No one goes into real estate planning for the day a client might sue them! But it can happen and the best way a real estate agent can protect themself is with errors & omissions insurance.
As a real estate agent, you’re handling transactions involving high-value assets and working with clients who are experiencing a significant emotional moment in their lives. The unfortunate by-product of working in real estate is the possibility of being sued by a client if they think you didn’t do the best job you should have for them.
This guide covers the basics of errors & omissions insurance, the costs, what it covers and what it doesn’t cover. The case studies will show just why a client may bring a lawsuit against a real estate agent and how errors & omissions insurance can protect you.
What is Errors & Omissions Insurance?
Errors and omissions insurance (commonly called E&O insurance) is a form of malpractice insurance. E&O insurance is carried by a variety of professionals whose clients depend on them to make major decisions. Lawyers, doctors, insurance professionals, anyone working in financial services and even wedding planners all carry some kind of E&O insurance.
For real estate agents, E&O insurance is not just a recommended professional protection- it’s usually required by the state before you can even get your real estate license. It covers claims levied against agents if they are sued by clients for negligence, failure to deliver promised services or the results of a professional mistake due to an error or omission during their partnership. If the claim is covered by the insurance company, they will also cover the costs of legal expenses, provide legal assistance and may cover some or all of any judgments or settlements that result from a claim.
You may never end up using your E&O insurance- which would be great! But you must be protected and carry an uninterrupted policy as long as you are a real estate agent.
How Do I Get E&O Insurance?
All agents, brokers and real estate companies in Iowa are required to carry uninterrupted E&O insurance by the Iowa Real Estate Commission (IREC). You have to show proof of coverage in your real estate license application, which is something your brokerage can usually help you with.
Each brokerage is a little different in what they require of their agents for coverage.
Some brokerages will recommend carriers and point you in the right direction so you can purchase your own policy. Some virtual brokerages won’t offer much guidance and you should be prepared to do your own research into insurance carriers. Other brokerages may automatically enroll their agents under the company’s E&O plan and either roll the costs into monthly fees or cover it as a service. This isn’t quite as common, but there are some brokerages that do it.
You may have to work with your brokerage to find a policy or you may have to do the legwork on your own. It just depends on the brokerage! Either way, you should be prepared to pay out of pocket for your E&O insurance.
How Much Does E&O Insurance Cost?
The cost of E&O insurance depends on a few factors: your carrier, your plan and your brokerage. Depending on how your brokerage handles E&O insurance, you may need to budget for it as a monthly business expense.
Here are examples of plan options from two major E&O insurance carriers:
Victor Insurance Managers Inc. (Partner of NAR®)
- Premium begins at $500 for one year
- Deductibles start at $0
- Limit up to $20 million
- Partner of the National Association of REALTORS® so members can receive credits for being a member (where allowed by state law)
- You can read more on their site here
Rice Insurance Services Company (Partner of the IREC)
- Premium begins at $962 for one year
- Limit up to $100,000 per claim or $100,000 aggregate with no deductible
- Additional protections available to add to your plan at extra cost
- Recommended by the Iowa Real Estate Commission
- You can read more on their site here
These are just two examples from two well-known E&O insurance providers. Other well-known carriers of errors & omissions insurance include Nationwide, Travelers and Insureon. You will have to shop around and connect with advisors at each carrier to get quotes and more information on the coverage provided then choose the one that best suits your needs and budget.
What Does E&O Insurance Cover?
Even the most responsible and conscientious agents can be sued by a dissatisfied client or third party. You can do everything right in a partnership with a client and still be the target of a lawsuit if something happens. Even if a lawsuit is deemed frivolous, it will still cost you a lot of money to defend yourself.
The phrase ‘negligence due to an error or omission’ can cover a variety of scenarios:
- A buyer feels misled about a property- For example, if a buyer says you misrepresented the square footage of a house or didn’t negotiate a fair purchase price based on market value, they may sue you to make up for the financial loss.
- The agent gives incorrect tax or legal advice- It’s best not to give any kind of legal advice to your client in case you are wrong and they suffer a financial loss or incur a fine of any kind based on your recommendations. You should suggest they seek legal counsel or a tax professional’s advice rather than taking it from you.
- The agent fails to disclose an issue with the property- If you find out about an issue with a property and then fail to tell your clients, they can sue you for the omission of facts. This can also happen if an issue comes to light after they’ve purchased a home that you honestly weren’t aware of– your clients can claim you should have known or done your due diligence.
- A client feels the agent failed to fulfill the contract- If there is anything in your agency agreement with your client that they feel you did not meet, they can bring action against you. For example, if your client sets a strict timeline you don’t meet they can argue you didn’t meet the terms of your contract.
- The agent fails to take action on something they should have- You can’t let anything fall through the cracks when it comes to helping a client. Even something as simple as giving the client an electronic copy of the home inspection instead of a hard copy can cause issues down the road. Keep an eye on the details, cover your bases and always leave a paper trail.
- A client injures themself during an open house- It’s happened before! If a client slips and falls or injures themself in some way during your open house, they may bring a lawsuit against you or your client. If there is a known danger in the house, you should warn visitors about it. However, accidents happen that you just can’t anticipate.
- A client feels an agent failed to deliver on a promise- Don’t make any promises you can’t keep! You can’t always guarantee an inspection will come out a certain way or that a seller will make a certain amount of money on the sale of their home. If you explicitly make a promise you don’t keep, you’re opening yourself up to a potential lawsuit if you can’t deliver.
It’s essential to keep written records of everything you do and agree to do for a client. You may hear jokes about the amount of paperwork involved in real estate, but it protects you down the road! Everything in a transaction needs to be documented and signed by your client. Whether that’s a change in the listing contract, acknowledgment of an inspection report, changes to a purchase agreement, changes to an offer, the list goes on! Everything needs to be documented, dated and signed so you can provide proof later if a client disputes your actions.
Even if a lawsuit is dismissed and you are in the right, it can still be very expensive just to defend yourself in court. If your claim is covered by your E&O policy, the insurance company with help cover attorney’s fees, court costs and any judgments or settlements that may result.
What May Not Be Covered by E&O Insurance?
The coverage of your E&O insurance policy will vary widely by carrier. With some plans, you may have to pay an additional fee to add on specific protections. With other carriers, certain incidents will not be covered by your plan.
You should talk to your insurance agent about the following scenarios:
- Earnest money
- Pollution/Environmental issues
- Lockbox damage
- Cyber liability
Discrimination- As a real estate agent, you have to adhere to the Fair Housing Act which prohibits discrimination in housing based on race, religion, origin, sex, disability and/or familial status. If a client brings a suit against you claiming you discriminated against them in some way, your insurance carrier may be hesitant to cover you. Talk to your insurance agent about discrimination and what kind of protections your plan will offer. Even the most well-meaning and careful agent can be hit with a discrimination lawsuit.
Earnest money- If your client ends up losing their earnest money due to a professional mistake on your part, they can bring a suit against you to try and recoup their earnest money- and potentially any other financial loss incurred because of your mistake. Or a seller could allege that you never collected a buyer’s earnest money or didn’t deposit it correctly. Make sure your policy covers tricky situations that involve earnest money.
Pollution/Environmental issues- Some E&O insurance carriers consider this an add-on to your coverage. This would cover damages if a major environmental issue is found on a property- think mold, pollution, asbestos, radon, lead, water, etc. Normally, any pre-existing issues like this would be caught and addressed in the seller’s disclosure, during the home inspection or during the radon test. But what if a seller isn’t aware of a problem? Or a buyer chooses to forego an inspection for some reason? You want to be covered, just in case.
Lockbox damage- If a client’s home is broken into because someone used your lockbox to access their home, they could sue you for negligence. If you are a listing agent, you absolutely need to make sure your E&O insurance covers this type of incident. It’s also important to make sure your policy covers bodily damage as well, in the event someone breaks in using the lockbox and causes harm to the homeowner.
Cyber liability- More E&O insurance carriers are expanding their policies to include some kind of protection in the event a client’s secure information is digitally stolen from you. Real estate agents are targets of phishing scams, viruses and wire fraud all the time. If a client’s information is stolen from your systems, you could be liable. Make sure your carrier has coverage for cyber incidents.
What is Not Covered by E&O Insurance?
Your policy will not cover you if a client sues you because you committed fraud or otherwise engaged in illegal activity. The company may initially defend you in a lawsuit but if your actions with a client are found to be dishonest or illegal, your carrier will drop your case and you’ll be liable for paying back legal fees.
When Would I Use E&O Insurance?
Many E&O insurance carriers provide real-world examples and case studies of clients using their insurance to cover claims made against them by clients. The two major E&O insurance carriers we mentioned above, RISC and Victor Insurance, both feature extensive case studies to provide tangible examples of when a real estate agent would need to use their E&O insurance- even when you think you’re doing the right thing.
Read the case studies here:
Hopefully, you’ll never have to use your errors & omission insurance in your career as a real estate agent. But you must be covered by an uninterrupted policy at all times. Even if you always operate at the highest level of professionalism, it takes just one disgruntled client for you to be involved in some kind of negligence or malpractice suit. Errors & omissions insurance is one of the most important protections a real estate agent can have. Talk to your broker about the best carrier and policy for you and make sure you are protected!