Real estate agents face huge risks on any given day, as clients entrust them with what is likely the largest purchase of their lives.
Because of that, Real Estate Agent Errors and Omissions (E&O) insurance is not something real estate agents should consider optional. Too much at stake to not have this important risk-transfer strategy in place. A real estate operation can be shut down, or an individual real estate agent can lose assets without coverage.
"Real estate agents deal with many customers with a great deal of money on the line in each transaction," says Adrienne Woodhull, RPS area president. "For example, you have first-time homebuyers relying on their real estate agent's experience and advice to help navigate a purchase. The buyer's life's savings could be at risk should something go wrong."
Individual Agents Need Real Estate E&O Too
Real Estate Agent E&O insurance provides professional liability coverage for claims involving allegations of negligent work, errors or inadequate work that results in financial loss to a third party.
"A policy will also provide some coverage for bodily injury claims since slip-and-fall exposures and other potential injuries exist during open houses and individual showings," says Woodhull.
Woodhull stresses that, if a real estate agency is not incorporated, individual agents should carry E&O insurance.
"Without coverage, their personal assets can be at risk. Coverage is essential for smaller real estate agents to mitigate the possibility of financial harm."
Pay Attention: What to Look For in a Policy
No two policies are the same, and clients need to understand what's included in their coverage.
When reviewing available policies on the market, Woodhull recommends that a Real Estate Agent E&O policy include Fair Housing and Discrimination coverage, typically provided with defined liability limits. Coverage should also cover claims involving open houses and lockbox incidents.
"In addition, because the industry is highly dependent on referrals, it's important to ensure there's coverage to help manage a firm's or real estate agent's reputation," says Woodhull. "Sub-limits for reputation coverage vary based on the carrier."
Types of Real Estate Agent E&O Claims
Real Estate Agent E&O claims run the gamut for real estate agents — from allegations of misrepresentation to fraud or negligence. Let's roll the tape.
"Believe it or not, something as simple as putting a comment in the MLS entry can potentially lead to an E&O claim," Woodhull explains.
"For example, one real estate agency posted an entry advertising a piece of land with the phrase, 'Build Your Dream.' After the property was sold, the buyers weren't granted a permit to build on the vacant piece of land. They sued the real estate agency, claiming false advertising and misrepresentation and said they would have never purchased the land if they could not build."
Property Showing: Bodily Injury
In another case, during the showing of a home in foreclosure, the real estate agent advised a couple looking to buy the house not to go into the attic, as he wasn't sure of the condition of the space. The husband chose to go into the attic anyway and fell through a loose or defective floorboard. He immediately got up with only a few scratches.
The couple ultimately purchased the home and, several months later, sued the real estate agency claiming the husband suffered serious and permanent injuries to his knees, hip, back, neck, shoulder and hand due to the fall from the attic. The claim alleged negligence on the part of the real estate agent for allowing entry into a property with dangerous conditions.
"We also see dual-agent claims when a real estate agent represents both the buyer and seller," says Woodhull. "One case, for example, involved new construction in which the agent represented the builder and buyer."
Based on the builder's assurances, the buyer expected the house to be finished within a certain time frame. Under duress, the buyer paid for costs other than the sale price to ensure the house was ready on time. Even so, the still-unfinished house had several construction defects for which the buyer was asked to pay.
The buyer canceled the purchase contract, but the builder refused to refund the money paid until the property was sold. When the buyer discovered that the real estate agent also represented the builder in the transaction, he filed a lawsuit alleging a conflict of interest. The buyer claimed that the real estate agent failed to protect his interests before the closing and during the construction process. The claim also alleged that the agent misrepresented the builder's experience and the quality of his work.
Louder for the People in the Back
We've said it before and we'll say it again: Real Estate Agent E&O insurance is must-have coverage for all real estate agents.
"The market outlook for the industry is positive," says Woodhull. "After a lull due to high inflation and interest rates, the real estate industry is picking up, and it's a good time to review an agency's insurance program to ensure it addresses the individual insured's exposures."