Defense Inside or Outside of the Limit?

Individual E&O Best Practices

Real Estate E&O Coverage: Defense Costs

Say you are a real estate agent representing a seller who is listing a property. During the transaction, you failed to disclose a very serious mold issue in the property to the buyer. As a result, the buyer not only discovered the defect after closing, but their child becomes very ill.

The homeowner sues both the seller and you, the real estate agent, for fraud and misrepresentation. The buyer is seeking $1 million in damages, for both mold remediation and bodily injury costs. 

Fortunately, you have a real estate professional liability insurance policy in place, but you will probably quickly be calling your insurance agent with this question: if the buyer is seeking $1 million in damages, will you have enough coverage to also defend the claim?

This is why you need to know about defense coverage inside or outside the limits in your real estate errors and omissions insurance policy.

Defense Outside the Limits (DOL)

If your E and O policy includes DOL coverage, you probably have a separate limit of liability for defense costs, meaning that the insurer will pay for your legal fees and court costs outside of the policy limit. 

Let’s assume that your policy has a $1 million limit of liability with DOL coverage for defense costs. In this case, the insurer would pay for your defense costs up to $1 million, and then pay the $1 million settlement to the buyer, resulting in a total payout of $2 million.

Defense Inside (Within) the Limits (DWL)

On the other hand, if your policy has DWL coverage, your defense costs are included within the E & O policy limit.

Say that your professional liability policy has a $1 million limit of liability with DWL coverage for defense costs. The insurer would then pay for your legal fees and court costs within the policy limit, reducing the amount available for settlement.

Why Does This Coverage Matter?

Let’s assume your defense costs on your real estate E&O policy are included within the limit of liability (DWL). Say your defense costs were $500,000 and the settlement amount was $1 million. In this case, the insurer would pay $500,000 for your defense costs, leaving only $500,000 available to pay the settlement.

As a result, you would be responsible for paying the remaining $500,000 out of your own pocket.

Clearly, the difference between DOL and DWL significantly impact the coverage you have for a real estate E&O claim.

Many quality real estate E and O policies will provide you with an additional $1 million in coverage for defense costs. Other carriers with DWL coverage would limit the amount of funds available for settlement.

Find E&O with Defense Outside the Limit

Our team would be honored with the opportunity to assist you or your firm with your E&O coverage. We work with real estate brokers nationwide on real estate insurance, and our goal is to help brokers not only find the best price, but also understand the coverages they are choosing.

To get started, simply complete the contact form below. If you would rather set up a few minutes to discuss your E & O coverage, you can schedule time on Google Meet here.

Jonathan Lugo Insurance

About the Author

Jonathan Lugo

Founder | FirmSecured

I am the founder of the FirmSecured program powered by Veritas Risk Management. I’m licensed in over 30 states and love helping real estate brokers find quality E&O and cyber liability insurance coverage. I currently live in Northeast Tennessee with my incredible wife, Madeline.