Most property managers we talk to manage at least a few properties they own themselves, sometimes a large portfolio. Others manage rentals owned by their agents or related legal entities. Vacation rental managers often have short-term rentals of their own in the mix of 3rd party rentals.
You may not have an unrelated owner who could sue you over your management, but tenants and guests still can. When you both own and manage the property, allegations about maintenance, screening or other management decisions can point directly back to you and your firm, and your professional services.
Whether your E&O covers those professional services for owned properties depends on the wording. We’ve covered why this matters here. Now, let’s look at what the policies actually say.
Many Policies Start With an Owned-Property Exclusion
A common approach in the forms we review is to exclude claims involving services for property owned by an insured or a related entity, then provide specific exceptions.
The exclusion usually looks something like this, paraphrasing common wording:
This policy does not cover claims arising out of the sale, leasing, appraisal or management of property owned, developed or constructed by an insured; an entity in which an insured has a financial interest; an entity with a financial interest in the named insured; or an entity under common financial control.
Putting the property in an LLC does not necessarily avoid this restriction. The wording can reach indirect ownership and financially related entities.
Some policies provide no applicable exception for managing owned rentals, leaving professional management services for those properties excluded.
Others restore coverage through exceptions—often called carvebacks—with conditions involving ownership percentage, property type, who performs the services or a separately scheduled limit.
How Policies Restore—or Restrict—Coverage
Sales, Leasing and Management May Have Different Exceptions
Coverage for selling an agent-owned home does not establish coverage for managing that agent’s rentals. Some policies restore qualifying residential purchases or sales without restoring ongoing management.
Leasing may also be handled separately. One form provides an under-50% ownership exception for leasing, while its residential property management exception requires services by another insured who is not the owner. The leasing threshold should not be read as a general permission to manage owned properties.
Other wording we have seen expressly combines “management or leasing” within the same under-50% exception.
Ownership Percentages Can Determine Eligibility
Some policies restrict management based on the insured’s ownership percentage:
- “15% or more”: Management is excluded when the insured owns 15% or more.
- “More than 25%”: Leasing or management is excluded when the insured owns more than 25%.
- “Less than 50%”: The management or leasing exception requires combined ownership below 50%.
Remember, coverage could be affected based on how those percentages are counted and/or measured. Depending on how the policy is worded, two insureds owning 30% each may exceed a combined threshold even though neither individually owns a majority.
Residential and Commercial Management May Differ
One endorsement narrows the exclusion’s management wording to commercial property management, with an exception where combined ownership is less than 50%. Residential management receives different treatment, but leasing remains separately listed in the exclusion. Its commercial management exception should not automatically be applied to leasing.
By comparison, another form’s under-50% management and leasing exception applies to real property, without a residential-only restriction.
Forms commonly define Residential Property or Residential Real Property as a one-to-four-family dwelling. A five-plus-unit apartment building would not qualify for an exception using that definition, even though tenants live there.
A Residential Exception May Require a Nonowner Manager
Some residential management exceptions require services to be performed:
“by another Insured who is not the owner”
A narrower residential provision also requires that no insured owner perform professional services, “including supervision.” Assigning daily tasks to a nonowner may therefore be insufficient if the owner continues supervising management decisions.
Coverage May Depend on a Scheduled Limit
One endorsement includes a separate category:
“Property Manager for Owned Properties”
We have seen schedules from the same carrier vary from $0 to $1 million for owned-property management. Finding the coverage wording is only part of the review—you also need to check the corresponding limit and deductible in the schedule, which may be buried deeper in the policy.
This scheduled management provision is not expressly limited to residential property. A limit for selling owned property does not necessarily provide a limit for managing it.
Payments May Be Reduced by Ownership Percentage
Some forms restore qualifying claims but reduce the insurer’s payments.
One applies the reduction to qualifying claims brought by another owner or an owner-related entity. Another applies it even to qualifying claims brought by a noninsured, reducing both Damages and Claim Expenses by the percentage owned by all insureds. That provision applies to residential and commercial management.
Under that second provision, 40% insured ownership produces a 40% reduction in otherwise payable damages and claim expenses. At 100% ownership, the stated reduction could eliminate those payments.
Developed or Constructed Rentals Need Separate Review
A firm may manage a rental that its principal built, developed or substantially expanded. An exception for owned-property management does not necessarily resolve restrictions involving that property’s development or construction history.
Some forms separately exclude leasing or management of property developed or constructed by an insured or a financially related entity. Others provide a management exception or apply an ownership-based payment reduction.
Several forms use “developed” or “constructed” without defining the underlying activities. Review whether the restriction reaches the work performed, rather than assuming it applies only to ground-up construction—or that every renovation triggers it.
Keep in mind, what we are referring to here is if the firm can manage the rental after construction, not if construction management services themselves are covered. Those activities usually fall under separate construction-management restrictions on usual property management errors & omissions policies.
Other Wording Can Still Affect Coverage
Professional Services May Require a Fee
An ownership exception may permit management while the Professional Services definition separately requires services performed:
“for others for a fee”
Unpaid management services for one’s own property may not satisfy that definition. Rent received as the property owner should not automatically be treated as compensation for management services.
Individual Coverage Extensions May Restrict Owned Properties
Restrictions for agent-owned services can also appear within other coverage provisions. For example, showing or lockbox coverage may exclude insured-owned properties even where other management coverage is available. One showing endorsement expressly includes showing rentals to prospective tenants, but excludes insured-owned properties from that protection.
Pollutant-disclosure coverage can have a similar restriction. One form ties that coverage to defined residential or commercial properties that exclude properties in which an insured or family member has—or previously had—an ownership interest. That can affect a claim alleging failure to disclose mold or another pollutant at an owned rental.
Claims From an Affiliated Owner May Be Separately Excluded
Even where management of an owned property is permitted, a separate exclusion may restrict claims brought by a related property-owning entity.
For example, a tenant’s claim against the management firm and a claim brought by the principal’s property-owning LLC may receive different treatment. Permission to manage the property does not necessarily restore coverage for a claim from that affiliated LLC.
Palomar With the PBI Group Endorsement
PBI Group’s exclusive real estate E&O program with Palomar includes property management within the definition of Real Estate Professional Services. The PBI Group endorsement replaces the owned-interest exclusion and provides an exception for qualifying “services as a Property Manager.”
The Property Manager definition includes leasing space, along with collecting rents, selecting tenants and arranging qualifying repairs, renovations or maintenance by others. This connects leasing performed as part of covered management services to the management exception.
That exception is not restricted to residential properties. For qualifying owned-property management, it does not require a nonowner to perform the services.
The Professional Services definition does not require a fee. Qualifying unpaid management can therefore be considered, provided the work is performed through the insured firm and the remaining policy requirements are met. Below we explain how to properly report the management of owned properties on the application.
Management of Developed or Constructed Properties
One of our endorsements at PBI Group addresses management of property developed or constructed by an insured, typically with a $50,000 sublimit for damages and claim expenses, within the overall policy aggregate. For firms with substantial management of owned and developed properties, we have creative coverage options available.
This provision addresses E&O claims arising from management of the completed property. It does not establish coverage for performing other construction work or acting as a developer or contractor.
Other Considerations
Owned Properties Must Be Managed Through the Firm
Determine whether an owned cabin, condo or other short-term rental is managed through the insured firm or self-managed separately, or by another entity. E&O policies only cover professional services performed on behalf of the Named Insured. The property needs to be managed through the insured management entity for coverage to potentially apply.
Property-Level Insurance Remains Necessary
E&O coverage for agent-owned doors does not replace the need for property and liability insurance on the building, or renters’ insurance.
A carveback to the owned-property exclusion does not automatically insure the property-owning LLC for every claim or override other exclusions.
Report Unpaid Management on the Application
Disclose owned or affiliated properties managed through the firm even when no fee is charged. For our program, underwriters account for that exposure using the management fee that ordinarily would have been charged to a third-party owner for those management services.
The rating basis is that management fee, rather than the full annual flow-through rent (or gross total bookings in the vacation management world) collected. Underwriters may request annual rental income or gross total bookings to help calculate an equivalent management fee portion.
If an actual standard fee for owned properties is already included in reported management revenue, identify it to avoid double counting. An estimated fee used for underwriting does not itself satisfy another policy’s contractual “for a fee” requirement.
If your firm manages owned or affiliated properties, we are happy to review the ownership provisions, professional-services definition and endorsements with you. Feel free to schedule a policy review call with me here.
*Coverage depends on the issued policy’s complete terms, conditions and endorsements and the specific facts and allegations. This article is for general education purposes only and is not legal or tax advice.
