As of this week there were 179,344 active attorney members of the California State Bar. The California Association of Realtors® (CAR) projects that, by the end of this year, it will have slightly more than 160,000 Realtor® members. There are more of them than there are of us! That in itself provides real estate brokers with good reason to want a Professional Liability (Errors and Omissions, or "E&O") insurance policy that will cover them in the event of a lawsuit.

In last week’s column we discussed the fact that many real estate brokers purchase E&O without having a good understanding of the coverage provided. They are likely to be more focused on the size of the premium and the amount of the deductible than on exclusions and limitations of coverage. This can lead to unhappy consequences, such as having a claim denied or finding out that the coverage for a certain kind of activity is severely limited.

In a column this size one couldn’t possibly review all of the exclusions and special circumstances to be found in various E&O policies. (There is no "standard" policy.) In the space available here we will examine some of the more notable ones.

1. The sale of agent-owned properties: It is common for real estate agents to put their own property on the market under the auspices of their employing broker. Different brokerages have different policies on this, mostly having to do with commissions. Different insurance carriers have different policies as well. Some will not provide coverage for such transactions. Of those who do provide coverage, it is not unusual for them to place special requirements on the transaction. Among those: (i) there may be a prohibition against the agent owner from being the listing agent; (ii) the agent owner may be prohibited from representing the buyer ; (iii) an inspection by a certified home inspector may be required ; and/or (iv) a home warranty may be required.

It would be a sad day for an agent-owner who was later sued to find out that he had no coverage because he had not complied with the special provisions of the E&O policy.

2. "Inside/Outside the Limits": There are two kinds of expenses involved with a lawsuit over a real estate matter. There are the litigation costs and there are the expenses of liability. The latter could be either an award of damages or the amount of a settlement. It is well known that the former, defense costs, can be substantial - sometimes even exceeding the amount of liability.

The declaration page of an E&O policy will show its limits of liability (both per claim and in aggregate). But it may not specify anything about defense costs. Where do they come in?

Somewhere in the policy it will be stated whether defense costs are "inside the limits" or "outside the limits" (or, some other language might be used). If defense costs are inside the limits that means that they are applied against the liability limits. Suppose you face a lawsuit seeking $500,000 in damages, and that it cost $100,000 to defend the suit. If you had a liability limit of $500,000, and your defense costs were treated as inside the limits, then you would only have $400,000 available to pay the damages. If your defense costs were outside the limits, then your liability limits would remain intact at $500,000.

3.Restricted coverage: Finally, it is important to note that many policies may offer only restricted coverage for claims involving certain kinds of activities. You might generally have liability coverage for up to $1 million; but, if the suit were based on discrimination, the policy might limit the coverage to only $100,000.

In some cases, you might have no coverage at all. This has become fairly common in matters related to mold or asbestos.

Reading an E&O policy carefully is not a particularly enjoyable activity for brokers and agents. Likewise, carefully reading a purchase contract is not much fun for principals. But, in both cases, it really is important. The CAR Buyers Guide to Errors and Omissions Insurance, discussed here last week, is a great help with respect to E&O policies. Any reader who wants one is welcome to contact me by email.

Also See: Real Estate Errors and Omissions Insurance Is Frequently a Misunderstood Product