unrealistic expectations on returns and may be unprepared to deal with some of the risks that may impact their investment, presenting opportunities for conflict and claims.
For the 22 percent of real estate firms buying D&O coverage, the typical real estate structure with many Single Purpose Entities (SPEs) can complicate the policy design and breadth of coverage. Is it necessary to provide coverage for all the SPEs or just the entities with employees and active operations beyond ownership? Electing only to cover the operating entities can reduce the exposure basis and cost, but can also potentially leave the corporate family exposed. Gaining a clear understanding of the potential coverage and limitations will help businesses make informed decisions about the appropriate coverage structure to pursue.
Questions To Answer and Other Considerations
Your broker can help your organization answer several key questions when it comes to considering coverage. These questions should be answered in collaboration with ownership, the risk manager or the financial officer.
These questions include:
- Does your Board of Directors include outside directors? If so, what are their expectations?
- What concerns do you have about lenders' actions regarding failure to meet covenants on loans and mortgages?
- Do you plan to raise capital in the next 12 months? Are you using a private placement seeking investors?
- What challenges have you experienced in dealing with local and state regulatory authorities? Have you been involved in any regulatory actions?
- Does your firm include outside ownership or outside investors?
- Do you currently carry professional liability coverage? Are they with the same carrier?
- How do you interact with building or tenant organizations?
When choosing carriers to fit your management liability needs, the process should be conducted with your other policies in mind. While not a requirement, selecting the same carrier for policies such as D&O and Errors and Omissions (E&O) can help eliminate grey areas and potential finger-pointing between carriers when it comes to claims. Combining policies can also mean shared limits and likely premium savings.
If you find your company unprotected from management liability risks, RCM&D can help you decide if procuring coverage is right for you. Talk to your trusted advisor today for more on management liability risks and solutions.