As a real estate professional, you face risks in your work every day that, iIf not managed well, could result in lawsuits. Often these are centered around claims of misrepresentation, negligence, failure to disclose and so on. Sometimes, you may be facing a lawsuit when you did nothing wrong. That’s why choosing the right Real Estate Errors & Omissions insurance is so important. To ensure your business is sufficiently protected, you need to pay attention to all those individual coverages when choosing your policy.
In this blog, we explore the cost of having inadequate real estate E&O coverage, what you should look out for when comparing policies, and how to understand the scope of coverage, including limits, deductibles and exclusions.
The Cost of Inadequate E&O Coverage
When you don’t pay attention to which individual coverages you have — or don’t have — in your E&O insurance plan, you might later be shocked to find yourself or your brokerage unprotected. You or one of your licensees might be doing property management for a client; when a problem arises, you discover your E&O policy doesn’t include that coverage. Maybe you list a property owned by you or a family member, and later find yourself without coverage for selling agent-owned property when the buyer is unhappy.
Not having the right E&O coverage in your real estate business can cause devastating consequences. Not only will you have to defend any lawsuits by yourself if you don’t have the right coverage, but you’ll also be up for all the legal costs that come with that. Going through a lawsuit is stressful enough without having all of those additional worries. Court costs, settlement costs, the time cost of lengthy legal proceedings . . . these can all take a significant toll on a real estate licensee and business.
What to Look Out For When Comparing Policies
While it’s so important that real estate licensees read ALL product information relating to their insurance policy, including all terms and conditions, four main things are crucial to understand:
- Limits
- Retention/Deductibles
- Exclusions
- Endorsements
Limits
The actual numbers will differ according to your policy but limits are displayed something like this:
$100,000/$500,000
The first number is your per-claim limit, which shows the maximum that would be paid for an individual claim. The second number is the maximum total limit for all claims within the policy period (usually a year). This is also called the aggregate limit.
If you have a claim that is over your per-claim limit or you have multiple claims that exceed the aggregate limit during the insurance period, you will have additional costs to cover yourself.
Note that if you’re covered by a company policy through your real estate brokerage and you have a claim, if it exceeds your company’s per-claim limit, you may be on the hook for the additional costs. And if your brokerage has experienced significant claims during the year, they may not have enough remaining aggregate coverage to cover your claim. Another situation where you may be asked to cover the costs yourself — even though you thought you were protected by your company’s E&O policy.
Retention/Deductibles
A retention is what you will pay before your insurance coverage begins. It’s your out-of-pocket expense that operates similarly to other deductibles you may have for other insurance policies.
Exclusions
Real estate E&O policies have exclusions that will limit your coverage. Typically, this includes instances of fraud, criminal acts, and where the licensee has done something intentionally. However, not all E&O policies are equal. You should check very carefully what the exclusions are for each policy you are considering before purchase.
Understanding the Scope of Your Coverage: Endorsements
Just as limits, retentions/deductibles, and exclusions differ with each E&O policy, so does the scope of coverage or the “endorsements.” Real estate E&O is designed to protect real estate professionals from a wide range of potential legal claims, but no E&O insurance package is the same. It’s important to ensure you are covered for all your business activities. For example, if you’re a seller’s agent but decide to move into property management, your E&O coverage may not automatically cover property management. Whether you’re considering renewing an individual or company real estate E&O policy, this is an additional area in which you will need to purchase coverage.
Whether you need a particular endorsement, or a higher limit in a particular coverage area, comes down to a judgment call by you about what the risks are in your real estate business. Consider the price range of the homes you’re selling, which typically dictates the size of potential claims and lawsuits. Doing a comprehensive review of the risks and having a risk management plan in place can help to identify key areas of concern where you need insurance coverage. It can also help to identify the gaps where you’re currently not protected.
Consider what endorsements, and the coverage limit for each, you may need in your real estate business. Some common endorsements that licensees should review between E&O policies include:
- Environmental coverage for potential liabilities related to environmental hazards or contamination at properties. Mold is a common occurrence with water intrusion, yet not all Environmental/Pollution endorsements cover mold, and many E&O policies only include $10,000 coverage in this area. (CRES has been a real estate E&O specialist for more than 25 years, and our environmental endorsement always includes mold coverage. You’ll also enjoy a standard $100,000 limit for an individual policy).
- Open House coverage to protect against third-party accidents or damage claims that may arise during open houses, including from real estate signage Depending on your state, Open House & Showings coverage (also called Contingent Liability) may be included in your CRES policy or may be a highly-affordable option. Beware of E&O policies that don’t offer Open House & Showings coverage. How are you going to conduct business without this crucial protection?
- Agent-Owned property sales coverage for properties that the real estate licensee themselves owns. This is a common area for real estate lawsuits. Many E&O policies only cover agent-owned property sales of your primary residence. CRES agent-owned property endorsement includes all residential vacation or rental properties up to a 4-plex that a licensee owns.
- Lockbox property damage protection. Many policies include minimal Lockbox coverage of $5,000, but CRES includes $100,000 of coverage. If someone breaks into your Lockbox, the potential for damage to your client’s property will be well over $5,000.
- Subpoenas coverage for legal expenses associated with responding to subpoenas. CRES individual policies in most states include subpoena coverage under our “Broad Form” endorsement. Broad Form is an affordable option on company policies.
- Regulatory Issues coverage to protect you if a claim is made against you on the basis of non-compliance with real estate laws and regulations. (Also included in CRES Broad Form endorsement.)
- Cyber coverage for data breaches and cyber attacks. If you have a data breach and have to notify every client in your database, those expenses can be significant. Many E&O policies still don’t include this coverage, but CRES Broad Form includes data breach notification coverage up to $50,000. Your real estate brokerage may need more comprehensive Cyber Liability insurance in a separate policy to include coverage for attacks from ransomware and wire fraud
- Escrow Disputes. If your state uses escrow for settlement, your E&O policy may include minimal Escrow coverage of $5,000. But with a settlement-related claim, those disputes commonly far exceed $5,000. That’s why CRES policies include $100,000 of Escrow Disputes coverage.
It’s common for companies that offer errors and omissions insurance across industries to not include many of these specific-to-real-estate coverages – and to include much lower limits on the endorsements they do include. Over 25 years of specializing in E&O for real estate sales, property management, appraisers, mortgage brokers, escrow, and transaction coordination, we know what protection a real estate professional needs. Be sure any errors and omissions policy you consider is tailored specifically for real estate, and isn’t a generic policy used across industries. Real estate risks are too specific and need specific endorsements to ensure you’re protected.
Get Tailored Insurance Coverage for Your Real Estate Business
As part of one of the largest insurance brokers in the world, CRES can help you find the best coverage and value your money can buy. The size of the insurance broker usually dictates the real estate E&O options they can offer; if you’ve been working with a smaller insurance broker, you’ll find that CRES has unequaled access to more real estate errors and omissions options and Cyber Liability insurance plans than just about anyone.
CRES real estate E&O + ClaimPrevent® also includes access to qualified attorneys — pre-claim — so you can get expert legal advice whenever you need it to help avoid lawsuits. (At $300-$400/hour on average if you had to pay an attorney, this service alone is why many real estate brokers and licensees rely on CRES.)
Contact the CRES team at 800-880-2747 for a confidential discussion today, or easily get a quote and complete your E&O plan online.
