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November 21, 2023

Errors and Omissions Insurance for Real Estate Professionals

In the real estate industry, you need to dot your I’s and cross your T’s. High-stakes transactions are the norm – one missed deadline or omitted piece of information can lead to major disputes. A commitment to meticulous work can help prevent many issues, but errors and omissions insurance for real estate professionals provides another essential layer of risk management.

How Small Oversights Can Lead to Massive Lawsuits

Brokers, property managers, and other real estate professionals are particularly vulnerable to lawsuits. Consider the following scenarios:

  • A property manager leases a building to a business. During the winter months, an ice dam forms on the roof and causes a leak, resulting significant losses to the tenant’s inventory. After discovering that ice dams had also been a problem in the previous year and that the property manager had not disclosed this information, the tenant files a lawsuit.
  • A real estate broker submits an offer on behalf of a client. The seller makes a counter-offer, which the client wants to accept. The broker believes he has sent the acceptance but later realizes he had saved the email as a draft and not sent it. By the time he discovers this, the deadline has passed, and the seller has received and accepted another offer. The client sues the broker for breach of duty.
  • A real estate broker has dual agency for both the buyer and the seller of a house. After the sale is complete, the buyer discovers issues. She concludes that the broker failed to disclose information and recommended a higher price than the true value of the property. The buyer files a lawsuit alleging conflict of interest and breach of duty.

When lawsuits occur, they can result in expensive and lengthy legal battles. Here are some recent headlines:

  • A landlord sued real estate company JLL for failing to disclose dual representation. According to Bisnow, a U.S. Appeals Court has vacated an earlier ruling against JLL and remanded the case to a lower court.
  • In another case involving dual agency, the Herald-Tribune says a broker has been sued in a lawsuit that accuses him of manipulating the seller in a $4.6 million transaction to select a buyer that he also represented.
  • The Herald-Tribune also reported on a lawsuit involving a property that sold for $4 million and then sold again for $7 million less than 24 hours later. The original seller filed a lawsuit agent the real estate agent claiming negligence and breach of fiduciary duty.
  • CVN says a real estate agent in California has been hit with $500,000 in punitive damages. The buyer accused the agent of concealing extensive fire damage.

Reducing Your Risks with Errors and Omissions Insurance

Real estate professionals can reduce their legal exposures by reviewing all applicable laws, paying close attention to hot topics like disclosures and dual agency, adhering to ethical practices, and maintaining documentation for all transactions and disclosures.

Even with these risk management practices in place, a lawsuit is possible. It only takes one missed deadline or oversight for financial losses and legal action occur. Lawsuits are also possible when the real estate professional has done nothing wrong but is accused of negligence or breach of duty. The resulting legal battles can be time consuming and resource draining.

Errors and omissions (E&O) insurance for real estate professionals provides important protection. According to the Insurance Information Institute, errors and omissions insurance is also called professional liability insurance. Many types of professionals should consider coverage, including real estate agents and brokers. Most policies work on a claims-made basis and pay the cost of legal defense and judgements, up to the policy limits.

Securing E&O Insurance

Some states require real estate brokers to carry E&O insurance. Even if coverage is a legal requirement, it’s a smart idea. When reviewing your coverage, consider the following:

  • Claims covered – Policies typically cover claims involving breach of duty and negligence but not criminal and intentional acts.
  • Costs covered – Policies typically cover legal costs. Some also cover professional penalties.
  • The limit – How much coverage you need will depend on your level of risk. When securing coverage, bear in mind that larger real estate transactions can lead to larger lawsuits.
  • The coverage period – A claims-made policy does not cover claims that emerge after coverage lapses, whereas tail coverage offers an extended reporting period.

Heffernan Insurance Brokers can help you secure errors and omissions insurance for real estate professionals along with the other coverage types you need. Learn more.

Tags:  real estate

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