Being a realtor is a fulfilling job with a lot of rewards. You not only get to earn more than most careers if you are good but you can also have a flexible schedule.
However, the job also has its risks. Even the most responsible real estate agents can be sued if a client is dissatisfied. Some information may be misunderstood or the paperwork can get messed up and the next thing you know, you can get faced with a lawsuit for negligence.
To combat these risks, real estate agents or brokers should have their real estate errors and omissions (E&O) or professional liability insurance. It is a great risk management move for your career and may even be required for your real estate license.
In fact, it is not only real estate agents that make use of E&O insurance policies. This type of insurance services are used for any working professional who makes a living out of offering people advice based on their professional experience and educated opinions such as consultants, physicians, and architects.
Do realtors need E&O insurance?
The answer is yes! As a realtor, you need to implement measures that can protect yourself and your career. Getting a real estate E&O insurance is one of these measures.
If you find yourself involved in a lawsuit with a client, the costs can be very high and could bankrupt your business without insurance. Aside from the cost of maintaining an attorney, if found guilty, you will surely have to pay a hefty fee for settlement.
Even if a lawsuit is dismissed or you are found to be in the right, the cost of defending yourself in court can still cost you thousands of dollars.
A real estate E&O insurance policy will give you financial protection when you find yourself in a lawsuit.
So, it is important to get yourself an E&O insurance whether it is or not required in your state. You should get your hands on a real estate E&O insurance policy the moment you are licensed and ready to work.
How does errors and omissions insurance work?
A real estate E&O insurance will help protect you from lawsuits that claim you made an error in your professional services. The insurance will help cover your attorney fees, court costs, and settlements in court.
The E&O insurance policy will usually cover the legal costs and most of the settlements.
But there are instances that a real estate E&O policy will not cover the whole settlement if it exceeds the limits that are specified in the contract.
You should also check insurance policy’s activation and expiration dates. An errors and omissions insurance will only help you cover claims if they are filed within the policy period and the incident happened on or after the insurance retroactive date.
What does errors and omissions insurance cover in real estate?
Clients sue their real estate agents over a lot of things. Here, we give a list of some situations where an E&O insurance coverage can help. But take note that different insurance companies offer different coverage for real estate E&O. Your policy’s coverage can be different from another realtor’s policy coverage. Make sure to always read the fine print in your policy so that you know what terms are excluded and what situations could void your insurance coverage.
Failure to disclose important information
Real estate agents have the responsibility to disclose any problems about the house to your clients such as mold problems, lead paint, or asbestos. If the seller did not give any information to you under this area, always suggest your clients do a home inspection first. This becomes a very grave offense if there is proof that you are aware of the problem and decided to hide it from your clients.
Failure to exercise due diligence in research
As a real estate agent, it is your responsibility not to just know everything about the house but also the neighborhood. New homeowners might discover that there is a toxic waste dump nearby and could blame you for not telling them about it before they made an offer on the house.
Failure to act promptly
As a real estate agent, failure to act on your part can result in a lost opportunity for both the seller and the buyer. Sometimes, you can be sued over this.
Failure to adhere to fair housing practices
Sometimes buyers can sue you for discriminatory practices wherein you avoid showing them certain houses or neighborhoods because of their race, religion, or sexual orientation.
Failure to secure electronic data
Your clients will entrust you with a lot of personal information and financial data. If you store this data electronically and your device gets hacked or stolen, you will be placing all your clients at risk for robbery and identity theft. Clients can sue you for the potential or actual damage that may occur because of this negligence.
Lockbox and open house property damage
Sellers will entrust you with their property while you are showing their home to buyers and they can sue you for damages or losses. You must keep an eye on visitors during the open house and make sure that none of the seller’s personal properties get stolen or damaged under your watch. You also have to make sure that you secure the lockbox where the house key is located so you do not place the seller at risk for break-ins and robbery.
If you are subpoenaed for a court case and you are not the defendant, the E&O insurance can cover related expenses and will provide you a daily allowance while you are unable to report for work.
How much does an E&O insurance cost?
Not all E&O policies are created equal. Every real estate agent has a unique coverage needs so the cost of an E&O insurance will vary from one realtor to the next. Here is a list of factors that affect the total cost of your real estate E&O insurance:
Rates will vary depending on where you operate. If you want to be a real estate agent in a busy city, the insurance cost will be higher compared to if you were operating in a small town.
The insurance company will have to take a look at your claims history. If it has been found that you have a lot of lawsuits or liability claims, the cost of your real estate E&O insurance will be higher.
You will be given a choice as to what areas of coverage you need and what you do not need. Generally, the more coverage you ask for, the higher your premiums become.
How much E&O insurance is required by TREC?
The Texas Real Estate Commission (TREC) governs real estate practices in Texas.
TREC requires a maximum of 100K for error and omissions insurance policies for realtors to get and maintain an active license to operate in Texas.
If a real estate broker does not own 10% of a real estate company, the real estate company should provide proof to the TREC that they have E&O insurance with a minimum of $1 million annual limit for each occurrence.
Learn to protect yourself
It helps to learn to protect yourself from lawsuits. With the right practices, you may even avoid going to court altogether.
As a realtor, you should keep accurate records of all the real estate interactions and transactions you do with every client. Some would even go as far as to record every meeting and keep an electronic journal for every meeting.
Keep a notepad handy every time you take phone calls from your clients and write down their responses or concerns.
For major decisions or any recommendations that the clients decide to forego, let them sign a document stating the specific decision involved. Some realtors may think this is too much but it saves you from a lawsuit.
For instance, you recommended the client to do a home inspection. The client ignores this recommendation. You then ask them to sign a document stating that you did recommend a home inspection and the client declined. So when they move in and suddenly have complaints about the house, you get saved by the document!
Going through these measures is very helpful in case a client becomes unhappy with their purchase later and tries to get out of it by placing you at fault. Learning to protect yourself – whether you have E&O insurance or not – can help you avoid a lot of misunderstandings and conflict in the long run.
Real estate is a thriving business because of its high rewards but it can also come with high risks. You will be bound to face a dissatisfied client somewhere in your career. Even if you did your job carefully or you win a lawsuit in court, the overall expenses along the way can still be a devastating blow to your finances.
With a real estate error and omissions insurance, you do not have to worry about paying a hefty amount out of your own pocket every time you find yourself dealing with a difficult client or if you made an error on the job.