Liability lawsuits have the potential to financially destroy your real estate agency. Ensure you have the right insurance coverage to protect it.
Some real estate agencies choose to bundle coverage in a business owners policy (BOP), while others pick program insurance, which is a tailored, plan-specific policy. Either way, liability insurance is a key part of protecting your business.
Clients place trust in their real estate agents to find them a home that fits their needs. But what happens when these trusted agents fail to disclose necessary information about a property? What if parts of the house are damaged during a showing? What if client assets are misappropriated or lost during a transaction? All of these are common scenarios, and each scenario needs specific treatment in your insurance program.
Professional liability insurance
Sometimes called errors and omissions insurance, this coverage protects you from claims that you failed to disclose important information about a property or made statements that ended up being untrue. Most policies cover your legal expenses and settlements or any penalties you must pay to the injured party. There are three primary exposures real estate agents should insure.
- 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 the kitchen of their newly purchased home was recently renovated when really it was over 10 years ago? Both cases would qualify as an error or omission if the information was omitted mistakenly. But if you intentionally make a false representation, that’s not covered.
- 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. As a real estate agent, you should have knowledge of the property being sold and the surrounding neighborhood. For example, if a client buys a property next to a lot owned by a developer who later starts construction on a new high-rise building that obstructs their view, 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.
- Misrepresentation: The only type of misrepresentation covered by insurance is when an agent makes a persuasive statement about a property that they believe to be true but actually isn’t. 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 pointing to the fact that it is owned by a developer. If you tell your client that the lot next to their property is empty and unowned because you genuinely think it is (and you were wrong), this is misrepresentation. You may be sued for their loss of property value, but your insurance would likely step in to help. However, deliberate false representation is considered fraud and isn’t typically insurable.
There are several other scenarios that can be covered by professional liability insurance, so it is important to talk to your insurance agent or 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 is typically covered by a general liability plan?
- Client injury: General liability plans protect your real estate business if someone is injured in your office or while viewing a property you are showing them. This coverage is 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 that 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 agency employee causes damage to a property, general liability would cover that cost. This includes houses you are contracted to sell as well as other houses you are showing to your buyers.
Cyber liability insurance
Real estate transactions are a juicy target for cyber criminals. Some use email to pose as banks or other money handlers and trick agents or customer service representatives into providing the 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 a potential for your agency to be sued and have to pay damages for any client financial losses.
Crime insurance
Also called a fidelity bond, this protection steps in if someone in your agency steals. It can apply to money, securities and even the property of another entity (for example, something from a home being shown). Your agency can cover a few individuals or a wide swath of your employees. It all depends on who has access to valuables.
Business auto
Real estate agents and brokers drive for business all the time. If your employees drive their own vehicles and cause an accident in the course of work, your business could be named in a lawsuit for compensation. You would normally need nonowned commercial auto insurance, since your company doesn’t own the vehicle. If you do own the cars that your employees use for business, your insurance coverage should clearly name all drivers and vehicles. Make sure you have medical payments coverage in case others are injured in an accident.
What can affect your premiums?
There are several factors that can affect premiums:
- Location: Your premiums may be higher if your area of operation is considered high risk.
- Previous liability claims: Just as your car insurance premiums increase with every citation or accident claim, so will your liability policies. If you or your agency have a history of liability claims, your premiums 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 higher premiums.
Your agency can do a lot to reduce risk of loss and prevent claims. Full and accurate disclosures on every transaction, careful driving, a safety-first program for showing properties, and rigorous and routinely updated cybersecurity hygiene can keep your liability claims low. Ask your insurance professional about risk management suggestions if you don’t already have a formal plan.
For more information
Your insurance professional will work with you to build a plan that fits your exposures and your budget. Reach out to our OneSelect team for a quote.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Please refer to your policy contract for any specific information or questions on applicability of coverage.
Please note coverage can not be bound or a claim reported without written acknowledgment from a OneGroup Representative.
Written content in blog post: Copyright © 2020 Applied Systems, Inc. All rights reserved.