The real estate business can be a highly litigious one due to the significant sums of money involved (for most people, the purchase of a house or apartment will be the most expensive outlay they make in their lives) and the potential for deals to fail for a number of reasons. Often these reasons may not have anything to do with the action of the real estate agent or broker who has provided their contracted services in a professional and efficient manner, but this doesn’t always protect against lawsuits. Even if a lawsuit has no foundation, it will still have to be defended in court, and that means legal fees will be payable, frequently at a level that could threaten to bankrupt the realtor or broker.
This is where Errors and Omissions (E&O) insurance* comes in. Should you, as a real estate professional, have to face such a lawsuit, your E&O insurance, if correctly chosen, will help to save you money and perhaps even save your business when you are accused of committing errors, omissions, or neglecting your professional duties. However, it is important to note that many insurance policies contain caveats to protect the insurer in terms of exclusions in certain cases. If an agent has acted dishonestly or criminally, that will void their insurance policy; many policies also exclude claims arising from properties that are found to be contaminated by pollution. Policies may also contain clauses that impose deductibles on legal costs and damages if it is shown that the claim against the agent has merit.
If a claim is brought against a real estate agent who holds an Errors and Omissions insurance policy, the insurer will step in to defend the case on behalf of the agent, appointing legal counsel as appropriate, employing expert witnesses, commissioning reports and so on. If the case is found by the court to have merit, the insurer will meet the costs of settlements or judgements imposed on the agent within the liabilities defined in the insurance policy. This offers a significant level of protection to those working in real estate who may be facing significant financial loss resulting from lawsuits brought by clients.
Estate agents often purchase insurance from a broker, and this frequently incorporates Errors and Omissions insurance as part of an overall package of services provided by the broker. Many agents fail to properly scrutinize the coverage provided; they are simply satisfied in knowing that it is present. This is a serious error, as you may not find out that you have inadequate coverage until it’s too late to rectify matters. In a number of jurisdictions, it is legally compulsory to purchase this sort of insurance from your broker in order to operate, but this can mean that you don’t have many options regarding the type of coverage, amount insured for, exclusions and so on contained within the policy. Sometimes it can appear that you are insured for a significant sum to cover any liabilities, but in fact this sum covers all the agents working for a particular broker and the sum available to any individual agent could be much smaller.
As noted above, Errors and Omissions policies frequently specifically exclude some types of events from their coverage. This includes any claims arising from an agent behaving dishonestly or criminally, and any claims arising from a property that has been damaged by pollution. Additionally, policies frequently exclude any damage resulting to the property of a third party from an agent’s errors and omissions, and also any physical harm/death caused by an agent’s actions.
Deductibles are frequently payable with Errors and Omissions insurance; these are the sums for which an agent is personally liable, generally the first X thousand dollars of any legal costs or damages. Policies may impose two types of deductible, one payable on the legal costs and one payable on any damages awarded. A number of brokers offer Errors and Omissions insurance with no deductibles, but this will be conditional on the agent being able to produce complete documentation for every stage of the transaction in question, and insurance may be invalidated if they cannot.
It cannot be overstated how important it is to keep complete records as an estate agent. Legal cases arising from client complaints can be extremely complex, with brokers being involved in lawsuits and also potential complaints to state real estate commissions. Having full documentation of every stage of your involvement with the client may enable you to avoid legal action in the first place, or, if it does proceed, help you to win the action. Make notes of all your meetings with clients, including the date, who you spoke with, and what you spoke about. Save all your text messages and emails from clients in files where you can easily access them when necessary. Don’t be embarrassed to ask clients to sign statements about their actions, particularly if they are not following your recommendations; for example, if you recommended that a client should have a home inspection carried out on the property they were buying, and they refused, if they later complain about some defect that would have been picked up by a home inspection then having a signed acknowledgement that they refused to have one is extremely useful. This might deter a client from taking action, or, if they decide to press ahead, it is extremely useful evidence to give to your insurance company to help them defend the claim.
*As with any insurance, coverage will be subject to the terms, conditions and exclusions contained in the policy wording. The information contained in this article is general only. Coverage for claims on the policy will be determined by the insurer, not BizInsure, and will depend on the specific facts and circumstances involved.