Social inflation is wreaking havoc on the real estate professionals errors & omissions segment, leading to an increasing number of lawsuits and astronomical settlement amounts.

While no real estate professional is safe thanks to a cooling housing market, property managers are seeing more than their fair share of challenges and facing an even more challenging insurance market as a result.

Class-action lawsuits against mid and large-size property management companies related to discrimination, price-fixing or improper or excessive fees have spiked. More than 33,000 housing discrimination complaints were reported last year, which is the highest on record, according to the latest "Fair Housing Trends Report" from the National Fair Housing Alliance.

At the same time, nuclear verdicts on bodily injury claims when there are issues of negligence, such as improper security at a property or failing to adequately maintain the premises, are also impacting property managers.

Nuclear verdicts are typically defined as jury awards of $10 million or higher. Between 2010 and 2019, the number of nuclear verdicts not only increased, award amounts rose by 27.5%, according to the 2022 report on nuclear verdicts by the U.S. Chamber of Commerce Institute for Legal Reform.

Premises liability claims accounted for nearly 25% of nuclear verdicts during that time period, according to the Chamber of Commerce's report, which said that premises liability claims “encompass a broad range of actions" that lead to bodily injury, such as negligence claims connected to hiring or supervising employees, or insufficient security to prevent a crime that caused bodily injury.

Across the real estate E&O sector, six-figure claims against property managers are becoming more typical. Examples of high-dollar claims have included:

• Shootings on a property resulting in bodily injuries where the property manager is found liable for failing to provide proper security.
• Violations of the Fair Housing Act related to discrimination, such as wrongful eviction or denying service animals that are not typically used in that capacity, such as pit bulls.
• Property managers aggressively pursuing unpaid fees that result in crossclaims—which is when a claim is brought by a plaintiff against a co-plaintiff, or by a defendant against a co-defendant—for negligence or breach of contract. Often, the claimant seeks 2-3 times the amount of the fee that should have been collected. 
• Charging blanket move-out fees instead of fees for actual damage caused.
• Improper use or distribution of personal tenant data. 

Underwriters are watching these trends carefully and taking action to limit exposure against inflated claims in the future, especially considering that there is no tort reform related to real estate liability awards. 

Insurers have responded in several ways, including reducing limits and raising deductibles for large residential property managers, particularly in states where litigation is rampant, and not quoting business in highly litigious states.

Additionally, insurers have begun applying class-action sublimits for larger residential property managers and exclusions related to social engineering and improper wire transfers. Carriers have also begun restricting capacity for residential real estate property managers and instead focusing on commercial real estate.

This all boils down to a very tough insurance market for property managers—and it's getting tougher. Agents and brokers in this class need to work with their clients to help them understand the risks of social inflation, address their exposures and educate them about emerging areas of concern where they may currently have coverage gaps, such as between their E&O policy and cyber policy.

Jude Sedliak is senior vice president of Berkley Service Professionals, a Berkley Company. He has more than 25 years of experience underwriting professional liability insurance in both the standard and nonstandard markets. He has extensive knowledge of more than a dozen E&O classes with a specialization in miscellaneous professional, real estate and insurance agents.

The remarks in this piece are Mr. Sedliak's and do not necessarily represent the views of W. R. Berkley Corporation or Berkley Service Professionals.