Geo. F. Brown & Sons Inc., the program administrator for the NAR's newly endorsed errors and omissions insurance underwriter, will be making available to REALTORS® a number of new coverages this year, including E&O for the sale of personal residences and investment properties and failure to disclose environmental hazards.

The Chicago-based administrator will be introduced at the upcoming NAR Midyear convention in Washington. The new underwriter is Seattle-based SAFECO. E&O coverage has not typically extended to acts committed while a broker or agent is representing himself in the sale or purchase of a personal residence, said Brown & Sons Vice President Joan Schmalz.

"There has always been a fear of conflict of interest when a broker is involved in his own deal," said Schmalz. "There's always been this fear that because the broker is the professional that he'll do or say something that the other side will claim later is unfair.

"But we've looked at the claims and we're not adverse to writing the coverage. The way we look at it, the broker is living and working in the community. Making money is important, but his reputation is also pretty important.

"He's not going to do anything in a personal sale that will damage his reputation, just like he wouldn't in his other transactions. We're comfortable offering the coverage."

Extension of coverage to unknown environmental problems is a bow to the modern age of real estate, where brokers are often the target of complaints that they should have detected or should have disclosed pollution problems.

In her 12 years with Brown & Sons, Schmalz said many things had changed in E&O coverage, but one thing had not: "I'd say 85 percent of claims still involved misrepresentation," she said.

"The seller will say the living room is 15 by 20, and it's actually 14 by 20. The Realtor won't have checked it, and the buyer will freak out about the extra foot.

"And water problems continue to be a big issue -- water in the basement, or a leaking roof. The seller says there aren't any problems. The broker doesn't know. It rains, and the buyer is unhappy."

Schmalz said she applauds the use of seller disclosure forms and urges brokers to use them even if they are not required by state law.

"I think selling a house without a seller disclosure form is crazy," she said. "It's important to have the seller sit down with a piece of paper and understand that it's a legal document and there are penalties if he doesn't tell the truth."

Currently only 12 states require real estate brokers and sales associates to carry E&O. Nevertheless, some 70 percent of brokerages nationwide have some sort of insurance protection.

"If I were a consumer I'd ask if my agent had E&O," Schmalz said. "It gives some protection to the consumer, but it also tells you the level of professionalism of the agent."

She said E&O is becoming more important as more brokers become involved in property management, mortgage brokering and other ancillary services.

Other problems on the horizon, she said, were the practices of buyer brokerage and transactional brokerage.

"The problem with buyer brokers is that they have to be very specific with the client about what they do and what they don't do," Schmalz said. "A lot of buyer brokers don't do a good job of explaining their limits.

"And transactional brokers. The problem is that transactional brokers are supposed to be a figure head who can't say a word one way or the other. I don't think that's happening. The nature of the business -- the nature of the agents -- is to be helpful and friendly.

"We're starting to see claims on transactional brokerage. It's going to be a problem."

Published: May 12, 1999

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