Real Estate Errors and Omissions Insurance

Home Inspector Looks at the Windows of a House for Sale
•••

imagesbybarbara / Getty Images

The work done by real estate agents and brokers involves high-cost deals, many moving parts, and outside parties who take part in many steps of the process and care deeply about the outcome. With such high stakes, even the best agent faces the risk of a lawsuit, no matter how well the agent performs their job. The lawsuits might be unfounded or frivolous, but legal expenses must be paid, no matter who wins in court. These costs can be devastating to an agent's finances. If you work as a real estate agent, it is crucial to protect against the threat of such lawsuits.  

Errors and omissions insurance—"E&O" for short—is a type of malpractice insurance coverage for real estate agents, brokers, and firms, so they can avoid having to pay legal costs out of pocket. It pays for claims that come about due to error, omission, or negligence related to an agent's duties. 

Key Takeaways

  • E&O insurance pays for judgments against a real estate agent and protects them against financial losses from lawsuits filed as a result of their work. 
  • E&O insurance excludes claims that result from dishonest or criminal acts by an agent, as well as claims that deal with a polluted property.
  • Some E&O policies have two deductibles: One for defense costs, and one for payment of damages if an agent is found to be at fault.

What Is E&O Insurance?

When an agent or a firm carries E&O, the insurer will step in to assist if a legal claim is filed against them. Though each contract may differ, the agent must pay for their own legal defense up front. Then E&O pays any settlement or judgment against the agent, up to the limits of liability as stated in the contract. In brief, this type of coverage protects real estate agents, brokers, and firms against financial losses that come about from lawsuits filed as a result of or in the course of their work. 

Coverage Provided by Brokerages 

Many real estate brokers sell E&O insurance to their sales agents as part of a larger package of services. They often provide these bulk services to the agent for a flat fee. Agents don't always think about the chance of a lawsuit when they're just starting out or signing with a firm, so they might not purchase the deal. When they do opt to buy the coverage, many don't read in depth about all the details of the full policy. They just know they have the coverage. 

Buying a plan through your firm isn't always ideal. In fact, some firms opt for a bare-bones version of E&O just to make sure they are in compliance with the law. Many states mandate that agents have E&O insurance in order to receive and maintain their licenses. As an agent, if you purchase a plan through your firm, you will have very little, if any, say in regards to the terms of the policy that they offer.

If you sign up for E&O through a brokerage firm, you may notice a very high coverage limit. This often covers the whole firm, and is meant to be shared by all the agents. Your own limit may be much lower if many claims are in process at once.

Common E&O Exclusions

An exclusion is a part of a policy that states which events and costs a company will not cover.

All E&O plans will exclude from coverage any and all claims that result from dishonest or criminal acts by an agent. If you are a real estate agent and make false claims about a house you're trying to sell, or if you engage in any sort of fraud in the process, you can't expect E&O to bail you out. The same goes for claims against an agent who caused harm or death to a person, or if they caused damage to someone's property. These are common exclusions in most E&O plans, as are claims arising from damage caused by an agent to a person's property that occurs in the course of work.

One other frequent E&O exclusion is found in the case of polluted property. Under most states' laws, real estate agents have a duty be truthful and disclose known defects; this includes the knowledge of waste on a piece of land (or under a structure) or any former pollution that may affect the buyer's choice.

Deductibles for E&O Insurance

A deductible is the amount of money an agent must pay toward a claim before the insurance coverage kicks in. Some E&O policies have two deductibles. There might be one for defense costs and a second for payment of damages if an agent is found to be at fault.

Some firms allow zero deductibles on E&O packages, so long as the agent maintains a complete file of all records required by the firm and the law. But that can backfire if the agent cannot produce a complete package from closing.

Steps You Can Take to Protect Yourself

If a client files a lawsuit against a real estate agent, chances are that they will also file a lawsuit against the firm (which has deeper pockets). They might also file a complaint with the agent's state real estate commission. 

If you are an agent, it can help your case to keep very precise records of all exchanges with clients in defense of these issues. That may also help your firm in its legal defense as well. For instance, some agents keep journals that track client names, dates of phone calls or meetings, and the topics they talked about.

Take detailed notes when you're taking phone calls from clients. Make sure to record how the client responds to any issues, confirms receipt of forms or documents, or relays statements made by third parties, such as lenders, or vendors with quotes.

As a real estate agent, you should feel secure in your recommendations to clients. As such, it's no extra trouble to ask them to sign documents stating the precise actions you suggest. This is one method to prevent against "he said she said" types of legal claims, which happen often in the course of buying or selling homes and working through deals. If you decide to use this method, make sure your forms include a checkbox or line to state whether the client agreed or disagreed with what you suggested. For instance, a buyer who declines a home inspection might come knocking on your door if the heating system breaks down the day they move in. You will be covered if you have a signed waiver showing that your client opted out.

It goes without saying, but these tips are a must when money changes hands. Agents should document as many facts as possible during real estate transactions. It can help down the road if the client later becomes upset about some aspect of the sale. Some agents even keep records of all text messages. Smart agents will also maintain a file of every single email. 

An agent might not need to rely on E&O coverage if they take these precautions, but the insurer might be glad they did if they do purchase coverage. The insurer is your partner in most cases, because it doesn't want to pay either. It will defend a claim against you, and the more you can hand over to support your case, the better.