Paying for errors & omissions

Veteran broker Jeff Atlin could well have been first in line when they started handing out E&O insurance more than 20 years ago. Considering today’s escalating premiums, what Atlin paid back then was, indeed, a handout.

 

“I took out that coverage starting in 1991, when it was first being offered to mortgage brokers here,” says the private lending specialist, a partner with Toronto-based Abacus Mortgages.

 

“Premiums have gone up considerably since then. Recently, we received a notice from our current insurer, whom we’d been with for years that our premiums would be tripled at renewal.

We decided to call around and got three other quotes that werealso high, although a couple were a little cheaper.”

 

He’s not the only broker now on the hunt, with a significant number of insurers actively courting brokerages across several markets. It means choice is considerably greater than the one or two providers Atlin and other seasoned brokers had to choose from in those early days when E&O insurance specifically formulated to cover brokers against professional errors and negligence was first introduced.

 

Starting in September, the policies are mandatory in Alberta, with insurers required to provide the provincial regulator proof of their clients’ coverage. The scope of those policies mirrors Ontario, Saskatchewan and Manitoba mandates: $500,000 for a single occurrence and $1,000,000 for all occurrences in a 365-day period for both liability and fraud coverage.

 

And as in those other provinces, Alberta brokerages are also having to choose between going with an insurer endorsed by one of their industry’s professional associations and the many other providers looking to grow their respective books.

 

“Mortgage brokerages are coming to us through word of mouth and they’re a mix – brokerages that are and brokerages that are not currently receiving coverage from the insurer-partners of their professional associations,” says Andrew Reid, principal insurance broker and director at Purves Redmond Ltd. The firm represents GCAN insurance. “The fact is that we are not doing a lot of advertising.”

 

The increased demand Reid – and the several other insurance brokers representing providers like GCAN, Chubb and Chartis – is now fielding comes not only from Alberta, but Ontario.

 

Some brokerages in the central province are now grappling with significant increases in insurance premiums resulting from an uptick in claims stemming from private lending deals. Insurers are also fine-tuning risk assessments for individual firms based on their claims history, funded volume, the number and experience of their agents and their exposure to private lending, among other key determinants of risk. The end result has been substantial premium increases for many brokerages.

 

“In one case, a brokerage came to us with a renewal for five times the amount they paid last year,” says Reid, whose E&O book is largely comprised of GCAN policies. “Brokerages are now looking around for better deals and the rates that we’re accessing for them are competitive.”

 

While broker associations have entered into “partnerships” with individual insurers, there is no specific requirement for brokers to use a particular service provider in order to win provincial licensing. Still, their associations do endorse individual insurers, an effective and coveted marketing tool for providers such as Encon Insurance Managers Inc. – CAAMP’s partner.

 

Reid, with a portfolio of 200-plus brokerage clients, maintains the rates he accesses on their behalf are competitive, with brokerages increasingly willing to explore options outside their professional associations.

 

Although CAAMP continues to provide its members access to highly competitive rates, the association’s President Jim Murphy tells CMP, “the rates are competitive depending on individual claims histories.”

 

Tamera Olsen, executive director of MBABC – B.C.’s professional association for mortgage originators – makes a similar boast about the organization’s own insurance program, with insurance brokerage Jones Brown and with Royal Sun Alliance as underwriter.

 

“We really just launched our program late this spring,” she tells CMP, “so we don’t have exact numbers on member participation yet, although the association brings a certain amount of buying power to the table that is certainly more than an individual brokerage does. That reflects the very competitive rates our members can access. Of course, the rate is going to vary from office to office based on individual claims history and other factors.”

 

It makes brokerage-to-brokerage comparisons difficult. It has, however, done little to silence industry concerns about escalating premiums. They’re the kind of complaints association executives in Alberta have heard and expect to hear more of. It comes with the job. But provincial association partnerships with E&O insurers are crucial to preventing a monopoly situation and winning brokers access to coverage specifically tailored to their needs, argues the immediate-past president of the Alberta Mortgage Brokers Association.

 

“There is no financial compensation to AMBA stemming from the partnership with its E & O insurer,” says Dean Koeller, who stepped down from his position this spring, just after spearheading the selection process for the association’s new insurer-partner. “That partnership is about providing members rates that are as good, or better, than what else they can get in the marketplace, but it’s also providing an insurer the kind of economies of scale that encourages it to make a long-term commitment to the industry. That makes us less susceptible to insurer flight in an economic downturn or a correction in housing prices and less dependent on one insurer, which can then set prices outside of competitive forces.”

 

The comments come as several brokerages across the province complain of premium increases at renewal.

 

In May, AMBA announced LMS Prolink, with insurer Liberty International Underwriters as new insurer-partners for its E&O Liability program.

 

Koeller sees the endorsement as a way to win the insurance company the kind of profitability needed to compete with CAAMP’s partner, Encon Insurance Managers Inc. That head-to-head competition is key to winning Canadian brokerages the best possible rates and blocking formation of a monopoly, he tells CMP.

 

Still, as a partner with AMBA, Liberty – through its insurance broker partner, LMS Prolink – has committed itself to leading E&O information and education sessions for association members.

 

“It really comes down to risk management,” says Derrick Leue, LMSProlink president, “and educating brokers about why claims happen, where they come from and how to manage E&O insurance.”

 

Ensuring that message gets through to brokers is why most insurers work exclusively with one insurance brokerage, putting the onus on their respective partners to lead educational efforts such as helping an association formulate E&O policy and procedures.

 

Those types of campaigns did little to insulate the industry from a spate of claims, starting in 2008. The timing coincides with Ontario’s move to make E&O insurance for its hundreds of brokerages mandatory, and that may not be coincidental.

 

The spike came courtesy of investors who funded private lending deals, says Leue. Many watched in horror as the recession, and resulting job losses, drove up default rates for subprime mortgages.

 

In the aftermath, investors were left hunting for someone to blame. Many fingers were pointed at the mortgage professionals who brokered the deals. It didn’t help any that brokers in Canada’s largest market were now required to carry E&O coverage.

 

“That made mortgage brokerages more attractive to aggressive plaintiff lawyers,” says Leue, suggesting mandatory licensing in Ontario gave investors access to claims money they simply wouldn’t have had brokers been uninsured. Atlin isn’t quite so diplomatic.

 

“I believe that it painted a target on the backs of mortgage brokers,” says the Ontario broker, himself a past president of the Independent Mortgage Brokers Association of Ontario, IMBA.

“Now they could go after them and hope to get a payout. The question is, were they justified in taking that action or were they just going after brokers because they represented the best hope of getting paid? I think it’s more of the latter.”

 

That litigious environment has started to change, although the rates for almost all brokerages exposed to private lending haven’t come down.

 

“Thankfully those claims are starting to stabilize in terms of their frequency an severity,” says Leue, who has fielded complaints from brokers about premiums that have risen as much as 500 per cent at renewal.

 

That kind of increase – and the real possibility mandatory coverage has encouraged it – has cemented opposition to E&O insurance among some B.C. brokers.

 

“By doing my job carefully and professionally, I’ve never had it and never needed it,” says Allan Sadler, owner of Rala Investments, a brokerage specializing in private deals. “I hope B.C. will never mandate it for brokers. It could possibly lead to a growth in claims here as well.”

 

Despite its exhaustive regulation of the industry, Canada’s most western province hasn’t moved to force brokerages to hold E&O coverage.

 

“It is something we strongly support and encourage our members to have, though,” Olsen tells CMP, pointing to MBABC’s new partnership with Royal Sun Alliance. Under that plan, all mortgage professionals of an insured brokerage must be association members. The same applies to similar programs available through other associations.

 

While MBABC and AMBA moved to strengthen their relationships with chose insurers this spring, IMBA ended its formal partnership with its provider. That insurer effectively quit the niche market, the result of growing claims exposure. Leue, whose company was the brokerage partner for that insurer, hopes to eventually regain the partnership with IMBA – this time with Liberty as the underwriter.

 

“Certainly, these relationships are important,” he tells CMP, also referencing the company’s very active relationship with Alberta’s mortgage broker association. “Definitely, we would have fewer clients if we did not have AMBA. The relationship provides us with a marketing advantage in terms of reaching AMBA members.”

 

CAAMP’s own E&O program affords insurer Encon, and its chosen brokerage partner, Rocca Dickson Andreis, the same kind of head start. Still, that endorsement may not wield the same power it once did, as brokerages look to trim costs.

 

“After we got the quotes from other insurers, we did go back to our current insurer – through CAAMP – and ask them to readjust their quote,” says Atlin. “They did bring it down a little and we decided to stay with them, because cost was only one factor to look at. But had we allowed ourselves more time to look for coverage, we would have explored all the options with all the insurers. It’s what all brokerages need to do these days.”