E&O Coverage for Real Estate Agents – Don’t Sell a Home Without It

Real estate errors and omissions (E&O) liability coverage is big business. Although the recent property debacle has focused attention on single home sales, they are only part of the market, even if transactions involving them account for a majority of the liability spectrum. Based on the principle that whoever can sue, will sue, and for the largest amount they can think up, any person even remotely connected with the real estate industry is at risk, and therefore needs adequate coverage.

Real estate E&O coverage is one of the specialties of San Francisco-based brokers Cooper & McCloskey. Their Web site points out that the “threat of a lawsuit is always a possibility for any professional, regardless of actual liability. Real estate brokers operate in a highly regulated industry within an increasingly litigious society. Add these elements together and you have a profession that faces a broad range of errors and omissions (E&O) liability exposures.”

Some of the more common sources of liability claims against real estate agents can include errors involving a deposit loss, failure to notify of a needed inspection in a timely manner, and incomplete or incorrect closing documents.

The Web site LovetoKnow.com, also warns that “even the most meticulous real estate broker can make mistakes on mortgage documents, especially since each home sale involves a substantial amount of paperwork.” A mistake that is as simple as transposing a number can throw off all the documents and become a very costly mistake.

Commercial Coverage

Notable differences exist between the liabilities affecting big real estate agents and small to medium-sized firms. Large firms, particularly those that deal exclusively in commercial real estate, have their own ways of covering their E&O exposures to liability claims. Paradoxically, they are less of a target for litigation than smaller firms and those who handle individual sales and leases.

“Essentially we experience very little litigation,” said Edward D. Castro, counsel and assistant secretary of Cushman & Wakefield Western Inc. He explained that, as large commercial firms deal exclusively with buildings, factories, offices and other major properties (rarely anything worth less than $2 million), they experience very few of the problems that frequently arise on smaller transactions.

“Our staff is extremely professional,” Castro said. “Agents are trained to know what to do, and what not to do.” In addition most of the “transactions we handle involves attorneys.” Therefore the people working on a particular deal, on all levels, are more sophisticated, which means there’s a lot less chance that they are going to make a mistake. Likewise, the buyers or potential leaseholders “perform their due diligence,” he continued. “They know the property.”

He also stressed that a cardinal principal at Cushman & Wakefield is “full disclosure.” As a large number of claims arise from failures to disclose structural defects or other problems – lumped together as “misrepresentation” – affecting the value of the property, or its suitability for the buyer’s or leaseholder’s uses, up front disclosures, forestall later litigation. Requiring lawyers to prepare the necessary sale and lease contracts also means “they are involved at the front end, rather than the back end,” Castro said.

“Problems are more likely to arise in situations where you have smaller properties, unsophisticated buyers or sellers and attorneys aren’t involved.” He added that there’s a vast difference between the type of property handled by a firm like Cushman & Wakefield, and the sale of a single family home or apartment. Although most real estate agents are conscientious, it’s relatively easy to get a real estate license in most states; therefore the level of experience in those who deal with smaller sales is often less than the experience of those who staff large commercial firms. As a result “there’s more litigation and more [conflicting] issues in smaller transactions,” Castro said. “There’s usually no lawyer involved; contracts are drafted by the broker.”

He also explained that when Cushman & Wakefield does get involved in litigation, “it’s usually as a witness summoned by subpoena.” When coverage is needed, Cushman & Wakefield’s captive insurer is responsible for handling it.

Asked about any effects the “real estate bubble” has had on business, Castro said it has affected some aspects of the industry – notably the increase in “note sales and receiverships,” as well as a far higher incidence of foreclosures. These types of transactions differ from more normal ones. He explained that there are “different buyers, no guarantees and no inspections.”

He also noted that there are more buyers trying to get out of deals now than before the crisis. “Even if there was a problem, the deal went through a year or so ago, because the value of the property was going up; it’s different now.”

Smaller, Mid-sized Real Estate Agents

The thousands of mid-size and smaller firms, who handle the bulk of U.S. real estate transactions, face the same problems as larger firms. But unlike their larger counterparts, smaller firms lack permanent legal staff, let alone a captive to turn to.

Even huge groups, like Century 21, are normally operated by individual franchisees. For the most part smaller companies, even if they are operating under a franchise, rely on insurance agents and brokers to find the coverage that’s appropriate for them. They are called on to place fairly complex coverage, which is essential for their clients.

Victor O. Schinnerer, one of the largest and best know professional liability brokers, provides coverage for one person real estate firms to very large firms, in all specialty areas – including residential sales, said a company spokesman in response to e-mailed questions. Schinnerer not only provides coverage for real estate agents and brokers, but for related professionals as well, including appraisers, title agents, escrow firms, auctioneers and real estate consultants.

The company places all of its business with “CNA (Continental Casualty) on the Real Estate Program.” Schinnerer also receives first notice of loss and then its carrier partner, CNA, handles the claims. “A large percentage of claims involve misrepresentation – and this covers a wide area.”

While many “standard exclusions” apply to policies, Schinnerer also offers “optional coverages which can be purchased based on the policyholders’ needs.” These typically include environmental and pollution risks, as well as the misuse of computer data. Schinnerer said that all of its policies are written on a claims made basis.

As far as the real estate crisis is concerned, Schinnerer said that some “firms have dropped their coverage or just gone out business,” adding that the “downturn in the economy in general and the housing market in particular have caused multiple issues in both residential and commercial real estate.” The loss in equity in property is the primary effect, but it also affects the ability “for people to pay their mortgage and/or get a loan. In addition there are many unrealistic expectations in the housing market; mainly that prices will always go up. This has lead to a different assortment of claims.” However, there is some good news. Schinnerer said “new firms are starting up on a daily basis. Established real estate professionals are doing well in this market.”

The Hartford is another carrier that writes real estate professionals E&O coverage.

A spokesman for The Hartford explained, in response to e-mailed questions, that the insurer “has been writing real estate E&O coverage for more than 20 years. The Hartford provides coverage “primarily to residential real estate brokerage firms,” the company said. “We also have the ability to write firms involved in commercial transactions including sales, leasing and property management. Each policy is individually underwritten and priced with customized coverages available by endorsement.”

As far as writing the coverage, The Hartford said it relies on its nationwide appointed independent agency network and a few specialized brokers who concentrate in the class as sources of business.

Like a number of insurance companies The Hartford has seen some effects from the depressed economy. It said that while the real estate E&O market has continued to grow even through the recent difficulties in the real estate market, the pace of growth has slowed with the downturn in the economy. “The growth in the product is highly correlated to the number of real estate transactions, and we are optimistic that as the economy recovers, we will see an increase in real estate transactions.”

That doesn’t necessarily mean that there will be a corresponding decrease in claims.

Liability Pitfalls for Real Estate Professional

• Misrepresentation
• Undetected pest damage, sewage, or septic problem
• Error in home inspection; undetected problems with sewer or septic system, foundation, ceilings, roof, leaky pool, etc.
• Legal error
• Failure to detect intentional misrepresentation by seller
• Error in zoning interpretation
• Error in comparative market research report
• Undetected pollution (in soil, in well water, etc.)
• Inaccurate appraisal
• Inadvertently offered bad advice
• Bank mortgage error
• Overlooked property easement
• Breach of confidentiality

Some of the coverages include the following:

• Broad coverage for professional services associated with the real estate industry, including coverage for firms involved in residential sales, commercial sales/leasing, property management, consulting, appraisal and mortgage brokering
• First dollar defense
• Fair housing coverage
• Environmental hazards coverage
• Real estate development services coverage
• Contingent bodily injury and property damage for renovation services
• Shared expense deductible
• Worldwide coverage