In any profession, the top 15%, or even top 10%, are the ones consistently reaping the rewards, and real estate is no different. Regardless of who is making big money, allreal estate professionals are vulnerable to lawsuits.
The surprise is that only 83% are protected by Errors & Omissions (E&O) Insurance, according to the most recent National Association of REALTORS® Member Profile. E&O Insurance is professional liability insurance that reduces risks for real estate companies and professionals against client claims of inadequate work or negligent actions.
Ted Devine, CEO of Chicago-based Insureon, an online insurance agency for small and micro businesses, shared answers to the top 7 questions asked about business insurance every year by real estate professionals.
1. What's the most significant risk to my business today?
Devine: Non-disclosure of home defects. Failing to disclose the presence of a defect you know about is a huge professional liability exposure.
2. Where are real estate agents most vulnerable (i.e., where do they not realize they're exposed to risk)?
Devine: One area is in driving clients around to look at properties. Many agents don't realize that their standard personal auto insurance may not cover business driving like this. The key is to tell your auto insurance agent how you're using the car. Depending on the specifics of your case, you may want to invest in commercial auto insurance, though personal policies can be modified to accommodate business driving.
- Another big risk, though, is nondisclosure of defects or otherwise misrepresenting the state of a property. State laws vary on whether an agent can write away liability for this, but it's a big exposure that all agents should be aware of.
3. Is there a time I should review my insurance policy each year?
Devine: Yes. Sixty to 90 days before your policy is set to expire. At that point, you should ask for new quotes. (This will help ensure that your new policy is adequate for any updates or changes that have happened to your business in the last year.)
4. Do I need more insurance during busy periods and can I get away with less during slow periods?
Devine: No and no. A single policy should be sufficient for the entire year.
5. If I sold more properties this year than before, do I need to update my insurance? (Am I at risk if I just renew the current policy?)
Devine: First of all, take a vacation. But then, yes, you should request a new insurance quote. A lot of policies are based on revenue, so if your revenue changes your coverage needs change. Renewing your existing policy without updating revenue numbers could indeed leave you at risk.
6. How much is a typical business insurance policy and what does it cover?
Devine: A typical Business Owner's Policy (BOP) costs about $500 per year [for our clients]. This policy includes General Liability (GL) and Property Insurance. The GL portion protects against "slip-and-fall"-type injuries and generally against third-party lawsuits alleging property damage or bodily injury (e.g., a person trips over the welcome mat at your office and breaks their wrist).
- A typical Errors & Omissions Insurance (also called Professional Liability) policy ranges from about $500 to about $900 per year. These policies cover third-party lawsuits over mistakes or oversights you made in your professional capacity as a real estate agent. For example, if a client sues you for failing to disclose a property defect, an E&O policy may be able to cover the lawsuit.
For both GL and E&O, the policy covers legal costs, including lawyers' fees, court costs, settlements, and/or judgments. Commercial Property Insurance, included in the BOP, can cover the rental office and equipment or gear within it (furniture, computers, printers, etc.).
7. Do I need different coverage if I have any employees?
Devine: Yes. Two policies:
- Employment Practices Liability Insurance: This is not mandated, but can be useful to have. It covers the cost of lawsuits brought by employees alleging discrimination, harassment, wrongful termination, and a whole range of other hiring- and work-related events.
- Workers' Compensation Insurance: This is required by most states (Texas is the exception) for any business that has employees. It covers the costs of on-the-job injuries and illnesses.
Insureon Tip: Don't underestimate the value of Workers' Compensation Insurance.
"While real estate and title professionals may seem to have a fairly safe work environment, it's important to remember that much of your (and your employees') job might involve driving around and / or spending time in properties other than your office. Protecting yourself and your employees regardless of where you do your work can save you serious money in the event that someone is injured."
Be prepared. If you don't have E&O insurance, get it. Make sure you understand the terms and conditions—what's covered and what's not.
You may not be able to control the real estate market, but you can control your legal vulnerability. Clear your mind for what really matters…the success of your clients.