Insurance for real estate agents and brokers
Homebuyers are thrilled when they find the home of their dreams. But when things go wrong, they often take real estate professionals to court in a quest for money.
Homes are the biggest purchases most people make in their lifetimes. When buyers lose money because of construction defects or unforeseen repairs, they're not happy. That's why it's vital for real estate agents and brokers to be insured against errors and omissions E&O), says Kevin Hall, general manager of the Gary Kent Team of agents at Keller Williams Realty in San Diego.
Without that coverage, he says, agents and brokers have too much to lose. It's not unusual for real estate lawsuits to exceed $100,000, Hall says. "On the large side, it could be $2 million," he says. "Mistakes happen."
Ray Brown, a former real estate broker who co-wrote the book "Home Buying for Dummies," says getting sued is an occupational hazard for real estate professionals. Even if you're certain you're not to blame for a buyer's loss, you can't be sure that a judge and jury will see things your way. The goal is to stay out of court.
To protect themselves from being accused of misleading buyers, real estate agents are trained to disclose all key details about the homes they sell. If they're smart, they'll never use the word "fixed" when discussing repairs with buyers, Brown says.
"‘Fixed' sounds like it is permanently repaired," he says. "You can repair a leak in the roof, but it can leak again."
Because the fear of E&O lawsuits is great, a huge volume of information often is disclosed to buyers in writing, Hall says. That way, agents and brokers feel they won't be accused of hiding information. "We are learning from each lawsuit how to protect ourselves," he says.
Suing everybody in sight
When they file lawsuits, angry homebuyers often name everyone who had anything to do with the deal, says Bill Jansen, a Northern California attorney who specializes in risk management for insurance brokers. "The buyer may sue the seller, the listing agent, their own agent and the home inspector," he says.
Typically, real estate brokers are responsible for buying E&O coverage for the agents they manage, says Alan Levenson, manager of Technology Insurance Associates LLC in New Jersey.
Some insurers charge brokerages a flat fee based on transactions from previous years, Hall says.
"If you have a big year, next year your E&O will go up, because you will have more exposure," he says. "They also look at your loss record. They don't write insurance to lose money."
Levenson says there's no standard guideline for agents and brokers to determine how much of their annual gross income should be spent on insurance.
What coverage do you need?
Aside from E&O coverage, agents typically buy their own policies, Brown says. Here are several types of coverage that real estate professionals should consider:
Property insurance is important if you own a real estate office. This will protect the structure and its contents from such things as fire, theft and natural disasters.
General liability insurance protects you against claims arising from injuries and property damage. It can pay for your legal defense, but don't count on that if a claim stems from allegations that you failed to perform your professional duties. For that, you'll rely on E&O coverage.
Employee dishonesty insurance can be helpful if you have workers who handle money. This may be the case with brokerages that, in addition to selling homes, manage properties, collect rent and pay for maintenance, Jansen says.
If you have employees, employment practices liability insurance protects you from workers' claims of discrimination or harassment.
When you drive clients to view homes, commercial auto insurance protects you from claims related to the use of your car.
Workers' compensation insurance pays for medical care for employees who are injured while working, regardless of who's at fault. Because regulations differ by state, contact your state insurance department for details.
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