What do Ontario Realtors really think about their mandated commission protection insurance and what can boards and associations across the country learn from Ontario as they consider whether commission protection insurance is a good fit for their membership? REM reporter Tony Palermo investigates:
Recent brokerage insolvencies and, in some cases, misappropriation of funds by brokers, have some real estate boards across the country looking towards Ontario and its commission protection insurance program to see if it might be an option to help protect their members’ commissions as well.
Earlier this year, Newfoundland Association of Realtors CEO Bill Stirling told REM that his organization would be looking at all of its options to better serve its members, including offering commission protection insurance. Several salespeople belonging to Exit Realty on the Rock were left wondering if they would get paid when the provincial Office of the Superintendent of Real Estate suspended their brokerage’s licence.
Another board member elsewhere in the country, who doesn’t want to be identified because he isn’t authorized to comment, confirmed that his board and its partners are looking at commission protection insurance as a possible option for its members as well.
“But I can tell you that this conversation has been going on for well over 30 years,” said the member. “Some of our members question why they should be forced to pay commission protection insurance to subsidize bad businesses.”
He can see their point but personally feels legislators need to update his province’s legislation to include better safeguards to help protect Realtors, in whatever form those may be.
In Ontario, commission protection insurance isn’t an option; it’s mandated by the Real Estate and Business Brokers Act, 2002, (REBBA) under regulation 579/05 section 11(2). And because it’s mandated in legislation, it’s never been put to Ontario salespeople as an industry vote as to whether or not they really want it.
“I can tell you it’s a very comprehensive insurance program that serves our members well,” says Real Estate Council of Ontario (RECO) deputy registrar, industry standards, Brian Schlotzhauer.
RECO introduced commission protection insurance approximately 15 years ago to protect Ontario salespersons’ commissions in the event of some sort of financial failure such as brokerage bankruptcy, theft, fraud or other misappropriation of funds. RECO endorses the insurance program and also acts as the designated administrative authority responsible for making sure that the insurance program complies with the REBBA.
Although RECO has an administrative department that can help Realtors through the claims process, Schlotzhauer says it’s important to note that RECO only plays an administrative role. The policy, underwritten by Lloyds Underwriters, is managed and distributed by Alternative Risk Services, which deals with the Realtor when a claim is filed.
This means that any decision whether a claim will be honoured remains with Alternative Risk Services.
The company’s Ryan Durrell says reporting a claim for commission protection coverage is a straightforward process: a claim form is completed, a copy of the Agreement Of Purchase and Sale is attached to the claim form, the package is sent to the claims adjuster, the claims adjuster confirms receipt of the package, and then a complete investigation into the situation takes place, which includes independent verification of the theft, fraud or misappropriation of funds. Once verified, the adjuster will request payment be made by the insurer.
It sounds simple enough, but what do Ontario Realtors really think of the program?
A successful claim
In early 2013, RECO revoked the registrations of Toronto-based Graydon Hill Realty and its broker of record David Allen after an inspection revealed irregularities with the brokerage’s trust account. During court proceedings later in the year, it was revealed that Allen had moved approximately $200,000 from the brokerage’s trust account between March 2012 and January 2013 through a series of unauthorized transfers.
About 30 agents were with the brokerage at the time.
“The commission protection insurance served me very well,” says Katrina McHugh, who was with the company at the time and now works at Bosley Real Estate. “It took about five or six months but I got back most of what was owed to me.”
Most, but not all. McHugh says she was out of pocket the deductible and the HST, which is not covered under the program. Even so, she believes having commission protection insurance is a great option.
“The alternative is not to have any protection, but then what?” she asks. “We’re living in crazy times.”
Alternative Risk Services says while each claim is different, the settlement process can take anywhere from a week to several years depending on the closing date of the transactions or the complexity of the occurrence.
But some Ontario Realtors say the devil is in the details and caution that Realtors aren’t as protected as they think they are.
As it turns out, with the way RECO’s commission protection insurance program is configured, the size of the brokerage may be a key factor in determining whether a Realtor will receive their full claim, even if the claim is substantiated.
The commission protection portion of the insurance policy is configured as follows:
- Limits of Liability: $100,000 each claim / $1,000,000 aggregate each occurrence
- Deductible: $250 each claim
Let’s break this down and deal with the deductible first, since it’s the easiest to understand.
According to Durrell at Alternative Risk Services, the $250 deductible applies only once per individual registrant, per occurrence, even though the claim may be for several different transactions.
For example, let’s assume a brokerage becomes insolvent (the occurrence) and a Realtor (the registrant) is still owed commissions on three transactions. A separate claim form with supporting documentation would be filed for each of the three transactions, but the Realtor would only be charged the $250 deductible once since the three unpaid transactions are all as a result of the same occurrence.
This would apply to each of the affected registrants.
The Limits of Liability is the trickier clause. The first part, the $100,000 for each claim limit, applies to the individual registrant. It’s basically saying that each registrant can claim up to a maximum of $100,000 for lost commissions.
The second part of the Limits of Liability clause is where some Realtors really issue a caution. The $1,000,000 Aggregate Each Occurrence clause means that $1 million is the most that will be paid out for all registrants combined, including from co-operating brokerages, for each occurrence. So, the more active salespersons a brokerage has, the more likely the $1 million cap will be reached.
Durrell says when the total claims are likely to be over $1 million, Alternative Risk Services could pay for part of the claim based on an assessment of what the total claim might be relative to the $1 million limit.
“For example, if the total claims are likely to be $2 million, then we would likely pay slightly less than 50 per cent of each claim,” says Durrell. “Once all of the claims are known and quantified, and if some of the $1 million (cap) is still available, then it would be divided among all of the claimants in proportion to how their respective claims compare to the total of all claims.”
In January 2009, RECO began an investigation into Re/Max Executive Realty and its broker, David Seto, after receiving a tip from an anonymous source about irregularities with a trust account. Freeze orders were issued shortly thereafter. Later in the year, Seto pleaded guilty to misappropriating trust funds and was sentenced to a year in jail. His brokerage was fined $200,000.
At the time the freeze orders were issued, the brokerage had three offices in the Toronto area with over 110 agents.
Broker of record Ken McLachlan of Re/Max Hallmark Realty took over two of the former Executive offices. Eight months later, the former Executive agents were still waiting for their commissions and were reportedly chastised for bothering RECO with their follow-up calls.
When McLachlan caught wind of this, he wrote a scathing letter to RECO, outlining the facts as he understood them and demanding action from RECO to help move things along.
McLachlan says he never received a response to his letter.
“I’m not too pleased with how RECO handled the Seto case,” says McLachlan. “It was a long and drawn out process, a lot of pulling teeth, and there was a lot of frustration for the agents who were affected. It was complete nonsense how they were left hanging.”
The claim took years to resolve. Some agents reportedly settled for varying amounts along the way (starting with 20 cents on the dollar) while a handful of others retained a high-priced lawyer and battled it out. After court appearances and a lot of stress and frustration, those who were part of the group who hired the lawyer were ultimately paid most of what they were owed.
An internal document obtained by REM dated Sept. 25, 2009 from McLarens Canada, the insurance adjuster, stated, “Over 400 notifications of claims or potential claims for commissions have been received from claimants representing an unprecedented number of complex claims related to any one relationship. We continue to receive late notifications of claims for commission from claimants. Based on our investigation we estimate the amount of money that was stolen from the brokerage’s trust account is in the range of approximately $700,000.”
At the time, the insurance liability limit for each occurrence was $500,000, and the total claims reportedly exceeded that limit.
RECO’s Schlotzhauer says RECO increased the liability limit to $1 million in the 2010/11 insurance year, not because of any one particular incident, but as part of its ongoing review process to see where enhancements could be made.
He says in the 15 years the commission protection program has been in effect, there has only been one instance “where the cumulative claims for a defunct brokerage reached the cap, and that was when the cap was at $500,000.”
Citing privacy reasons, Schlotzhauer would not confirm whether that one instance was the Re/Max Executive claim.
So, from an insurance coverage perspective, it begs the question: are Ontario Realtors at a disadvantage working with a larger brokerage?
“I wouldn’t say that,” says Schlotzhauer
But you have to wonder. An earlier REM article reported then Re/Max Ontario-Atlantic Canada regional director and executive vice-president Michael Polzler said “everybody was shocked” by the news about Re/Max Executive.
“There were really no signs of this,” said Polzler. “David Seto has been a broker/owner since 1997 and to the best of our knowledge never had any financial problems. He had a reputation for always paying on time.”
It would stand to reason that if it can happen to a long-standing broker with “a reputation for always paying on time,” then it can likely happen to anyone.
Ontario government review
Between March and May 2015, the Ontario Ministry of Government and Consumer Services solicited input on its Proposal to Amend the Insurance Requirements Under the Real Estate and Business Brokers Act, 2002. One area the proposal touched on was changing the legislation to stipulate “minimum” insurance coverage amounts as opposed to “maximum” amounts as it does now. Doing so, the ministry reasons, would allow the “purchasing of additional insurance coverage at no or minimal increased cost to registrants depending on market conditions.”
Sue Carroll, strategic issues and media advisor with the ministry, says 14 industry stakeholders responded: the Ontario Real Estate Association, the Toronto Real Estate Board, 10 salespersons/brokers and two individuals who only provided their name and city. She says the ministry is still reviewing the comments received in response to the posting.
Schlotzhauer says that in administering the commission protection program, it’s important to weigh the coverage levels and caps against the premiums being charged (currently $417 per year, per registrant.) At the same time, he says RECO is continuously reviewing the insurance program to ensure coverage levels are appropriate for the current market and that the cap level is something that is currently under review.
Still, he believes the commission protection insurance program is very comprehensive and responsive.
“For most people, when it comes to any type of insurance, all they think they are doing is paying,” says Schlotzhauer. “But when you really need it, only then is its true value recognized.”
Are you really covered?
During the course of researching this article, one of the biggest complaints from Realtors was that they didn’t know that payment of a legitimate claim was subject to a cap that included all claims filed under the particular occurrence. Some assumed the “Aggregate Each Occurrence” amount meant them alone—in other words, their total commissions owing. Others simply didn’t understand the wording and just assumed they were covered, citing that others had told them all along they would be protected.
Even Ken McLachlan, broker of record for Re/Max Hallmark Realty, who took over two of the three former Re/Max Executive offices when they became insolvent, says he didn’t know about the cap until he attempted to help the former Executive agents who came to work with him get the commissions they were owed.
“As a broker, I should have been more aware (of how the commission protection insurance works) and frankly it’s my job to be aware, but I was just as surprised when I learned that the cap applied to (the total claims) for each brokerage,” says McLachlan.
He’s not alone. We conducted an informal survey of Realtors around Ontario and discovered the vast majority had no clue about how the policy worked and assumed they were fully protected.
Nearly all of the Realtors surveyed also didn’t know that if the total commissions owed to all agents exceeded $1 million, including from co-operating brokerages, their claims would then be paid as a percentage of the total claim.
In an email response to our findings, Real Estate Council of Ontario (RECO) deputy registrar, industry standards, Brian Schlotzhauer said the following:
“In terms of the awareness level of the details of the program, that is something we are always working to improve. Each year, registrants receive a package with information about their coverage, there are occasional articles in the registrant newsletter, there is an elective in the continuing education program that covers insurance, and there are sections of the website and our annual report dedicated to insurance information. We also conduct seminars at local boards and associations about the insurance program.
“But we are aware that we could and should be doing even more to elevate understanding, so we are looking to enhance our communication package for registrants for this year’s renewal process.”
By the numbers
In Ontario, the mandated commission protection insurance program is managed and distributed by Alternative Risk Services.
Ryan Durrell of Alternative Risk Services says, in general, commission claims are cyclical and depend on the economy. He says that few claims were reported in 2014 and 2015, but that “the program is handling a couple of events in 2016.”
Durrell says that between when the program was founded on Sept. 1, 2000 and Aug. 31, 2015, there have been 121 occurrences under the commission protection coverage.
An “occurrence” means an incident of bankruptcy, fraud, theft or misappropriation of funds at a brokerage.
Payment of claims, which includes settlements and expenses, under this coverage is estimated at $4,483,368.
UPDATE – MARCH 20, 2018:
Durell recently sent REM the following update:
“We have since increased the coverage’s Occurrence Aggregate to $3,000,000 from the previous $1,000,000. That was effective September 1, 2016, and if you dig into your invoices, you’ll find we were able to do that with a nominal increase in costs to the Registrants.
“Another interesting feature incorporated on September 1, 2016 that you may not be aware of is coverage for those retiring. We previously had coverage which expired after 5 years, and are now phasing in coverage for registrants on the current, in-force policy. This means that, so long as RECO’s program is in place, registrants no longer need to worry about their coverage expiring during their retirement, when a potential claim could cost them their life savings.”
Where to go for more information
The Real Estate Council of Ontario’s (RECO) commission protection insurance program is underwritten by Lloyds Underwriters, and is managed and distributed by Alternative Risk Services. For additional information on the insurance program, visit the following websites: