Real Estate Errors and Omissions Insurance
Lawsuits can be filed against real estate agents and brokerages, no matter how carefully the agent performs her 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.
Errors and omissions insurance—E&O for short—is a type of malpractice insurance coverage for real estate professionals to help them avoid coming out of pocket for these costs. It pays claims that come about due to error, omission, or negligence related to an agent's duties.
What Is E&O Insurance?
The insurance company defends the claim when an agent carries E&O insurance. It 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.
Coverage Provided by Brokerages
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. Agents don't always think about the particulars of this important insurance policy. They just know they have the coverage.
But this type of coverage isn't always ideal. In fact, agents in 13 states are required by law to buy their own coverage in order to receive and maintain their licenses. They have very little, if any, say regarding the terms of the policy provided by the brokerage. They might think that impressive coverage limit applies only to them, but it's typically shared by all agents associated with the firm.
Common E&O Exclusions
An exclusion is a component of an insurance policy that specifically states the company will not cover certain events.
Common exclusions in E&O coverage include claims resulting from dishonest or criminal acts by an agent and claims associated with a polluted property. Claims against an agent are typically excluded if the agent caused bodily harm or death to another person, as are claims arising from damage caused by an agent to someone's property.
Deductibles for E&O Insurance
A deductible is the amount of money an agent must personally pay toward a claim 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 documents required by the brokerage and the law. But this can backfire if the agent cannot produce a complete package from closing.
Chances are that a client will also file a lawsuit against the brokerage if he files a lawsuit against a real estate agent. He might also file a complaint with the agent's state real estate commission.
It can help to keep accurate records of all transactions and interactions with clients in defense of these issues. For example, some agents keep electronic or handwritten journals that document client names, dates of interactions, and topics of conversation.
Keep a notepad handy and take detailed notes during the conversation when you're taking phone calls from clients. Record the client's responses to documents, as well as statements made by lenders, the home inspector, and any home warranty recommendations.
An agent should feel comfortable asking clients to sign documents stating specific actions the agent recommended and that the client agreed to—or did not agree to.
For example, a buyer who declines a home inspection might come knocking on the agent's door if the air conditioning breaks down the day she moves into the home. The agent is covered appropriately if he has a signed waiver showing that he recommended a home inspection and the buyer declined.
Agents should document as many facts as possible during real estate transactions. It can help down the road if the client later becomes unhappy 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 she takes these precautions, but the insurer might be glad she did if she does purchase coverage. Remember, the insurer will defend the claim and the more ammunition you can hand over to its attorney, the better.