Most real estate agents understand the necessity of errors and omissions (E&O) insurance; what many of them don’t know, however, is that not all E&O plans are created equal.
Making price the primary focus when selecting a policy often comes at the expense of critically important features, like policy exclusions or additional coverages needed to fully protect a firm’s business model. Once the realization hits that a more robust plan is needed, it’s often too late.
A common and dangerous insurance myth too many real estate agents believe is assuming E&O policies automatically cover agent-owned property transactions. In reality, the vast majority of E&O provisions are designed to cover third-party transactions only—not those carried out by the agents themselves.
Self-dealings by insured agents often carry much higher risks than the typical transaction, with claims for cases involving first-party players paying out, on average, up to five times more than those resulting from standard third-party affairs.
In today’s real estate marketplace, more agents and brokers are selling properties they own or are involved with—such as investment properties. This means it’s more important than ever to know how your policy will respond in the event of an agent-owned property claim.
Although these transactions have historically had minimal provisions available at best, most standard insurance carriers now provide limited coverage for agent-owned property transactions if certain requirements are met. It is important to know what conditions, if any, your E&O policy requires for triggering coverage in these scenarios.
Typical requirements to activate coverage for these dealings (which are often still limited to residential transactions) can include:
- Use of standard real estate contracts
- The recommendation or purchase of a home inspection
- Providing a completed sellers disclosure form
- Home warranty purchase
It is extremely important to become educated on how your policy handles agent-owned property transactions. While it may provide limited coverage, this protection will still be designed to cover the real estate professionals involved in the claim—it will not defend the agent as the seller.
A smart best practice to implement is designating a coworker to handle these transactions, allowing you to keep the deal at arms-length. Deals carried out in this manner are typically easier to defend.
Selling investment properties can be a lucrative business—just be aware of the insurance precautions you need to take beforehand.
Lisa Scoble is the VP of Program Business with Pearl Insurance.
For more information, visit realtors.pearlinsurance.com.
Information provided within this article is accurate to the best of the author’s knowledge, and is to be used for educational purposes only. It is NOT to be taken as professional legal counsel.