Defense Policy

Changing REALTOR^® technologies make E&O insurance more vital than ever.

By David Tobenkin

The exponential growth of the Internet and portable electronic devices used by REALTORS^® to communicate with clients in recent years has increased the potential for costly errors. Agents who don’t take precautions can face legal liability claims when something goes wrong with a transaction, and this fact has increased their need for errors-and-omissions (E&O) insurance to protect themselves.

It is simply too easy for REALTORS^® to omit key details or unintentionally make misleading statements in the frequent, abbreviated, and often breezy and informal communications commonly made through smartphone texts, emails or via posts on social media like Facebook and Twitter.

“REALTORS^® expanding into those areas may be treating them too casually and mistakes are being made,” says Eric Myers, vice president and real estate E&O program manager at Chevy Chase, Maryland-based Victor O. Schinnerer & Co., Inc. The company is an underwriting manager for insurer CNA, which has partnered with the National Association of REALTORS^® (NAR) to provide NAR members with special pricing on real estate E&O insurance.

“Sharing real estate information through new technologies like texting and instant messaging runs counter to what we are taught in real estate — to document all transactions that bring up additional exposure to demonstrate that the real estate professional used reasonable care in communications with clients and that communications were clear,” says Myers. “But with many of these technologies, there is no documentation trail.”

What to Know About E&O

Myers and others say that many REALTORS^® don’t understand what E&O policies cover or how to employ them. And, more commonly, they harbor a misconception that such insurance isn’t needed outside the 12 states where it is mandated by law.

“E&O insurance is as essential as a [property] survey,” says Dale Carlton, Jr., CRS, J.D., 2015 CRS president and an associate professor with REALTOR^® University. “I wouldn’t buy a sandbox without getting a survey to make sure the property is where it is believed to be. This insurance protects you from the worst-case scenario if you did something wrong you were not aware of or if someone says you did, which means you will still have to defend against the lawsuit even if you exercised adequate care,” he says.

“People feel that if they haven’t been sued during a long career in real estate, they don’t need E&O insurance, but the longer you’ve been in the business, and the more matters in which you have been involved, the greater the chance of a lawsuit,” Carlton says. “And the fact that you didn’t know something may not protect you; you may have had a duty to know something, such as the sewage plant that was going to be built a mile from the home you were selling.”

Yet only 33 percent of REALTORS^® were covered by E&O insurance in 2013, according to a 2014 NAR member survey.

E&O insurance covers against negligent, unintentional activities by the REALTOR^®, such as unintentionally failing to disclose a material condition in a property, failing to discover a material condition in the property and unknowingly having a financial conflict relating to the property that could harm the client’s interests.

Not covered are intentional acts such as willfully failing to disclose a known material condition and, often, violations of some state codes and regulations, notes Krista Kochosky, J.D., senior counsel and head of litigation at the Cranberry Township, Pennsylvania-based Lynch Law Group, LLC.

The insurance generally pays for the cost of defending against such claims and, if the plaintiff is successful, for the claim itself, up to the limit of the policy. A rare exception to the need for such insurance, Carlton notes, is where large brokerages can afford to self-insure.

Residential REALTORS^® can obtain coverage for less than their commercial real estate colleagues given lower risk, says Myers. The cost is often modest, sometimes as little as $600 per year for an agent in an area with moderately priced residences, Myers notes.

Myers says that carrying appropriate E&O insurance can be a competitive edge for REALTORS^® and associated brokers by demonstrating that they are established, responsible professionals. He mentions that some types of residential sales work require it, such as bank work, franchise work and HUD work.

Follow the Game Plan

Real estate professionals must make sure their E&O policy also covers the business activities in which their brokers and agents will be engaged. Thus, if one REALTOR^® covered by the policy of a brokerage that is primarily engaged in residential real estate sales also manages properties, this activity should be included in the E&O policy. If not, it should be made clear that such activities are not part of the real estate practice of the brokerage, and the agent should obtain his or her own coverage. E&O insurance may not cover negligent advice or statements that are outside the scope of an agent or broker’s professional expertise, such as offering legal, accounting or engineering advice.

Ideally, competent legal counsel who has a firm understanding of the real estate business generally, and of the broker or REALTOR’S^® particular business, should review E&O policies to make sure insured and insurer agree, and that the policy is clear as to what is and isn’t covered. There are potential issues affecting coverage that most REALTORS^® would never think of, Carlton says, such as policy language that may provide for coverage of negligent actions only in the course of paid services, but not for REALTORS’^® charitable services to nonprofit activities.

Agents also must make sure they know what coverage their broker is providing and what contributions, if any, they will be expected to make to premium payments and deductibles in the event of claims. Sometimes, additional coverage or a separate policy for agents may be advisable, Carlton notes.

CLAIM CHECK Most common types of E&O insurance claims
Claim Types	Problem Areas
Negligence	Contract Error
Misrepresentation	Valuation
Breach of Contract	Sewer & Well
Fraud, Intentional Acts, Misconduct	Escrow
Breach of Fiduciary Duty	Structural Issues
Civil Rights & Fair Housing	Water Infiltration & Mold
	Title Issues

The amount of E&O coverage REALTORS^® need may vary, with those handling much more expensive properties needing more coverage due to potentially greater claims, Carlton says.

Real estate professionals must make sure there are no gaps in coverage, which frequently occur when the broker or agent switches employers or insurers, or retires without realizing that claims on past acts are still possible. Other gaps may arise from a failure to understand the nature of the coverage period; most policies are written to cover a period when claims occur, rather than when the negligent act itself occurred, which can affect the window of coverage.

Some points may need to be negotiated. A broker may wish to insist that the policy include the right to select the attorney who will defend it in the event of a lawsuit, or the right to decline to settle. These could have other legal or business implications for the agent or brokerage. “You want to be represented by an attorney who knows not only real estate, but your particular business,” says Kochosky.

As with other forms of insurance, REALTORS^® who have policies and procedures designed to promote professional best practices can generate discounts from E&O insurers. Yet Carlton notes that a tome gathering dust on the bookshelf will not do. Brokerages must actively train professionals and ensure policies are implemented. Otherwise, failure to follow such policies could be used as evidence against the brokerage in any negligence lawsuit.

Kochosky notes that REALTORS^® should require signed documents from clients acknowledging that issues with the property have been explained to them and that clients may need to consult other professionals concerning issues related to their purchases, including appraisers, tax attorneys, accountants and engineers, since “the average consumer may otherwise think agents and brokers are responsible for those areas.”

Real estate professionals should periodically assess whether or not their policy remains well matched to their business practices. “For many brokers, what they are doing is always evolving, so their coverage must, too,” Myers says.

David Tobenkin is a freelance reporter based in the Greater Washington, D.C. area.

For more information about E&O Insurance, visit REALTOR.org.