Understanding Real Estate Errors And Omissions Insurance

If you’re a real estate professional, you need errors and omissions (E&O) insurance. Why? Because things can go wrong very quickly in the world of real estate.

Real estate agents and brokers deal with large sums of money, regulatory processes, and outside parties. If something goes wrong, you could end up facing a serious lawsuit.

Even if the lawsuit is unfounded or you win the case, you will still need to pay legal expenses. These costs can be significant and could completely ruin your business.

As a real estate brokerage or agent, it is crucial to be protected against the threat of such lawsuits—and this is where E&O insurance comes in.

In this article, we discuss what E&O insurance is, what it covers, and its exclusions.

What Is Errors and Omissions Insurance and Why Is It Important? 

E&O insurance is professional liability insurance that protects businesses or individuals in the event of mistakes. It provides cover for legal claims made by clients for poor-quality work or negligent actions.

Errors and omissions insurance helps protect real estate firms, appraisers, and agents from mistakes made in the professional services they provide. 

For example, if you provide professional real estate services and a client sues your business for a mistake or oversight, errors and omissions insurance can help cover your legal costs.

What Does Errors and Omissions Insurance Cover?

The coverage of errors and omissions insurance may vary from one insurance company and policy to the next.

In general, errors and omissions insurance provides coverage for:

• Mistakes. 
• Oversights.
• Negligence.
• Undelivered services.
• Missed deadlines.

When you purchase real estate errors and omissions insurance, you enter into an agreement with an insurer. They will pay for your losses up to your omissions insurance policy limits as long as you pay your premiums.

Under this arrangement, the insurer agrees to:

• Provide you with an attorney.
• Pay for your legal fees.         
• Cover any court judgments.               
• Provide funds for plaintiff settlements.
• Pay court, expert witness, and administrative costs.

The insurer will cover you for:

Negligence 

Negligence could stem from an agent failing to uphold professional standards or errors being made—for example, typos on legal contracts.  

A common lawsuit against realtors is omitting information that could have deterred the client from buying the property. Agents can avoid this situation by ensuring that property disclosure forms are complete and detailed. 

They should list everything that is or could be wrong with the building. This includes serious issues like: 

• Water seepage in the basement. 
• Termite damage. 
• Black mold. 
• Ice dams on a roof. 

Other negligence claims covered by errors and omissions insurance include: 

• Dual agency. 
• Breach of fiduciary duty. 
• Real Estate Settlement Procedures Act (RESPA) violations.

Professional mistakes

Making a mistake in the documentation or marketing of a property can cost your client money or even cause the deal to fall through. 

This could land you in court or cause reputational damage that may end your career. Diligence and attention to detail are your best and first line of defense. 

But mistakes do happen, and when they do, E&O insurance will cover you for any legal costs you may have to pay.

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Failure to deliver promised services

This happens when you fail to follow through with repairs, paperwork, or any other task related to the sale that was your responsibility to complete within a given time frame. 

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What Doesn’t E&O Cover? 

Knowing what isn’t covered by errors and omissions policies is crucial, especially if you are a new brokerage.

Claims not covered by errors and omissions insurance for real estate include:

• Customer injuries.
• Employee injuries.
• Contingent bodily injuries.
• Employee discrimination claims.
• Damage to business property or customer property.

These claims can be covered by other types of business insurance policies.

Many errors and omissions insurance policies do not cover temporary employees, claims made in certain jurisdictions, or claims made on work done before the E&O insurance was in place. 

Exclusions from E&O Insurance Policies

Exclusions are events and costs not covered by your policy. Typical exclusions for errors and omissions insurance are:  

Agent dishonesty or fraud 

If you aren’t honest about a property or commit fraud connected with a deal, your errors and omissions policy will not cover you. This is considered criminal activity. 

If you have deliberately omitted information about the smallest detail, your claim could be rejected. For example, if you haven’t disclosed a crack in the plaster of the property that could cost a lot to repair, an insurance company may not cover you if the buyer sues you for this.

Causing damage to property

If a real estate agent damages a property, this is also not covered by errors and omissions insurance. 

However, this kind of damage is covered by general liability insurance, so it’s also a good idea to have this in place.

Failing to disclose knowledge of pollution

Polluted property is another exclusion in errors and omissions insurance for real estate. In almost every state, agents are legally required to disclose knowledge of waste due to health and safety risks. 

The waste could be under a structure, on a piece of land, or near the premises or area for sale. This needs to be disclosed as it can affect a buyer’s decision.  

Who Needs Errors and Omissions Insurance?

Many businesses and professionals in the real estate industry need errors and omissions insurance, including:

🧍 Agents.

🧍 Brokers.

🧍 Appraisers.

Even though errors and omissions insurance is highly recommended for real estate professionals, it is only legally required in certain states. 

The following states require real estate agents or brokers to have errors and omissions insurance:

• Colorado.
• Idaho.
• Iowa. 
• Kentucky. 
• Mississippi. 
• Nebraska. 
• New Mexico. 
• North Dakota.
• Rhode Island. 
• South Dakota.
• Tennessee.

It’s important to understand your local laws as these requirements vary from state to state. For more information, contact your state’s real estate association.

What Does E&O for Real Estate Professionals Cost?

According to The Hartford, errors and omissions coverage typically costs between $500 to $1,000 on average per employee per year. 

Large agencies could spend up to $50,000 annually on errors and omissions insurance.

However, this is a rough estimate as the nature of your real estate business and various other factors affect the actual costs.

The cost of E&O insurance depends on the following:  

Business size

A larger real estate agency means higher risks. Small businesses typically have fewer employees and lower insurance rates. Rates will be the cheapest for independent realtors.

Revenue

Your chances of facing litigation increase as your clients’ budgets and your income increase.

Industry and the types of risks you face

Commercial real estate, for instance, carries more risks than residential real estate.

Employee training

Teaching your employees how to reduce risk can lower your insurance premium. If you can show evidence of investing in employee training, your team is more likely to be seen as competent and less of a risk to insure.

Location

The cost of your E&O insurance can vary from one state to another. Also, depending on where you sell real estate within your state, county, or city, you may be regarded as a higher or lower risk to insure. 

Claims history

If you have a history of lawsuits against you, insurers will see you as a major risk. This could mean your E&O will be more expensive.

Coverage limits

The amount of coverage you need will also make your total costs lower or higher. Higher coverage comes at a higher premium. 

Speaking to an insurance agent is the only way to get a clear and accurate quote on your E&O insurance for real estate. Businesses can come in all sizes and structures. An insurance agent will need to perform a risk analysis to determine the exact costs. 

Avoid Costly Mistakes with Paperless Pipeline

While it’s crucial that you have E&O insurance coverage in place, there are other things you can do to ensure you don’t make costly errors that could lead to a lawsuit.

With Paperless Pipeline’s transaction management features, you’ll have less to worry about, thanks to:

• Customizable and automatic checklists.
• Setting critical due dates automatically.
• Staying on top of document compliance with easy reviews.

Reduce your risk of mistakes by investing in transaction management software that is designed to protect your business.

Try Paperless Pipeline yourself with a free trial by visiting our website.