8 Reasons Real Estate Agents Need Their Own E and O
By Harry J. Lew
Many real estate agents get their E&O insurance protection through their brokers. That might be a good short-term solution but it can put you at financial risk later on.
As a real estate agent, you’ve invested a lot of time and money in your business. Placing ads, creating an optimized web site, getting visible in local search, asking for referrals—all these activities and more help you to generate new clients and income. Without these investments, your business would be dead in the water today.
But when it comes to protecting it against client lawsuits, you might have only done the bare minimum—buy into your broker’s errors and omissions insurance. This involves paying your broker for your E&O protection upfront, by the month or per transaction.
Although this might be financially beneficial in the short term, it might leave you at exposed to professional liability risks over the long haul. Here are eight reasons to reconsider putting your financial destiny solely in the hands of your broker’s errors and omissions insurance policy.
1. Will your broker’s E&O coverage always be there? Never outsource your destiny.
If you’ve ever forgotten to pay for your life, auto, or homeowners insurance, you know how easy it is to lapse your insurance. For example, if your auto insurance expires and you end up having an accident before you have a chance to reinstate it, the total value of the loss—the cost to repair your car, pay for third-party property damage, and cover doctor or hospital bills—will be on you.
In this case, you dropped the ball, so you own the consequences. However, if your broker fails to keep her E&O insurance active, you will be at risk through no fault of your own. If the policy gets cancelled for nonpayment of premium, any transaction you do while the policy is “down” will be uninsured. That means if you get sued and lose your case, your legal expenses and plaintiff’s settlement or judgment will be your responsibility. Your broker’s absentmindedness or lack of funds to pay the premium may have a devastating impact on your personal finances, costing you tens or hundreds of thousands of dollars out of pocket. The lawsuit might even knock you out of the real estate business entirely. Are you sure you want to bet your financial future on your broker’s ability to keep his errors and omissions insurance active? Wouldn’t you rather control your own destiny?2. Do you know how your E&O coverage works?
A broker’s E&O policy can have many moving parts. Multiple parties are involved: your broker and/or the owner of your real estate agency, the E&O insurance company and you. The agreement you signed with the brokerage owner may be easy to understand or as muddy as a stagnant pond in summer. One key issue is how the agreement apportions liability between you and your broker. Do you understand when you are at risk vs. when your broker is? And in what situations do you both share risks?
Finally, the limits in your broker’s policy might become an issue. Limits are the total value of insurance protection available to everyone the policy covers. If it’s $3 million, that’s the total available for everyone in the office. Shared limits are crucial because they raise this possibility: If other agents and/or your broker get hit with multiple lawsuits, their court settlements or judgments might exhaust your coverage. If you get sued after your colleagues “consume” the policy, you will be left uninsured. That means when a judge orders you to pay a six-figure judgment, you will be using your own savings to make the payment. Lacking sufficient liquid assets, you might have to sell your home or other personal assets in order to make good.3. What if your broker’s firm closes shop?
If you’ve been in the industry for a while, you know nothing is forever in real estate. Brokerages come and go. They get acquired. They fail. Firm owners die or decide to retire. When any of these changes occurs at your firm, it can result in your errors and omissions coverage being modified or cancelled. This means the transactions you completed while employed there may be uninsured in the future. This matters because lawsuits don’t always happen right away. Sometimes it can take a long time for them to arise. If and when they do, you will be the responsible party—and at risk.
Now, you can always replace your coverage later by either opting into your new broker’s insurance or buying your own policy. However, chances are, your new broker’s E&O insurer will not cover your past transactions—“prior acts” in insurance lingo. If you’re buying your own policy, you might be able to arrange for prior acts coverage for an additional fee. But if you’re joining your broker’s insurance, it’s unlikely the insurer will cover the work you did for another broker.4. What if you switch brokers?
Just as real estate brokerages enter and leave the scene, you might decide to switch offices. Or you might become a broker and start your own agency. In any case, just as with the prior scenario, once you make a move, you will likely no longer be protected by your former broker’s errors and omissions insurance. However, when you start with a new brokerage, their E&O insurance will likely refuse to cover claims resulting from your prior transactions. Again, under this situation, you might be able to arrange for full prior acts coverage if you’re purchasing your own insurance.5. What if your broker’s insurance doesn’t cover your job activities?
For example, maybe you manage properties while also doing sales. If your broker’s errors and omissions insurance fails to cover these activities, you will have no insurance for them. If you’re like many agents, you may not have asked to see the fine print of your broker’s E&O policy. You may never know that your property-management work isn’t covered until you get sued and try to file a claim. By that point, it will be too late. A related risk is that the broker’s E&O may exclude coverage for things like home showings or consumer discrimination lawsuits. If you want full protection for such risks, you’ll need to arrange for your own policy.6. Is your broker’s errors and omissions insurance actually a good deal?
Relying on your broker’s insurance is like buying a black box. You don’t know what the insurance company is charging your broker for the policy. Typically, brokers will spread the cost across all of the agents in the office. But don’t assume the “spread” represents the broker’s true cost. The broker might be treating E&O insurance as a profit center—marking up the individual agent charges so a profit remains after he pays the insurer. Under this scenario, you might actually get better protection at a lower price with your own policy.7. Does your broker’s E&O policy have all the bells and whistles?
If you buy your own insurance, you might get extras that your broker’s policy fails to provide. For example, with your own insurance, you might get phone access to an attorney in the insurer’s network to discuss client disputes before they become lawsuits. Being able to prevent client disagreements from becoming legal nightmares is always a good thing. You might not have the same claim-prevention access to an E&O attorney under your broker’s policy as you might have under your own policy.8. Finally, when facing a difficult legal conflict, whom do you want defending you: your broker’s errors and omissions carrier and attorney or your own?
An insurer will strive to satisfy its primary customer—the broker, not the broker’s agents. In cases where both you and your broker are being sued over a customer dispute, the insurer might have a financial incentive to believe what the broker says over what you say. What’s more, the insurer will likely want to solve for the broker’s interest, not your interest. In cases like this, you might end up regretting don’t have your own insurance.
In conclusion, as a real estate agent, you’ve invested a great deal to get to where you are today. If you added up the value of all the time and money you’ve invested to get licensed and to grow your business, the total may surprise you. Insuring this investment with your broker’s errors and omissions policy rather than with your own may save you money initially. But if you get sued, it might be the costliest mistake you’ve ever made.
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