Is E&O insurance enough? It’s not

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Every auctioneer today needs enough insurance. Every auctioneer also needs to be operating in a proper business structure to help protect themselves. Proper business structures in the current environment include either a corporation or an LLC: https://mikebrandlyauctioneer.wordpress.com/2015/09/10/auctioneer-business-structures/.

Errors and omissions (E&O) insurance is a form of liability insurance, which covers, generally, “errors and omissions.” It doesn’t cover any intentional illegal or purposeful misrepresentation or discriminatory acts. Further, E&O doesn’t cover bodily injury or other physical acts.

E&O policies typically have a policy limit as well as a “per incident” limit — in other words, you could be covered for up to $500,000 per incident and no more than $1,000,000 for the life of the policy. Your own coverage should be determined in concert with the magnitude of the property you are “selling” as well as the risk involved.

As we suggested, E&O wouldn’t cover any intentional acts. So, what if your auction terms and conditions literally say you are reserving the right to commit unethical or illegal acts — which would be prima facia evidence of your intent — E&O would be no help. In fact, there may be no insurance that will ultimately help you.

For instance, we were consulted on the following auction terms and conditions several years ago involving a very material item:

On absolute (without reserve) lots, the seller or auction house reserves the right to open the bid and place bids after a reasonable time of inactivity has elapsed on the auction block subject to the terms and conditions of the bidder agreement and consignment agreement.

Let’s just say you the auctioneer bid $1.00 on a lot after a “reasonable time of activity” and then this same property sells to another bidder for $1,000,000. Could this buyer argue the $1.00 bid (or more) was in bad faith? Could this buyer void the sale or take the property for the last good-faith bid — whatever that is?

Here’s our original treatise (of many) on the subject of the “last good faith bid.” https://mikebrandlyauctioneer.wordpress.com/2011/10/27/last-good-faith-bid/. Law Professor Drew Kershen also wrote about this same concept here: https://mikebrandlyauctioneer.wordpress.com/auction-publications/drew-l-kershen-horse-tradin/.

Nevertheless, the seller sues the auctioneer for $999,999+ in damages in this example, and your E&O insurance doesn’t cover you — as you reserved the right to intentionally commit an illegal act; this is hardly an error or omission. Don’t spend too much time seeking insurance to cover your intentional illegal acts …

This is when your business structure becomes more important — are you operating as a sole proprietor or as a corporation or LLC? Could a lawsuit involve not only your “business” but your home, car, and other personal assets? Any cost/benefit analysis makes forming (and operating as) a business entity an easy decision.

Lastly, of course, a plaintiff would have to prove you intentionally committed an illegal act, but that evidence is not hard to find if it’s in your auction terms and conditions. This may be a good time to check your own auction terms and conditions, as well as how much insurance you have … or don’t have.

Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at Mike Brandly, Auctioneer, Brandly Real Estate & Auction, and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, and an Instructor at the National Auctioneers Association’s Designation Academy and Western College of Auctioneering. He has served as faculty at the Certified Auctioneers Institute held at Indiana University and is approved by The Supreme Court of Ohio for attorney education.