You insure your car, but do you insure your business? If you don’t already have error and omissions coverage, you may be surprised to hear that you could be liable for over $1 million and get involved in a lengthy legal battle if you make a mistake when closing a RE deal.
Professional liability insurance — known in the real-estate world as errors and omissions coverage or E&O—is akin to medical malpractice insurance for doctors. Helping a client sell a home may not require the precision of brain surgery, but even simple property deals come with pitfalls that can land the most scrupulous real-estate professional in court. An E&O policy offers agents and brokers protection against the costs of getting sued for a mistake made in the course of doing their job.
As the name suggests, E&O policies don’t cover claims of outright fraud. Typically, they come in handy when a disgruntled buyer sues an agent or broker for failing to disclose a defect in a property, for misleading the purchaser about what they’re buying, or for a breach of contract.
Undisclosed termite infestations, mold contamination, or hidden water damage are typical sources of litigation. Boundary disputes are another flash point. Although the property could be in fine shape, the buyer may allege that the square footage of the home or surrounding property is smaller than advertised. Brokers and agents also get sued for failing to disclose that a property is encumbered by a lien, entangling the property in the old owner’s debts.
If an agent is covered, the insurer assumes the bulk of the legal costs, typically up to $1 million with a deductible. When an agent is targeted with a claim, the insurer hires an attorney and takes the lead in crafting a defense strategy or negotiating a settlement.
Unfortunately, finding the perfect policy will be more challenging for some than others. A lack of information about E&O insurance—and differences in local laws and market conditions—makes it hard to compare policies and know what to look for in the fine print. So shopping around for a policy can be a tricky endeavor, especially for independent professionals or brokerages operating on tight margins.
Do you have E&O coverage? What are your thoughts?
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