The details are still cloudy, but the stage is surely set for what promises to be the most significant industry crisis of this decade.
For brokers nationwide the wake-up call came last winter in the guise of their 2003 Errors and Omissions insurance renewal. Premium increases of 40% to 80% were the norm.
But even more insidious was the announcement by many insurers that “First Dollar Defense Coverage”, a long-time primary selling feature of E&O policies, was being dropped in favor of a deductible equal to that chosen for settlement and payout costs.
Imagine the financial impact on a firm if it must pay the first $5,000 or $10,000 of each claim’s expenses from its own pocket. Few agents and not many firms, even the large ones, could withstand hits to the bottom line of that magnitude.
Those who track industry liability issues say this is just the beginning of what promises to be a long -term concern for real estate practitioners. The villain in this drama is none other than the most recent risk to invade the real estate transaction: mold.
The numbers are not encouraging. In 2002 over 16,000 lawsuits were filed over mold. Experts suggest that by 2004 we may see over 20,000 legal actions.
This dilemma is made even more critical by the fact that homeowners insurance carriers have now completed a three-year nationwide effort to remove mold related coverage from homeowner policies, thus leaving the practitioner as the most eligible set of “Deep Pockets”, especially for property sales falling within the statute of limitations.
The brokerage industry is only just now reacting to this development. What is certain, however, is that the 2004 E&O renewal notices will drive home the true dimensions of this crisis.
Meanwhile, it behooves every brokerage to better understand the basics of overall risk management and to begin integrating such programs into their day-to-day operations.
The basic requirements for risk management programs in any industry includes the following components:
• Discipline & Monitoring
• Internal Investigations
• Consumer Complaints
• Cultural Fads and Trends
• Methods of Communication/Organizational Health
• Leadership, Audits, Accountability, and
• Compliance and Security Policies
Discipline & Monitoring
Many organizations have warning systems, but they activate too far into the process and are generally aimed at detecting instances in which agents may be treating the consumer in ways that are unprofessional and/or not by company policy.
And, most managers know they need to be alert for warning signs such as increased numbers of customer complaints, excessive transactional delays, litigation and other similar traditional “red flag” activities.
Quickly spotting and addressing these trouble spots as they emerge traditionally has been a generally successful management tactic. However, all too often, and in too many firms, these trends are in full bloom before they are recognized and corrective action is taken.
Cultural Fads & Trends Within The Industry
All agents and firms are affected and influenced by fads and trends in both commercial and professional activities. But there is a huge difference between a fad and a trend.
Fads tend to have “Short Legs”, usually lasting from a matter of weeks to a few months. Seldom do they persist from year to year. Trends, on the other hand, generally form into patterns over time.
A good example would be the use of cellular phones. This trend has been developing over a period of time. In fact, cell phone usage has created another set of patterns or behaviors that include such things as agents driving while talking on the phone.
This in turn has created yet another trend that suggests a growing number of accidents involving agents can be attributed to using cell phones while driving.
Why are fads and trends important relative to risk management? It’s because they develop new sets of risk management issues for that must be accounted for and addressed. The only way they can be addressed is for management to consciously assess emerging developments and to question their ultimate implications for the firm.
Methods Of Communication/Organizational Well Being
What do communication methods have to do with risk management?
There is a direct connection: The more open and communicative the entire brokerage team is with one another, the more likely management is apt to discover or learn of risk management issues.
Risk-generating practices ultimately can and will be discovered by, or revealed to, management through open, candid dialogue. Encouraging and soliciting frank feedback about these practices will always be in a firm’s best interests.
Leadership, Audits & Accountability
“Discipline Management” is another form of communication necessary for healthy organizations. “Discipline” suggests how seriously the ownership and management team values its rules, mission, and method for dealing with customers and prospects.
How effectively and seriously these rules and customer service standards are communicated affects the agents’ motivation, productivity, and interest in interacting in a creative fashion with the brokerage. Ultimately, they dictate and shape the attitude necessary to effectively serve the real estate consumer.
Informal Team Leaders
How agents conduct themselves is heavily influenced by others with whom they work with. One of the fears most often expressed about “Freedom Shops” and “Work From Home” programs is that “peer pressure” to perform correctly will be totally absent.
Peer pressure has been the subject of countless studies and the concepts of formal and informal leaders are well established. In firms where identified informal leaders, or risk management mentors, behave in a manner consistent with the firm’s policies, the likelihood of other agents drifting “Out Of Bounds” is greatly reduced.
Audit
Proactive audits for adherence to processes, procedures, policies and other activities are essential to any risk management program.
The mere fact that agents and managers are allowed to take short cuts or to develop their own set of transactional procedures simply validates and institutionalizes that non-conformist behavior.
For example, if agents are required to use the firm’s transaction management program, but aren’t held accountable if they don’t, eventually its non-use will become an accepted (or normalized) practice.
Proactive audits and rigidly enforced penalties for non-compliance, such as withheld or reduced commission checks, must become essential elements of a firm’s risk management program.
Accountability
All staff, agents and managers should know they will be held accountable for following proper procedures and using common sense as it relates to risk management issues.
However, experience also shows that if compliance is not in some way connected to their performance and compensation, their commitment will be limited.
There is a management maxim that says, “What gets rewarded or evaluated gets done.” If there is an expectation that all staff, agents and managers are to be aware of risk management issues and their role in them, the program is more likely to be successful
Safety & Security Policies
In light of recent world unrest, firms should reassess the security of their facilities and implement practices that lead to better screening of leads, prospects and customers. The personal safety and security of the firm’s agents and support staff in dealing with clients must also be a paramount concern.
Some brokerages have reviewed and rewritten their safety and security policies to even include stages of alert. Regardless, many staff and agents are much more aware of the need for security procedures, and expect their brokers to have well written and highly publicized policies and procedures.
Measuring & Celebrating Success
Lost clients, botched deals, complaints, claims, lawsuits and many other indications of inadequate or inappropriate risk management should all be recorded, tracked and continually evaluated and assessed.
This on-going process allows management to identify both preventive measures and opportunities to celebrate successes. Certificates of appreciation, notes in personnel files, and even more monetary-based gestures can underscore positive behavior and help to build organizational pride.
Summary
Meeting the challenge of effective risk management in today’s real estate transaction requires active observation and ongoing analysis of circumstances, policies, behaviors and other indicators of potential problems or issues.
Failure to forthrightly address these issues can result in financial loss to agents, the company and the consumers, and could significantly increase the cost of E&O insurance premiums due to a firm’s poor history of managing risk.
Now is the time to get started.
The National Association of REALTORS® and many of the more progressive state and local REALTOR® associations have developed, or are developing, risk management and risk reduction programs in response to this growing crisis.
Enlightened brokerages should be fully supportive of these efforts as they are a most logical and natural role for professional associations representing any industry.
