Ten Reasons Why Real Estate Agents Need E and O

By Harry J. Lew

There’s a lot of uncertainty in being a real estate agent. You have no way of knowing what the economy will be like in the future and whether it will support—or hinder—your sales efforts. You can’t predict how many transactions you’ll do in a given year or what your income will be.  And perhaps most importantly, you don’t know whether your next client will be a dream customer or someone who will be unsatisfied and name you in a lawsuit.

Because of these questions, many real estate agents buy E&O insurance to reduce their overall business risk. They appreciate how it gives them peace of mind in case they make a mistake that brings damaging financial consequences. But in their desire to reduce uncertainty as quickly and painlessly as possible, many agents get their E&O protection through their designated broker rather than from their own policy.

It’s easy to see the appeal of this.  For one thing, it’s convenient. You don’t have to identify E&O providers yourself and compare their various policies and costs. For another, you may also be able to pay for it via commission deduction, meaning you don’t have to remember to write a check. All in all, getting E&O insurance through your broker is a no-fuss way of getting E&O protection, right? Perhaps, but there are some disadvantages to consider. Here are the top 10:  

1. Getting E&O insurance through your broker means your future financial security depends on them keeping their E&O insurance policy in force. But what if they forgets to pay for the premium on time? Or what if they encounter financial difficulties and can’t afford to pay? If the policy lapses, your protection will cease. But you may not even know about it until after you need it. Given these uncertainties, are you still willing to bet your future financial security on your broker’s ability to keep his E&O insurance in force?
2. To be effective, an E&O insurance policy must be tailored to your actual professional duties. For example, if you do open houses, but your broker’s policy does not cover them, you will be uninsured each time you do one and at risk if a prospective buyer is injured. The best way to be fully protected? Write down every element of your job and then buy an E&O insurance policy that includes those duties in its policy language.
3. Another uncertainty relates to the limits on your broker’s E&O insurance policy. This number—say, $1 million—caps the total claim payout during the policy’s term to that amount. For instance, if a policy pays out $500,000 in connection with a colleague’s E&O insurance claim, it will leave only $500,000 for all other claims that arise during the policy period. Two other $250,000 claims will exhaust the remaining coverage, leaving you unprotected should you get sued. To prevent this from happening, consider buying your own policy so you don’t have to share limits with anyone else.
4. If you switch firms or start your own, your new E&O insurance policy might have so-called “prior acts” coverage. This means it will protect you if a transaction you did at your prior firm goes bad. However, retroactive coverage normally only applies if you maintained continuous E&O insurance protection. If your broker let her policy lapse during your tenure, your prior acts coverage would not apply to any loss that occurs before the gap. To receive protection, you would need to buy special prior-acts coverage. Again, having your own insurance and keeping it in force continuously will eliminate gaps that can put you at risk later.
5. When you have E&O insurance through your broker, you are assuming he will provide you with continuous protection. But what if you get into a dispute with the person? Will he still allow you to remain on his E&O insurance policy? Will the price remain the same? Will your future claims be handled expeditiously and fairly? All of those are open questions, which wouldn’t be the case if you had your own policy.
6. Now, what happens if your broker decides to sell her firm to or to simply shut down? Once again, you might be looking at a “prior acts” issue, which means you would have no protection for any claim arising from an event before or during the coverage gap.
7. Another question to consider: what if your business model is riskier than your broker’s? You would need higher limits, right? But what if your broker is happy with their lower limits? If you stayed under their policy, you would potentially put yourself at risk of having to pay the difference between a large court judgment against you and the lower limits in their existing policy. Would the difference between a large legal payout and your broker’s lower limit wipe out your savings?
8. If you switch firms or your current firm is taken over, will your new firm’s E&O insurance cover the type of work you do? And will it still be reasonably priced?
9. And what if your firm loses access to its E&O program or canceled midterm? Will your new firm’s E&O insurer cover the transactions you did at your prior firm?
10. Your broker carrier’s financial condition is questionable. Would your broker carrier be unwilling or able to pay our E&O claim or provide a defense?

In short, given the uncertainties of doing business today, are you willing to assume the risk of getting insurance through your broker when you could have E&O insurance that’s fully tailored to your business and guaranteed to be there when you need it (as long as you pay your premiums on time)?  Today, more agents are going the latter route, especially since there may be little or no financial advantage to getting insured through your broker.

So what say you? Does having your own E&O insurance provide extra peace of mind in a risky business environment? If so, is it time to join the growing number of agents who pay for their own E&O insurance? Increasing numbers of agents today answer, “Yes!”