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What is Errors & Omissions Insurance (E&O)?
Insurance for real estate firms is complicated, and real estate E&O is no exception. Errors and omissions insurance is also known as professional liability insurance, or simply as “E&O” insurance. It protects against lawsuits for negligence, errors, omissions, mistakes, and other professional exposure.
Insurance agents, real estate agents, architects, doctors, tech companies, and lawyers are examples of professionals who all generally carry errors & omissions insurance.
Why do Real Estate Brokers Need Errors & Omissions (E&O)?
As brokers and agents well know, the real estate industry is complex, and there is always a risk of errors or omissions. That’s where E & O insurance comes in.
E&O insurance, short for errors and omissions insurance, is an insurance policy that provides coverage for professional liability claims resulting from mistakes, negligence, or omissions made by a broker or agent. This type of insurance is essential for real estate brokers, as the consequences of a claim can be financially devastating.
Real estate brokers might be responsible for managing rental properties, working with clients to buy or sell a home, and negotiating real estate transactions. In addition, real estate E&O insurance is often required by real estate franchises, and in some states, by law.
Despite best efforts, real estate brokers may face claims from clients due to a variety of factors. For example, a client may claim that the broker did not disclose important information about a property, or that the broker did not secure a lock box properly. Other claims could be related to mold, where a broker failed to detect or disclose a problem with the property.
E&O insurance provides real estate brokers with protection against such claims, covering legal defense costs and any damages awarded. This can help to minimize the financial impact of a claim and protect the reputation of the brokerage or agency.
How Much Does Real Estate E&O Cost?
The cost of E&O insurance for real estate professionals depends on various factors. We discuss those here in much more detail.
As we discuss later, the two main types of E&O coverage are individual policies and firm-wide errors and omissions coverage. Your rate will depend on which type you have.
Individual E&O policies usually range from $100 to over $500 annually per agent.
Firm-wide E&O policies, on the other hand, cover all agents for all transactions at a given firm. Firm E&O premiums are generally based primarily on a real estate agency’s annual gross commission income (GCI). Past claims history and coverage endorsements area major factors that can influence the cost of E&O insurance.
Coverages Many Real Estate Brokers are Missing
Many broker/owners, when searching for real estate E & O insurance coverage, assume that all quotes and policies are somewhat the same. This couldn’t be further from the truth! Real estate errors & omissions, unlike some other types of insurance, is very specialized and nuanced.
In a recent blog we broke down the Top 10 Coverages Missing from Most Real Estate E&O Policies. For now, let’s consider a few of the most common.
Bodily Injury & Property Damage Coverage
Most real estate E and O policies have very broad exclusions for Contingent Bodily Injury & Property Damage (BI/PD). We dig into this into a lot more detail in our blog on why agents are exposed to BI/PD claims.
In short, this means that if someone is injured while you are showing a house, if an agent sells a home that has undisclosed mold and the buyer gets sick, or if a dog bites a buyer as they walk up to the front door with you, you probably have no E&O coverage!
This is especially true for property managers, but every single real estate agent has this exposure whether their E&O covers it or not. The Insurance Journal explains that this is an multi-industry insurance issue, making E&O insurance essential for coverage for an increasing number of bodily injury claims.
While some policies have coverage for BI/PD, most companies limit coverage extensively, or only cover up to a lower limit. You will often see coverage for bodily injury/property damage if the claim is at an open house or if the agent used a lock box.
The best of E&O policies provide full limits of coverage for a broad array of bodily injury or property damage claims.
Discrimination/Fair Housing Coverage
While E&O policies are more likely to have coverage for fair housing violations than bodily injury claims, many policies still limit coverage for fair housing claims. Check your policy sublimits to find out. 100k or 500k sublimits are not uncommon.
Copyright, Trademark, & TCPA Coverage
The vast majority of real estate errors and omissions policies do not cover copyright, trademark, or TCPA (Telephone Consumer Protection Act) violations.
At FirmSecured, we work with a handful of insurance companies that will provide these coverages. As NAR details, copyright infringement on listing photos is not uncommon.
Many cyber insurance policies also often contain some coverages for copyright issues.
Agent-Owned Property E&O Coverage
Many real estate professional liability policies have broad exclusions and gaps surrounding the purchase of property by agent, or the sale of a home in which the agent has ownership interest.
The best of E&O policies will cover both sides of most agent-owned transactions. If you or anyone in your firm buys or sells property in which someone in your office has ownership interest, you’ll want to read more about agent-owned exclusions and coverages to be sure you have the coverage you need.
Almost every policy excludes property developed/constructed by an agent, and sometimes also does not cover transactions if the property was developed by a spouse or an entity related to the agent. If that is relevant to you or your firm in any way, you’ll want to take a look at our article specifically on developed/constructed E&O coverages.
Deductible Waivers
Several strong real estate errors and omissions insurance policies have deductible waivers. This feature might mean you save thousands in the event of a claim if you’ve met a few specific risk management requirements on that transaction.
You can explore this more fully with our blog, “E&O Deductible Waiver: What Real Estate Brokers Need to Know.”
Defense Costs
While almost all professional liability policies will cover defense costs, not all policies cover this in the same (or the best) way.
For example, some policies include defense costs within your limit of liability, meaning you will have less coverage to cover a settlement. Other E&O policies will provide a separate limit of coverage for defense costs.
You can learn more about how this difference can cost real estate brokers hundreds of thousands of dollars in our blog titled, “Defense Inside or Outside of the Limit?”
Top Claims Examples for Real Estate E&O
Failure to disclose previous water damage is by far the most common claim our team sees every year. We always tell our real estate clients that you can’t be sued for over-disclosure. Generally, that means helping your buyers remember water damage they might not otherwise report is a wise idea.
The second most common claims our team sees is failure to properly advise whether a home is on city sewer or septic. While sewer/septic claims are generally avoidable, there still regularly make the top 3 list of claims!
Always remember, real estate agents must not only have errors and omissions (E&O) insurance but also be aware of reporting requirements for claims and potential E&O claims. Failure to report claims within the specified time could result in denial of the claim. You can read more about that in our blog, “Reporting E&O Claims: What Real Estate Brokers Need to Know.”
Firm vs. Individual E&O Coverage
The distinctions between firm, individual, excess, and group E and O can be confusing. That’s why we published a blog comparing firm vs. individual insurance. We will summarize the highlights here.
Firm Coverage
A true real estate “firm” errors & omissions policy will cover the real estate agency’s legal entity, and all of the brokers, agents, and independent contractors doing real estate business on behalf of that brokerage. This means all of the agents are covered under a single firm policy for real estate services that are performed at the firm.
Firm E&O policies are common in states that require E&O (like Kentucky and Colorado), as well as states like North Carolina, Texas, or Washington, where E&O is not required. These policies usually have $1 million in coverage per claim.
Individual Coverage
Because 15 states currently require that real estate licensees carry E&O coverage (Mississippi & Montana are examples), these states must also offer errors & omissions coverage.
The mandatory state’s group program will offer coverage that covers each agent/licensee individually. Some other E&O companies do also offer individual policies that are not part of the state program. Individual policies often have liability limits of 100k per claim.
Here’s the current mandatory or required states for real estate errors & omissions (E&O):
Alaska, Colorado, Idaho, Iowa, Kentucky, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, South Dakota, Tennessee, and Wyoming
Excess Coverage
An excess policy is not the same as the type of firm policy mentioned above. A true excess policy is like an umbrella policy, and it is excess to the primary, individual underlying policies. Firms often purchase an excess policy to meet franchise or contract requirements (typically $1 million limits).
The individual underlying policy is primary, meaning the individual policy’s entire policy limit is essentially a large “deductible” for the excess policy.
Our blog on best practices for renewing your individual E&O insurance explains a few things you should keep in mind when purchasing excess and individual policies.
Coverage/Price Differences
Many real estate (and insurance) brokers prefer firm policies as they generally have much more robust coverage when compared to individual E&O policies.
As you can see in this graphic, for agencies that have a dozen or more agents, firm E&O is often much more cost-effective.
Switching from individual/excess policies to firm policies can seem daunting, so we wrote an article to help brokers in that transition.
Does Real Estate E&O Cover Cyber Claims?
Real estate E and O insurance policies are not designed to provide comprehensive coverage for cyber-related risks.
While some real estate E&O policies may offer a level of protection for certain cyber risks through an endorsement, add-on, or rider, the coverage is often limited. Typically, any coverage for cyber risks on an E&O policy is narrow in scope with lower limits of coverage. $25,000 -$100,000 limits on E&O policies for certain limited cyber claims is not too unusual.
So, if you are concerned about real estate cyber risks, especially third-party wire fraud, a separate or stand-alone cyber insurance policy is likely the best option for you. Traditionally, stand-alone cyber insurance policies will cover most claims up to $1 million, and generally cost significantly less than your E&O policy will.
For more information on cyber liability insurance for real estate brokers, check out our “Comprehensive Guide to Cyber Insurance for Real Estate Firms”.
E&O is Nuanced & Specialized
As you can see, real estate E&O coverage has so many variables and nuances.
Many insurance agents have a broad generalized knowledge about commercial insurance, so they are simply not familiar with the specialized and unique aspects of real estate E and O coverage.
Be sure to work with an insurance agent who deals with real estate errors & omissions insurance policies every day. Find an insurance agent to represent you who not only has access to most of the E&O insurance programs available, but who will take the time to review your policy, compare/explain coverages, and present customized options for your firm.
If we have been a help to you in your E&O search, we would be honored with the opportunity to serve you and your team.
