Before paying for insurance, know what E&O Insurance in real estate is.
Definition of E&O Insurance
The National Association of Realtors (NAR) defines E&O insurance as protection against errors and omissions committed by real estate agents. Professional liability insurance protecting Realtors and brokerages against claims for negligent actions or inadequate work.
E&O insurance also pays for any lawsuit settlements and court costs up to the maximum amount specified in the insurance contract.
Brokerages and real estate agents defending themselves against lawsuits find the time and costs emotionally and financially devastating. Even if the lawsuit ends up as frivolous or unfounded by the courts, the legal expenses amount to lots of money.
Consider E&O as professional malpractice insurance for real estate agents. Protects against negligence, errors, and omissions (failing to act). Without E&O insurance the brokerage and individual agent pays for all the expenses defending themselves in court along with their attorneys’ fees and the court judgment against them.
Let the insurance company do all the work defending you. That includes interviewing witnesses, gathering documents and evidence, hiring a lawyer, and negotiating a settlement with the plaintiff.
What Types of Acts or Omissions E&O Covers
E&O coverage protects agents from liability claims resulting from:
Errors – Like losing a deposit, or preparing incorrect or incomplete documents for a closing. Providing legal advice which ends up wrong. Wrongfully estimating mortgage loan or closing costs to a buyer. Error in interpreting zoning limitations. Comparative Market Analysis (CMA) errors.
Omissions – Failing to notify a buyer to get a home inspection on time. Or, failing to provide “full” disclosure of property defects affecting its value. Failing to forward important legal documents to the closing officer.
Basically, making mistakes and forgetting to do something leading to harm to a client.
Does California Require E&O Insurance for All Agents and Brokers?
While 14 states currently require E&O insurance for all licensed real estate agents and brokers, California doesn’t. However, that doesn’t mean an individual agent in California shouldn’t purchase E&O insurance.
Does the National Association of Realtors Require E&O Insurance for Members?
While NAR publishes several guides and articles about the need for every member to get E&O insurance, it is not required.
However, NAR does provide discounted E&O insurance for individual members through its REALTOR Benefits® Program. Learn more about it. Here
Also, some Realtor state associations offer E&O insurance for their members through independent carriers. Two insurance companies in California (including one in San Diego) provide policies for Realtors. See the list. Here
How to Get E&O Insurance
Many real estate brokerages include E&O insurance for their traditional commission split agents. Most 100% commission brokerages sell E&O insurance to their agents on a per transaction basis for a flat fee.
Also, even if an agent joins a brokerage providing E&O insurance, not every policy covers the same errors and omissions. Or, provide the same defense of claims.
In addition, the coverage differs. For instance, a brokerage claims $1 million in E&O coverage. But, it’s not available for every agent in their individual defense. The $1 million available annually gets reduced every time a claim occurs. That means the first lawsuit defended may take up 50% of the $1 million coverage leaving 50% for the rest of the claims during the remaining year.
When the $1 million runs out and you get sued by an angry buyer or seller you are on your own to pay the legal expenses and court judgment.
The solution becomes purchasing a second policy just for you.
Tip: If your current broker maintains E&O insurance ask about the limits and coverage of their policy. When thinking of moving to another brokerage ask that broker to explain their E&O coverage and limits.
Remember, not all 100% commission brokerages are equal. Read about the differences. Here
Understanding E&O Exclusions
Insurance companies always include some form of exclusion in their policies. Whether auto, health, life, business, or professional insurance some form of exclusion appears.
An exclusion defined as a section of a typical insurance policy declaring specific items not covered for certain events. In other words, coverage eliminated for some types of risks.
An insurance policy typically limits coverage for these types of risks:
Not Accidental – Intentional or wrongful acts not covered like malicious conduct or intentional misrepresentation. Only negligence, errors, and omissions covered.
Illegal – Criminal conduct (like dishonest acts) and willful discrimination excluded because they are illegal. They violate civil (like discrimination) or criminal laws. For instance, emails violating the CAN-SPAM Act, or cold calling which violates the Telephone Consumer Protection Act.
Bodily Harm or Death – Exclusion if the agent’s errors or omissions cause death or bodily damage to other persons. For instance, a lock box left unlocked leading to a home invasion killing or injuring the homeowners.
Insured for an Extra Price – Some risks insurable if you pay an additional premium. For instance, Fair Housing coverage.
E&O Insurance Deductibles
Some E&O insurance policies contain deductibles which the agent personally pays before the policy coverage kicks in.
Other E&O policies include two deductibles:
One for Defense Costs; and
Another for Payment of Damages if the agent found liable.
Ask your current and potential future brokers about E&O deductibles.
Keep Good Records
Protect yourself against claims, lawsuits, and complaints with the Board of Realtors and/or state licensing agency. Many buyers and sellers make these extra complaints before or after filing a lawsuit.
Protecting yourself includes maintaining complete and accurate records. This includes every transaction and interactions with clients and third parties. Here’s how:
Keep handwritten or electronic journals documenting client names, interaction dates, and topics of conversations;
Phone calls require keeping a notepad handy to make detailed notes of the conversation. Keep all records of clients’ email and text messaging replies and responses to documents;
Make notes of every home warranty recommendations; and
Keep notes about statements made by home inspectors, lenders, etc.
Sure, it takes time. But rest assured that if a hearing or a trial occurs taking out your notes to recall events and statements made a year or two before impresses judges and jurors more than a plaintiff trying to remember the same events.
Also, ask clients to sign documents showing specific recommendations you make that the client either agrees to or doesn’t. For instance, making a buyer sign a waiver of a home inspection you recommend saves you when the buyer moves in and the furnace breaks down.
NAR published an article listing 12 things a transaction file should include to reduce the risk of errors and omissions. Read the list. Here
In fact, documenting as many facts and recommendations you make to clients during a transaction helps you later when the client becomes unhappy. That’s why saving every email and text message between you and a client during a transaction protects you in case the client claims errors or omissions by you.
Keeping these records makes your insurer happy by giving them more ammunition to defend you against claims.
What’s E&O insurance explained here only covers the basics. If you want to learn more details about this topic. NAR provides a useful guide to understand the basics of E&O insurance. Here
Otherwise, you learned about the types of errors and omissions E&O insurance covers and doesn’t. Only 14 states require agents and brokers to purchase E&O policies. California is not on that list.
You also learned about deductibles and what to ask your current and future brokers about them. Keeping good records of every communication with your clients is the first line of defense against claims and lawsuits.
Find a Brokerage Offering E&O Insurance
If your current broker doesn’t offer E&O insurance or charges too much, consider finding a broker offering reasonably priced E&O.
Including a $165 flat E&O insurance fee per transaction.
We also include Free:
Broker/Attorney Support; and
Agent Concierge Services.
Steven Rich, MBA –Guest Blogger
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Big Block Realty – 100% Commission Real Estate Brokerage