Many real estate agents sell property through their real estate firm that they developed or constructed. Other agents commonly sell property that their spouse or a related company/entity developed/constructed.
While this is common in the real estate, construction, and development world, many agents and builders are unaware that real estate agents often have little to no real estate errors & omissions (E&O) coverage for a professional liability lawsuit arising from the real estate portion of these transactions.
These transactions are already (statistically speaking) more risky, so a gap in coverage can be very problematic and concerning to agents.
What we’re referring to here by constructed/developed is a ground-up project. Agent-owned/agent-sold flips are generally in a different category when discussing E&O dependent on the carrier; however, there’s often little to no coverage for these deals, either.
Will Real Estate E&O Cover the Sale of Properties Developed/Constructed by an Agent?
Insurance companies are not too excited to insure the risk for agent developed/constructed properties under the agent’s real estate errors & omissions (E&O) policy. Most real estate professional liability (E&O) policies exclude coverage for the sale of property developed or constructed by the agent, a spouse, or a related entity, leaving a large number of real estate agents exposed.
While some errors & omissions insurance companies offer E&O endorsements adding this coverage, watch out. You might not get the coverage you think you’re getting. We will explore this further once we understand just why this coverage is so critical.
Why is This E&O Coverage Important?
An Appearance of Conflict of Interest
Whenever an agent is wearing two hats in a transaction, lawsuits generally become more likely. Defending yourself as an agent also is tricky.
Say there is a defect in a property you are selling through your real estate firm. The agent (and naturally the builder) would probably both be sued. Buyers can always allege that the agent should have known about a defect because they, their spouse, or their company was involved in the development or construction.
The agent is wearing two hats and will likely benefit more than usual from the sale of the property. That is what makes these lawsuits particularly difficult.
Does Your E&O Insurance Company Cover These Transactions?
Many real estate errors & omissions policies for real estate agents exclude coverage for claims related to property developed or constructed by a related entity. Usually that includes the agent themselves, the agent’s spouse or domestic partner, and any entity that the agent (or their spouse) might have an ownership interest in. Sometimes the percentage of ownership interest allowed is specified in the policy exclusion.
Some professional liability policies, particularly individual policies in mandatory states, might offer back coverage with an endorsement. Some insurance carriers charge hundreds of dollars just for this endorsement.
Many of these endorsements only cover claims if the property was developed/constructed by the agent’s spouse. If the agent had ownership interest, there could be an exclusion.
These endorsements usually comes with a list of conditions that the agent must meet – sellers disclosure signed, home warranty purchased, or a condition that the ownership interest in the property or role as developer was acknowledged often in writing.
Risks of Selling Agent-Owned Properties
The best of policies will include coverage for claims in which the agent has an ownership interest even if the property is developed or constructed by the agent, the agent’s spouse, or a related entity. If this information has you in your E&O search/research, we would be honored with the opportunity to serve you and your firm.
Mitigate Those Risks with FirmSecured
Ensuring your firm has proper E&O coverage for properties developed or constructed by an agent, their spouse, or a related entity is crucial. Often, insurance agents overlook the specific details in errors & omissions policies for these scenarios. That’s why it’s important to team up with an insurance professional who understands the unique E&O risks in real estate development and construction.
Keep in mind, not having adequate E&O coverage for these areas might be one of several gaps in your insurance plan. If this information has been helpful, we’re eager to offer more personalized insurance guidance for you and your firm.
