Liability lawsuits have the potential to financially destroy your real estate agency. Some agencies choose to bundle coverage in a business owners policy (BOP). O
Clients place trust in their real estate agents to find them a home that fits their needs. But, what happens if a trusted real estate agent fails to disclose necessary information about a property? What if house damage occurs during a showing? What if there is a misappropriation or loss of a client’s assets during a transaction? All of these are common scenarios, and each scenario needs specific treatment in your insurance program.
Professional liability insurance
Professional liability insurance, also known as errors and omissions (E&O) insurance, protects you from claims that you failed to disclose important information about a property or made statements that ended up being untrue. These policies typically cover legal expenses and settlements or penalties paid to the injured party. There are three primary exposures real estate agents should insure:
1. Errors and omissions
Did you fail to disclose to your clients that the basement of the property they recently bought floods every spring? Did you tell your clients that their new home’s kitchen had a recent renovation when it was really done over 10 years ago? Both cases qualify as an error or omission as long as the information was mistakenly omitted. Coverage is not for intentionally false representations.
2. Negligence
Negligence occurs when clients claim a real estate agent should have known something specific about a property, but didn’t, and failed to take appropriate action. For example, as a real estate agent, you should have knowledge of the property for sale and of the surrounding neighbourhood. If a client buys property next to a lot owned by a developer who later starts construction on a new high-rise building that obstructs the view of the client’s property, you could be sued for negligence. You should have researched who owned the lot next door and disclosed that information to the buyer at the point of interest.
3. Misrepresentation
The only misrepresentation covered by insurance occurs when an agent makes a persuasive statement about a property that the agent believes to be true but is actually false. Let’s continue with the previous example of an empty lot owned by a developer. You’ve done your research and there are no signs or proof pointing to the fact that a developer owns it. If you tell your client that the lot next to their new property is empty and unowned because you genuinely think it is (and you were wrong), this is a misrepresentation. You may face a lawsuit for their loss of property value, but your insurance would likely step in to help. Falsely representing a fact to a client is considered fraud and isn’t typically insurable.
Professional liability insurance can cover several other scenarios. Talk to your insurance broker about the span of the coverage being offered.
General liability insurance
General liability insurance protects your business from the more common forms of client lawsuits. What does a general liability plan typically cover?
- Client injury: General liability plans protect your real estate business if someone experiences an injury in your real estate office or while viewing a property you are showing them. This plan can be particularly important if you mostly work as a “buyer agent.” With clients viewing and walking through several unfamiliar properties, the risk of injury is high. Keep in mind, these plans cover client injuries only. (If you have several agents working under you, your workers’ compensation insurance would respond to employee injury claims.)
- Property damage: If an agent or another employee of the agency does damage to a property, a general liability plan would cover that cost. This includes houses you are under contract to sell as well as houses you are showing to your buyers.
Cyber liability insurance
Real estate transactions are a juicy target for cybercriminals. Some use email to pose as banks or other money handlers. They do this to trick agents or customer service representatives into providing personal data of buyers or sellers. Some hack directly into agency systems to steal customer data. In all cases of a cyber breach, there is potential for a lawsuit against your agency. If that happens, you may have to pay damages for any client’s financial loss.
Crime insurance
Crime insurance, a
Business auto
Real estate agents and brokers drive for business all the time. If an employee is driving a personal vehicle while working and has an accident your business could still be named in a lawsuit for compensation. You would normally need non-owned commercial auto insurance since your company doesn’t own the vehicle. If you own cars that your employees use for business, your insurance coverage should clearly name all drivers and vehicles.
What can affect your premium?
There are several factors that can affect the premiums that real estate agents pay for insurance.
- Location: You may have a higher premium if your area of operation is high-risk.
- Previous liability claims: Just as your car insurance premium increases with every citation or accident claim, so will your liability policies. If you or your agency have a history of liability claims, your premium will be higher.
- Coverage limits: If your agency has several employees, you will need more insurance – that is, a higher limit (or maximum payout). Higher limits mean a higher premium.
Your agency can do a lot to reduce your risk of loss and prevent claims. Full and accurate disclosures on every transaction, careful driving, a safety-first program for showing all properties, and rigorous and routinely updated cyber-security hygiene can keep your liability claims low. Ask your insurance broker about risk management suggestions if you don’t already have a formal plan.
Call your insurance broker
Your insurance broker will work with you to build an insurance plan that fits your exposures and your budget.