Real Estate Agent Errors and Omissions Insurance
E and O insurance protects real estate agents in case of lawsuits
No matter how carefully a real estate agent performs the job, lawsuits can be filed against the agent and brokerage, even those that may be unfounded or frivolous. Legal expenses must be paid no matter who wins in court, and those costs can be devastating to an agent's finances. Errors and omissions insurance, E&O for short, is the name used to describe a type of malpractice insurance coverage for real estate professionals.
When an agent carries E&O insurance coverage, the insurance company defends the claim and pays any settlement or judgment against the agent up to the limits of liability stated in the policy. The coverage protects real estate professionals against financial losses from lawsuits filed as a result of their work in the real estate profession.
Many real estate brokers sell E&O insurance to their sales agents as part of a larger package of services provided to the agent for a flat fee. As such, agents don't always know or think about the particulars of this important insurance policy. Here are some basics about E&O insurance coverage.
Typical E&O Coverage
- Pays claims that come about due to error, omission, or negligence related to duties as a real estate agent.
- Pays claims that are made during the policy period.
Common E&O Exclusions
- Claims resulting in dishonest or criminal acts by an agent.
- Claims associated with polluted property.
- Claims against an agent if an agent causes bodily harm or death to another person.
- Claims arising from damage caused by an agent to someone's property.
E&O Liability Limits
- Varies depending on your policy. Ask an insurance agent to explain options.
Deductibles for E&O Insurance
In insurance, a deductible is the amount of money an agent must pay before the insurance coverage kicks in.
Some E&O policies have two deductibles.There might be one deductible for defense costs and another for payment of damages if an agent is found to be at fault.
Some brokerages allow zero deductibles on E&O packages, providing the agent maintains a complete file with the required documents the brokerage and the law demands. This can also backfire if the agent cannot produce a complete package from closing.
If a person files a lawsuit against a real estate agent, chances are that person will also file a lawsuit against the brokerage, in addition to filing a complaint with the agent's state real estate commission. As a general practice and for improved risk management in the event of a potential lawsuit, follow these tips:
- Keep accurate records of all transactions and interactions with clients. For example, some agents keep electronic or handwritten journals that document client names, dates of interactions and topics of conversation.
- When taking phone calls from clients, agents often have a notepad handy and take detailed notes during the conversation.
- Note the client responses to documents and statements made by a lender, home inspector and / or home warranty recommendations.
As a real estate professional, an agent should feel comfortable asking clients to sign documents stating specific actions the agent recommended -- and the client agreed to. For example, the buyer who declines a home inspection may come knocking on an agent's door if the air conditioning breaks down the day she moves into the home the agent sold to her. If the agent's files contain the signed waiver showing that the agent recommended a home inspection and the buyer declined, the agent is covered appropriately.
Agents should document as many facts as possible during real estate transactions. It could help the agent down the road if a client later becomes unhappy about some aspect of a sale. Some agents even keep records of all of the text messages. Smart agents will also maintain a file of every single email.
Just drag every email into a folder after closing. With that, an agent might not need to rely on E&O.
Edited by Elizabeth Weintraub, Home Buying and Selling Expert at The Balance.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.