Errors and Omissions Insurance, the facts for Agents, Firms, and FamiliesBy rampdog | March 31st, 2012 | Category: Real Estate Articles | No Comments »
*In every real estate transaction there is the potential for a lawsuit. In an article
Authored by Barbara Nichols entitled “Don’t Get Sued by Uncle Joe!” (published on
www.Realtor.org on August 1, 2006) several cases were highlighted explaining the
pitfalls and risks that are inherent in the agent-client relationship. Ms. Nichols pointed
out a case in which a real estate agent took on the representation of a relative (a nephew
and his new wife). Although the agent was not familiar with the area in which the
client/relative was interested, the agent decided to represent the nephew anyway.
Ultimately, the agent located a “wonderful” townhouse which the client purchased.
Within a few months, the agent received a subpoena and was eventually sued, along with
the seller and the listing agent, by the nephew.
The agent was not aware that the townhouse development was involved in an
earlier lawsuit initiated by homeowners against the builder “…to repair leaking windows,
poor yard drainage and resulting mold problems.” This earlier case was eventually
settled but the builder never repaired the problems which lead to the lawsuit. Ms.
Nichols correctly pointed out in her article that if the agent would have simply referred
her nephew to another sales associate who worked and was familiar with the area
designated by the nephew, the agent would have been able to warn her nephew of the
problem. And while E&O insurance may, or may not, cover all situations, including the
one referred to above; one fact remains, without such insurance coverage in place a real estate professional is exposed to personal liability.
What does the protection look like?
So you see, having E and O insurance may or may not protect the parties, and there is no possible way for your coverage to protect you if you don’t have any. It can and does protect agents, firms, and families when things happen, which cause injury to buyers, sellers, agents, brokers, and developers and there is a proper clause in place to protect the insured from liability in a negligent or non-negligent claim against them.
As a buyer and/or seller you should ask the professional you are working with if they have errors and omissions insurance and make sure the limits are high enough to cover the home value range you are working in, especially if you are considering a higher end home or commercial property.
As an agent, firm or broker this coverage protects you against failure to provide adequate services. You do have to be careful about exclusions and riders, as these, like title insurance, can provide clues to industry wide fail points or new issues coming up where exposure has taken place. The list of exclusions can be broad in scope and lengthy as insurance companies need to protect themselves from things that cannot be prevented and cause loss. Some even provide discounts to firms which document their risk management plans which can show that a firm is doing things to prevent claims too.
The real estate industry as a whole is in a position to keep the cost of E and O down by practicing better, and keeping disclosure of defects at the top of the check list in terms of transaction management.
When transactions go bad or a claim has to be made, it’s generally made by the current owner of the property involved due to an event which has made a defect known. Each area is different and as brokers and agents are taught to only practice within their realm of expertise, the amount and type of insurance that will protect them may vary. The brokers/firms get sued for performance or other type of damage which has injured a consumer where the broker/firm is negligent, which causes them to file a subsequent claim, which is how e and o protects consumers. Not many agents have the financial wherewithal to purchase a property outright if a failure occurs, and so the protection is at aimed at providing the money should an error occur. The insurance company may or may not then have the right to ask for relief from the insured, but that is an entire conversation in itself.
Get the facts by calling an errors and omissions provider before you start practicing real estate, or if you have questions about the level of insurance your service provider carries, or if you need advice about a clause in your policy contact a good real estate attorney who understands the market and type of business you do.