Anyone in business should and sometimes must have certain types of insurance to protect themselves from liability. Most businesses carry at least General Liability insurance, Workers’ Compensation (if they have employees), and sometimes specialty policies, such as Cyber Liability insurance (for data breaches), among others. And most professionals, such as attorneys, physicians, engineers, accountants, etc., carry Professional Liability (“PL”) insurance. Curiously, California does not require real estate agents to carry PL coverage, also known as errors and omissions insurance (“E & O”). What is it and, even though the state doesn’t require it, should a real estate agent have it?
PL or E & O insurance covers an agent for liability if a client or another party involved with a transaction claims the agent did something wrong, or failed to do something they should have. A small mistake can still be an expensive mistake and it can harm your reputation. No one is perfect, and there are a lot of moving parts in a real estate transaction. It is all too easy for something to fall through the cracks, even for the most seasoned of agents.
But that’s what insurance is for. We live in a litigious society, unfortunately, and real estate agents must protect themselves, just as other professionals do.
What Can Go Wrong?
The relationship between a real estate agent and his or her client is that the agent is a fiduciary; he or she has the duties of utmost care, integrity, honesty, and loyalty to the client.1 Such a relationship is comparable to that of a certified financial planner to his client, an accountant to her client, or attorneys to their clients. It imposes on the agent the duty of acting with the highest standards towards the client, but it also is meant to preclude the agent from achieving any advantage over their client by virtue of their relationship. The agent must only act in a manner that is consistent with the best interests of the client. Period. Full stop.
Presumedly, most agents do operate with integrity and loyalty. But mistakes can still happen, even if you act with the greatest of care. Here are some things that can potentially go wrong. There are many more, but this will give you an idea.
• Failure to Disclose a Property Defect
This is probably one of the most common reasons agents get sued. The seller must fill out disclosure forms that report any defects in the property. But the agent should also perform a careful inspection to make sure nothing is missed and be sure to have the client sign a statement to document any awareness of property defects. If the seller is sued by the buyer later on for failing to disclose that the pipes are rusted and the water comes out brown, for example, the seller will likely turn around and point to the agent. In order to hold the agent liable, it must be proven that the agent knew or should have known about the defect and failed to disclose it.
• Offering Legal Advice
To obtain your real estate agent license, you must learn some federal and state laws that come into play in every real estate transaction. They may be simple or complex and you have to know them for the state exam. BUT THAT DOES NOT MAKE YOU A LAWYER! (Unless, of course, you already were one before taking the real estate exam.) Giving your client legal advice is a big no-no. And the unauthorized practice of law is a misdemeanor subject to up to a $1,000 fine or up to a year in county jail, or both under the California Business and Professions Code Section 6125! It may be tempting to impart your knowledge to your client because perhaps you really do know the answer to their question. But don’t do it! Refer them to a lawyer!
• Misleading Your Clients
Making untruthful statements about a property or about any part of the real estate transaction will only lead to trouble for the agent. If you are the seller’s agent, for example, and you represent to your client that a buyer’s agent told you his client pre-qualified for a mortgage when she did not, and the deal falls through because the buyer cannot get financing, your client may try to hold you
accountable for the misstatement.
• Breach of Contract
A client may allege that his agent did not perform within the terms and provisions of their contract. Perhaps there was a mistake made as to timing for a particular action, for example, such as an inspection. Various other claims may also be made, commonly including negligence, breach of duty, fraud, and misrepresentation. If something goes wrong, the client may pin the blame on his
or her agent. And if the contract was found to have been breached by the agent,
• Professional Mistakes
Even the most meticulous real estate agent could receive erroneous information about a property that leads to a mistake in the listing on which a buyer relies. If a client claims you made an error that led to economic loss, you could liable. For example, the seller could tell the agent he believes there is a 20-year warranty on the roof with ten years remaining. When the roof starts leaking and the roofer tells the buyer it was a ten-year warranty, the buyer may sue (both the seller and the agent) to recoup the cost of repairing or replacing the roof and for any damages caused by the leak. The agent may be faced with a settlement or judgment, fines, court costs and attorney fees.
These are just some of the reasons why agents need insurance. And although General Liability insurance may be provided by the broker under whose license you may be practicing, your clients may expect you to have PL insurance, as well. So, what kind of claims does PL insurance cover and is it worth it?
PL insurance protects your real estate practice from potential claims and unpredictable risks. The process of buying and selling property is very personal and emotions can run high. There are large sums of money at stake, especially in California where property values are so steep. And real estate agents are entrusted with the easy and honest transfer of property between parties.
Here are some examples that may occur in the real estate business where PL insurance may come into play:
• Buyer’s remorse: After closing a sale of a lakefront property, the new homeowner claims the property doesn’t include the lake frontage. The homeowner brings a claim against you, alleging they overpaid for the home as you misrepresented the true boundaries of the property. Even though this is a groundless claim and could be a symptom of buyer’s remorse, the buyer sues you and puts your business at risk.
PL insurance can protect your business. In the policy, your insurer agrees to defend and indemnify you, even if the allegations are groundless 2.
• Wrongful discrimination: Clients may claim that you did not show them certain homes because of their race, religion, or gender. Whether true or not, these claims could result in lawsuits that may put your business at risk and may tarnish your reputation.
Allegations of discrimination are serious matters and ones that can be very costly if you have to face them on your own without an insurer to provide you with a defense.
The cost of a policy will vary from insurer to insurer, and will be based upon the risks covered. Given the high dollar amounts at stake in the real estate field, it would be worth getting some estimates for a PL policy so that you may protect your real estate business as well as your personal assets.
2 Note that every policy and every set of factual circumstances are different. Your insurer will analyze coverage under the policy based on the facts at hand, the policy language, and the allegations being made against you. There may or may not be coverage found under your policy for any particular claim