Real Estate E&O Insurance: Don’t Sell Your Clients (or Yourself) Short

Real estate agents and brokers often assume that every sale will unfold like clockwork and that all their buyers and sellers will be reasonable. Sadly, reality can quickly prove them wrong. A property’s curb appeal might mask structural problems inside. Lead paint, a septic tank on its last legs, a leaking roof, a termite infestation, a radon or asbestos problem... all could be lurking behind closed doors, ready to confound the sale or generate legal disputes afterwards. Similarly, the people you deal with may initially seem nice. But when something goes awry during the purchase process, they may look to you for financial relief.

Here are some common mistakes that can lead to Errors and Omissions claims against you:

• You list a property with an undisclosed physical or structural flaw.
• You fail to execute your fiduciary duty to a client (i.e., failing to serve the person’s best interests).
• You describe a property incorrectly in a listing.
• You fail to disclose all liens on a property.
• You accept a referral fee or commit a Real Estate Settlement Procedures Act (RESPA) or State Real Estate Board violation.

The above points are just for starters. In fact, there are countless other ways you can get embroiled in a legal dispute.

For example, consider these five hypothetical scenarios:

• A couple with two asthmatic children buys a home. But after they move in, they decide to test their new dwelling for radon. Turns out, the property has high levels of this radioactive gas. Fearing for the health of their young children, they decide to sell the property at a loss of $50,000. Result: they sue their agent for the same amount, plus legal costs, for failing to disclose a serious health concern.
• During an open house, a potential buyer slips and falls on a dark stairway, injuring a disk in his lower back. Although he quickly seeks medical treatment, the injury is slow to resolve, and he is unable to work for 90 days. This causes him to lose $24,000 in earnings. Result: the injured visitor brings suit for that amount, as well as for his additional legal costs.
• A retired government administrator decides to open a home daycare business. However, she currently lives in a condominium with no space outdoors to let her customers’ children play during the day. She decides to buy a larger home with a sizable yard that would allow kids to play safely under her watchful eye. Working with a local real estate agent, she finds a property that fits her needs. However, after she buys it, she discovers town zoning does not allow her to operate a home daycare in that location. Before she submitted her deposit, the agent claimed zoning would not be a problem. Result: the home is no longer suitable for her purposes, she sues the agent for $50,000 in damages.
• A minority couple is relocating for work and needs to buy a new home. They find a local real estate agent on the Internet and ask that person to develop a list of properties that meet their requirements. After several days viewing homes, the couple realizes every single property was in a minority area, something they had not required. They raise the issue with the agent, asking if these were the only homes for sale that met their criteria. The agent answered yes. Dissatisfied with their options, they decide to work with another agent, who provides them with a more diverse list of properties. Result: the couple sues the initial agent for discrimination, winning a judgment of $40,000.

In short, the combination of a flawed property with a litigious client can spark a perfect storm of legal woes. Worse, if you’re sued and lose in court, you might be liable for a financial settlement that consumes a significant portion (or all) of your assets, both business and personal. Did you envision such risks when you decided to become a real estate agent? If not, what should you do about them now?

The good news is you’re not alone. By purchasing a Real Estate Agent and Broker Errors & Omissions insurance policy, you can protect your finances against covered legal exposures, reducing the odds that an angry client will put your assets at risk. Most importantly, having real estate E&O insurance in place means you will likely avoid being forced out of business or into bankruptcy because you made a mistake. You will be able to make good on your errors and omissions or get nuisance lawsuits dismissed with the help of an insurer-provided attorney.

So what is real estate E&O insurance? It is a type of professional liability insurance that turns the uncertainty of doing business today into a known and predictable expense. In other words, when you purchase E and O insurance, you convert a potentially large, yet unknown, loss into a much smaller outlay for which you can budget — an E&O insurance premium. By neutralizing the large risk, you’re able to operate with less worry and stress. In the unfortunate event a client files a claim against you — and you lose — your errors and omissions insurance policy will protect against covered judgments, settlements, attorney fees and court costs. In effect, your policy will become your financial safety net during nasty client disputes.

How does E&O insurance work?

When you purchase real estate E&O insurance, you enter into an agreement with an insurer for it to pay for your loses up to your policy limits as long as you pay your premiums.

Under this arrangement, the insurer agrees to:

• Provide you with an attorney.
• Pay for your legal fees.
• Cover any court judgments.
• Provide funds for plaintiff settlements.
• Pay for court, expert witness, and other administrative costs.

Now, under the terms of your policy, the insurer isn’t obligated to pay for your losses in every instance. It can exclude those that fall into certain categories such as:

• Dishonest, fraudulent, criminal, or malicious intentional acts or those that willfully violate any statute or law.
• Class action legal disputes.
• Litigation settled prior to your e and o policy’s inception date or that is pending at that date.
• Actual or alleged bodily injury, sickness, disease, emotional distress, mental anguish, or the death of any person.
• Other circumstances listed in your E&O insurance policy.

Despite the benefits of real estate E&O insurance, some agents decide not to purchase this essential coverage. Of course, those who do business in the dozen or so states that require E&O insurance must have their own errors & omissions insurance. But those in the remaining states often rationalize not being insured in various ways. For example:

• They claim they’ll never make a mistake.
• They assume their clients will always like them and will never sue them.
• They believe their property due diligence is excellent and that they’d never knowingly misrepresent the condition of a property.
• They assume if a dispute arises, they’ll quickly be able to reach an amicable out-of-court settlement.

Of course, when you think about these excuses, it becomes obvious they rest on a foundation of sand. For example, even the most experienced real estate agent will occasionally miss a defect and misrepresent the condition of a home. And agents with excellent people skills can still find themselves dealing with clients they can never satisfy.

For these and other reasons, having e and o insurance is highly advisable in today’s hazardous marketplace. If you want to do business without exposing yourself to extreme risk, make sure to buy your own E&O insurance.

Finally, remember that buying E&O insurance isn’t just about reducing the financial impact of getting sued. It’s also about conveying a positive message about your business to local prospects. If you want to be seen as a responsible, ethical real estate agent, then it’s important to have your own E&O insurance. It shows people you are a true professional who stands behind your actions, both in good times and in bad.