Why Real Estate Brokers Need E&O Insurance
Dan Levenson March 15, 2018
Real estate brokers deal with people more often than most professionals do, so they face a number of unique risks. As such, they may need even more insurance coverage, such as errors and omissions (E&O) insurance.
Often, one of the first items many businesses cut when dealing with a tight budget is insurance. But this can be a major mistake considering the litigious environment of today’s world. If you’re a real estate broker, you need to know about E&O insurance and how it can protect you.
Here are some of the primary benefits of having E&O insurance, along with what this type of insurance covers and does not cover.
What Is E&O Insurance?
This specific insurance coverage—also referred to as professional liability insurance—gives businesses providing professional services protection against negligence claims or lawsuits for failing to carry out their specialized duties.
How It Benefits You as a Real Estate Broker
It protects you from lawsuits — The most important reason for having E&O insurance is to reduce the likelihood for potential lawsuits. For real estate brokers who are dealing with lawsuits, this kind of insurance policy protects them from financial losses as a result of suits that were filed because of problems with their real estate work. The coverage applies not only to sales associates, but it also covers the real estate companies they represent.
It offers coverage when you change firms — Consider how there are some insurance firms that offer no protection for independent contractors, although they say they’ll cover you as long as you stay with their company. But if you change real estate firms, you’ll lose your protection regarding issues with older real estate transactions.
What It Covers and Does Not Cover
E&O insurance provides coverage for:
- Expenses related to your legal defense — E&O insurance covers the costs involved in proving a case.
- All of your employees — This includes W-2 employees as well as 1099 subcontractors.
- Personal injury coverage against claims such as libel, slander, and invasion of privacy.
- Worldwide coverage when a suit is brought into the United States.
- You can buy optional coverage for allegations of copyright infringement and intellectual property infringement.
On the other hand, E&O insurance does not provide coverage for matters such as property damage or bodily injury, employment issues, false advertising, patents and trade secrets, illegal or fraudulent acts, and other services.
Factors Affecting Cost
The cost of E&O insurance largely depends on the specific terms of a policy. Also, just as any other type of insurance policy, the cost can depend on particular risk factors.
For example, if your business is risky, you’ll probably pay more. Other factors affecting cost can include those such as:
- The size of a company or the number of agents working there
- The location of a firm — Consider how the cost can be more for a New York City firm than for one located in a small town.
- Whether you’ve had prior lawsuits
- A company’s practices regarding risk management
- How well your contracts are written
- lf your employees have been trained properly
Considerations and Warnings
- In addition to covering an attorney’s fees, E&O insurance pays for arbitration or mediation costs, copying and filing expenses, charges for expert witnesses, and costs involved in settling a claim.
- Consider how small and mid-size real estate firms handle most of the US’s real estate transactions and have to deal with the same issues as larger companies. Unfortunately, smaller companies generally don’t have permanent legal personnel as larger firms do, meaning they’re left to face legal problems alone.
- Some of the typical legal pitfalls that can confront real estate brokers include legal error, misrepresentation, mistakes in zoning interpretation, giving bad advice, undetected sewage or septic problems, undetected pest damage, and other problems.
- Contrary to what you may think, as a real estate broker, the greatest threat to your earnings is not your competition or a decrease in commission. Instead, your biggest financial danger is the possibility of being sued.
Because you’re even more susceptible to lawsuits than most professionals, it’s critical you have the right insurance policy. Failing to have the correct coverage can lead to financial loss, besides damage your reputation as a professional.