Who would you prefer to be in your errors and omissions (E&O) insurance portfolio? A mortgage broker or a real estate agent?
Quebec mortgage brokers are asking their provincial professional liability insurance carrier, the Fonds d’assurance responsabilité professionnelle du courtage immobilier du Québec (FARCIQ), to lower their E&O insurance rates, thereby recognizing that mortgage brokers represent less of an E&O insurance risk than real estate agents.
FARCIQ currently charges the same insurance premium for mortgage professionals and real estate agents. Annual insurance premiums for mortgage brokers and real estate agents alike started at $550 when FARCIQ was created in 2006. Premiums have since been adjusted a number of times and are currently just below $500 a year.
Before FARCIQ, mortgage brokers say they paid insurance premiums in the ball park of $300, while real estate agents were paying more on the order of $800 or $900.
Mortgage brokers say that since their E&O insurance claims are less frequent and less severe than those of real estate agents, they should pay lower premiums.
“We do more than $2 billion of funded volume,” Pierre Martel, president and CEO of Multi-Prets Mortgages, said of the approximately 18,000 licensed mortgage brokers in Quebec. “The largest claim that I saw was about $20,000. I’ve never seen anything for hundreds of thousands of dollars.
“We’re trying to negotiate with [FARCIQ] on the fact that our claims are lower, and to ask for an adjustment for our field of activities.”
So far, FARCIQ says it needs more data to assess the true risk of mortgage brokers versus real estate agents. Martel said FARCIQ has been studying the trends for seven years.
In the meantime, common mistakes made by mortgage brokers usually involve small sums of money – under $10,000, with sums under $2,000 falling under the insurance deductible, Martel said.
For example, a broker might require the appraisal of a home, but the sale doesn’t go through, so the client wants the money for the appraisal back. Or a broker might misjudge the amount of a refund owed to a client after the client makes an RRSP contribution as part of the Home Buyer’s Program. Also, a mortgage broker might miss out on sending a commitment letter, meaning a client might wind up paying a slightly higher interest rate on the mortgage loan.
“I think the severity and the frequency of the claims that would arise for the real estate agent would be higher than for the mortgage broker,” said Dave MacDonald, assistant vice president of ProFin, the professional & financial risks practice of RSA Canada.
One reason is that real estate agents are dealing with many parties in the real estate transaction, increasing the likelihood of an error.
“Real estate agents are dealing with the legal side, the lawyers,” said MacDonald. “They might be dealing with contractors to fix up the staircase and make it look nicer when they’re selling it.
“They are potentially dealing with staging companies, so the home looks better when customers come to look at it during an open house.
“Real estate agents are dealing with open houses, meaning they have clients coming into a house that is not theirs, but to which the real estate agent has care, custody and control. If something goes wrong during that episode, they are exposed as well.
“You’ve got title searches – in fact, the real estate agent may even engage the services of a mortgage broker as well, depending on how many services the real estate agents render.
“So a lot more services, a lot more exposure, a lot more potential for claims could actually occur with the real estate industry versus the mortgage broker industry, although they are all considered one industry overall.”