By Lisa Scoble, CIC, CRM
VP of Program Business for Pearl Insurance
Do you understand the coverage your Errors and Omissions (E&O) Insurance provides? Have you obtained protection for your assets with a comprehensive E&O policy? Many brokers purchase their E&O coverage without a clear understanding of the protection that is or isn’t provided. When price becomes the primary focus of purchasing a policy, you may be overlooking some important features, including policy exclusions and the possibility of adding coverage by endorsement when necessary to protect a firm’s business model. By the time you find out that you don’t have appropriate coverage, it may be too late.
A common assumption is that real estate E&O policies automatically cover agent-owned property transactions. Real Estate E&O policies are written to protect against claims from third parties. They are not written to cover an insured’s self-dealing.
Why is that?
Agent-owned property transactions carry a much higher risk than third-party transactions. They are potentially volatile, difficult to defend, and typically pay out significantly more than third-party transactions. For instance, the Pearl Insurance E&O program, which is endorsed by the Oklahoma Association of REALTORS® (OAR), sites that agent-owned property transaction claims pay five times more, on average, than those involving third-party transactions. In today’s real estate marketplace, more agents and brokers are selling properties they own or are involved with, such as investment properties, making it more important than ever to know how your policy responds in the case of an agent-owned property claim.
In addition, the likelihood that damages (settlements or judgments) are paid in agent-owned property disputes increases over non-agent owned property disputes. Although these transactions have a history of either no coverage or very limited coverage, most standard insurance carriers now provide limited coverage for agent-owned property transactions if certain requirements are met in the course of the transaction. It is important to know if your E&O policy allows for some agent-owned property coverage and what is required to trigger that coverage.
Don’t wait until you are faced with an agent-owned property claim to find out that you could have been covered for the claim had you followed the policy’s requirements. Those requirements are typically activities which also provide for additional protection and risk management. Coverage is often limited to residential transactions. Some typical E&O requirements to obtain coverage for these transactions include:
- The use of standard real estate contracts
- Providing a completed sellers disclosure form signed by the seller and acknowledged by the buyer prior to the closing
- Purchase or recommendation of a home inspection. If the home inspection is not performed, a written waiver should be signed by the buyer and included in your transaction file
- Purchase of a home warranty.
Not all policies include all of these requirements and some may include additional or more restrictive requirements such as an absolute requirement that a home inspection is performed by an American Society of Home Inspectors (ASHI) or Certified Real Estate Agents (CREA) accredited home inspector
It is extremely important to become educated on how your policy views agent-owned property transactions. While your policy may provide limited coverage in the case of agent-owned property transactions, the coverage is extended to the real estate professionals involved in the claim and is not designed to defend the agent as the seller. Following best practices would include having someone else in the office handle the entire transaction making it an arms-length transaction. These transactions can be easier to defend. Many brokers—who are fully aware of the risk involved in these transactions—implement an office policy requiring that a non-owner agent in the firm handle agent-owned property transactions.
While residential agent-owned property transactions may be allowed when you meet certain requirements, be sure to review your policy to see if/how agent-owned non-residential transactions may be covered, including raw land and commercial properties.
Agent-owned property that is managed by the agent/owner may also have some limitations to trigger coverage. Be aware of your policy’s stance on an agent managing property they own.
E&O policies may also cover agent-owned property transactions when the property was acquired through a guaranteed sale listing, but they may have requirements pertaining to the length of time the property is listed for resale.
Remember, the Code of Ethics also requires for the disclosure of any special circumstances associated with the ownership of a property as it relates to the agents involved. The sale of agent-owned or agent-involved properties is growing more common. Accordingly, it is imperative that all REALTORS® remember to disclose all special circumstances in writing to all parties on the outset of every transaction. These disclosures include, but are not limited to, situations involving agent-owned real estate or familial and business relationships between the agent and any party to the transaction. When you are up-front and honest, you can avoid problems with the sale, your clients, or the other parties involved, while also maintaining a clear and trustworthy reputation.
Selling investment properties can be a lucrative business for real estate agents; just be aware of the differences in coverage provided by E&O policies when it comes to this type of transaction. Real estate-specific policies with standard carriers tend to provide the broadest coverage for these activities.
Pearl Insurance’s E&O Insurance policy, endorsed by the Oklahoma Association of REALTORS®, provides broad coverage for the sale of agent-owned property. Talk to your Pearl Representative for additional information or visit the website to learn more about Pearl’s product offerings.
Pearl Insurance is a nationally known broker, marketer, and administrator specializing in the design and administration of quality insurance plans for associations, affinity groups, and large firms. In addition to providing real estate professionals with quality products and services since 1979, their partnerships with XL Insurance (through Indian Harbor Insurance and Greenwich Insurance Company) solidify their strength, allowing them to offer association members an A rated E&O program. Pearl Insurance has been the exclusive endorsed E&O provider of the Oklahoma Association of REALTORS® since 2012. For more information about Pearl Insurance’s sponsored E&O program, call OAR’s Pearl Insurance Representative, at 800.447.4982.
Information provided within this article is not to be taken as legal advice and is to be used for educational purposes only.