Few people enjoy reading an insurance policy (except maybe insurance lawyers). Most people don’t bother to do so until they have a claim. When that happens, your coverage, how it works in practice and your obligations take on a new significance. We often get questions about the deductibles in the Indemnity Plan and how they work. This article will provide the information you need and demystify the process.
What is a deductible?
A deductible is the amount of money that an individual insured (the brokerage, managing broker, associate broker or representative who made or allegedly made the error) is required to pay under the Indemnity Plan for each error that gives rise to a claim resulting in the payment of damages. The deductible is essentially your “skin in the game,” that is, the amount that you and your brokerage must contribute to the payment of the loss.
What is the amount of the deductible for each claim?
An individual insured (other than a brokerage) has a $2,000 deductible for each claim that results in the payment of damages. For a second claim within two years resulting in the payment of damages, the individual licensee’s deductible increases to $4,000 (and then to $8,000 per claim for three or more paid claims within two years). A brokerage has a $2,000 deductible for each claim resulting in the payment of damages, but it does not increase with multiple claims.
Each year it is open to E&O to increase the deductible amounts to reflect the changing needs of the insurance program. Although the deductible amounts have not changed recently, they could increase depending on the program’s loss experience.
Who pays the deductible?
Individual licensees may enter into agreements with their brokerages to assume responsibility for payment of the brokerages’ deductible obligations. These agreements are between the licensee and brokerage. Regardless of this type of agreement, E&O will hold each party responsible for payment of their respective deductible.
The payment of a deductible will typically be a business expense of a licensee and so may be deductible from business income. You should check with your tax advisor.
Are deductibles payable at the time a claim is reported to E&O or if a claim is resolved without damages being paid?
No. Deductibles are not payable at the time a claim is reported to E&O. Deductibles are also not payable if the claim is resolved without an indemnity payment (damages). Deductibles are only paid if damages are paid to the claimant.
Scenario A
A seller commences a Supreme Court action against the seller’s agent and brokerage seeking damages of $100,000. Defense counsel is appointed and the fees and disbursements to defend the claim are paid by E&O. Following a 10-day trial the action is dismissed.
In this situation no deductibles are payable by the individual license or brokerage, even though E&O has incurred defense costs.
When are deductibles paid?
Deductibles are payable by an individual licensee or brokerage when damages are paid to the claimant. This would happen if a claim is resolved by settlement or payment of a judgement against the licensee.
Scenario B
A seller commences a Supreme Court lawsuit against the seller’s agent and brokerage seeking damages of $100,000. The action is settled between the parties at a mediation before trial for the sum of $10,000.
In this situation, assuming this is the individual licensee’s first claim, they will pay a $2,000 deductible and the brokerage will pay a $2,000 deductible, for a total of $4,000 in deductibles. E&O will pay $6,000, the amount of the settlement in excess of the deductibles.
If a claim is only brought against an individual licensee, does the brokerage pay a deductible?
If damages are paid by E&O to resolve the claim, the deductibles of both the individual licensee and brokerage supervising the individual licensee at the time of the error are payable (see Part IV: Conditions, s.2.2 of Indemnity Plan RE0422).
Scenario C
A buyer commences a Supreme Court action against the individual licensee acting as the buyer’s agent seeking damages of $100,000. The action is settled between the parties for $10,000 at a mediation before trial.
In this situation the individual licensee will pay a $2,000 deductible and the brokerage will pay a $2,000 deductible, for a total amount of $4,000. E&O will pay $6,000, the amount of the settlement in excess of the deductibles.
What happens if the damages payable are less than the total amount of deductibles?
The damages would be paid in full by the individual licensee and brokerage.
Scenario D
A seller commences a Civil Resolution Tribunal claim against the seller’s agent and brokerage seeking damages of $5,000. The Tribunal awards damages of $3,000 to the seller.
In this situation the individual licensee and the brokerage will each pay a deductible of $1,500, for a total payment to the claimant of $3,000. E&O will not pay anything as its obligation is to only pay damages in excess of the deductibles.
What happens if a licensee does not pay their deductible?
The requirement to pay deductibles is set out is s.104 of the Real Estate Services Act. A licensee who does not pay their deductible within the time set for payment may have their licence suspended until the amount due is paid to E&O. This is a rare occurrence. The staff lawyers work closely with our insureds and are reasonable in setting the time for payment.
For more information on the Indemnity Plan and Coverage, see our FAQs.
Note: The information provided here is intended only to assist real estate licensees and is for general information only. Please read the Indemnity Plan carefully and obtain legal advice if necessary. The language of the Indemnity Plan governs the application of coverage in all cases.
