Do you understand the coverage your Errors and Omissions (E&O) Insurance provides? Have you obtained protection for your assets with a comprehensive E&O policy? Many brokers purchase their E&O coverage without a clear understanding of the protection that is or isn’t provided. When price becomes the primary focus of purchasing a policy, you may be overlooking some important features, including policy exclusions and the possibility of adding coverage by endorsement when necessary to protect a firm’s business model. By the time you find out that you don’t have appropriate coverage, it may be too late.

Part 1: E&O insurance and agent-owned property transactions

A common assumption is that real estate E&O policies automatically cover agent-owned property transactions. Real estate E&O policies are written to protect against claims from third parties. They are not written to cover an insured’s self-dealing. Why is that? Agent-owned property transactions carry a much higher risk than third-party transactions. They are potentially volatile, difficult to defend, and typically pay out significantly more than third-party transactions. For instance, the Pearl Insurance E&O program, which is endorsed by the WRA, cites that agent-owned property transaction claims pay five times more, on average, than those involving third-party transactions. In today’s real estate marketplace, more agents and brokers are selling properties they own or are involved with, such as investment properties, making it more important than ever to know how your policy responds in the case of an agent-owned property claim.

In addition, the likelihood that damages (settlements or judgments) are paid in agent-owned property disputes increases over non-agent-owned property disputes. Although these transactions have a history of either no coverage or very limited coverage, most standard insurance carriers now provide limited coverage for agent-owned property transactions if certain requirements are met in the course of the transaction. It is important to know if your E&O policy allows for some agent-owned property coverage and what is required to trigger that coverage. 

Don’t wait until you are faced with an agent-owned property claim to find out that you could have been covered for the claim had you followed the policy’s requirements. Those requirements are typically activities that also provide for additional protection and risk management. Coverage is often limited to residential transactions. Some typical E&O requirements to obtain coverage for these transactions include:

• The use of standard real estate contracts.
• Providing a completed seller disclosure form signed by the seller and acknowledged by the buyer prior to the closing.
• Purchase or recommendation of a home inspection. If the home inspection is not performed, a written waiver should be signed by the buyer and included in your transaction file.
• Purchase of a home warranty. 

It is extremely important to become educated on how your policy views agent-owned property transactions. While your policy may provide limited coverage in the case of agent-owned property transactions, the coverage is extended to the real estate professionals involved in the claim and is not designed to defend the agent as the seller. Best practice would include having someone else in the office handle the entire transaction, making it an arms-length transaction. These transactions can be easier to defend. Many brokers — who are fully aware of the risk involved in these transactions — implement an office policy requiring a non-owner agent in the firm handle agent-owned property transactions. 

While residential agent-owned property transactions may be allowed when you meet certain requirements, be sure to review your policy to see if/how agent-owned non-residential transactions may be covered, including raw land and commercial properties. 

Agent-owned property that is managed by the agent/owner may also have some limitations to trigger coverage. Be aware of your policy’s stance on an agent managing property they own. E&O policies may also cover agent-owned property transactions when the property was acquired through a guaranteed sale listing, but policies may have requirements pertaining to the length of time the property is listed for resale.

Remember, the REALTOR^® Code of Ethics also requires the disclosure of any special circumstances associated with the ownership of a property as it relates to the agents involved. The sale of agent-owned or agent-involved properties is growing and is becoming more common.

Accordingly, it is imperative that all REALTORS^® remember to disclose all special circumstances in writing to all parties on the outset of every transaction. These disclosures include but are not limited to situations involving agent-owned real estate or familial and business relationships between the agent and any party to the transaction. When you are upfront and honest, you can avoid problems with the sale, your clients, or the other parties involved, while also maintaining a clear and trustworthy reputation.

Selling investment properties can be a lucrative business for real estate agents. Just be aware of the differences in coverage provided by E&O policies when it comes to this type of transaction. Real-estate specific policies with standard carriers tend to provide the broadest coverage for these activities. 

Part 2: Risk reduction tips to keep you safe

While having the proper E&O coverage in place helps protect a broker from liability, the broker’s own transactional policies and procedures go far to reduce liability risks for the brokerage. Consider the following practice pointers as liability-avoidance tools!

Obtain a written seller’s disclosure form or waiver: When drawing up papers for a home or property, always make sure you obtain and review the seller’s disclosure or waiver form. Verify the information contained in the report is consistent with what you know about the property, and advise the seller to update the disclosure as needed after walk-throughs or inspections.

View the property: Before showing a home, walk through the property and point out any red flags. Red flags could include stains on ceilings, a leaning retaining wall, uneven floors, strange or musty odors, excessive visible black mold, and foundation cracks or water lines in the basement. These may all indicate a more serious problem. Never interpret a property’s condition, but instead suggest your clients obtain professional inspections before making or accepting an offer.

Provide full disclosure (if material in nature): Make sure buyers are aware of any potential problem areas. For example, if the vacant lot next door will be developed or if a property tends to flood, this fact needs to be disclosed to the buyers in writing to help avoid any future allegations.

Disclose all conflicts of interest in writing: Claims filed alleging failure to disclose dual agency typically have a high success rate for plaintiffs and result in sizable settlements. To avoid this type of situation, just remember the Four “D”s: Decide whom you will represent; Disclose this to all parties; Document your decision in writing; and Do as you say. 

Never act outside the area of your expertise: Even if a property is new construction, provide a list of professionals for the buyers to hire to inspect the home and assess the septic system and well. If the buyers forego these inspections, document that fact in writing and obtain a waiver. 

Follow pre-established office procedures: Every real estate office and professional should have a set of pre-established procedures to follow during transactions. Be sure to adhere to your office’s pre-established procedures or checklist to ensure you are maintaining a well-documented file.

Familiarize yourself with fair housing laws: Become familiar with and educate buyers and sellers about fair housing laws. Avoid using words and phrases in a discriminatory context in conversations and in advertising. Never work with a discriminatory seller or buyer, and provide equal service to all. 

Review the Code of Ethics regularly: As a REALTOR^®, you agreed to abide by a strict Code of Ethics to help maintain the highest standard of integrity among real estate professionals. To find the most current Code of Ethics and Standards of Practice, visit the National Association of REALTORS^® website at www.realtor.org. 

Seek assistance when you’re not sure: Don’t be afraid to say, “I don’t know” to your clients if you are not sure about something. It is better to take the time to look up the facts or ask someone who would know the answer, rather than supplying faulty information. Just remember to follow up with them and document your findings in writing.

Report all claims and incidents to your insurance company promptly: If you are aware of a potential claim situation, or if a claim is reported against you, you must report it to your insurance company immediately. Late reporting may jeopardize your E&O coverage! 

Avoid overstated adjectives: When discussing, marketing or otherwise promoting a property, avoid adjectives — such as “renovated” — that could exaggerate improvements to a property. When stating facts about the age or structure of the roof and/or property, be certain the information you are providing is accurate. 

Maintain a well-documented file: A well-documented file should include the date and time of all meetings, phone conversations, emails and faxes as well as records of all verified information, contracts, disclosures, waivers, and closing documents with appropriate signatures. It is important to note that you should never sign anything for your clients or customers. Warning: Do not destroy your file following a closing as many lawsuits can occur years after a transaction has closed.

By implementing these simple risk reduction tips, your documents will support your story of the transaction if a claim is filed against you — and odds are, the claim will be dropped. Attorneys don’t want to fight irrefutable evidence. When transaction files are complete and contain clear, concise and accurate information, you are better protected from frivolous claims and can avoid having to pay costly attorney fees and settlements. 

Make it your firm’s mission to promote loss prevention awareness starting today!

Lisa Scoble is Vice President of Program Business for Pearl Insurance. Pearl Insurance is a nationally known broker, marketer and administrator specializing in the design and administration of quality insurance plans for associations, affinity groups and large firms. Information provided within this article is not to be taken as legal advice and is to be used for educational purposes only.

Pearl Insurance is a WRA member benefit partner. Learn more about WRA member benefits at www.wra.org/exclusivegroupbenefits.com.