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.
Agents, brokers, and other real estate professionals deal with large sums of money, regulatory processes, and outside parties. If something goes wrong, you could end up facing a serious lawsuit that could result in penalties or hefty fines.
Even if the lawsuit is unfounded or you win the case, you’d 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 covers businesses or individuals for mistakes or oversights. It provides insurance coverage 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 Real Estate 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, real estate 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 related 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 your legal dispute fees.
✅ Cover any court judgments.
✅ Provide funds for plaintiff settlements.
✅ Pay court costs, expert witness fees, and administrative costs.
The insurer will cover you for:
⚠️ Professional negligence
Negligence could stem from an agent failing to uphold professional standards or errors being made—for example, typos in legal contracts.
A common reason for lawsuits initiated against realtors is when they omit information that could have deterred the client from buying the property. Agents can avoid this risk 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 real estate 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 a property incorrectly can cost your client money or even cause the deal to fall through.
This could land you in court or cause reputational damage that might 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 defense 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.
What Doesn’t Real Estate Errors and Omissions Insurance Cover?
Knowing what isn’t covered by errors and omissions policies is crucial, especially if you run a new brokerage. Claims not covered by errors and omissions insurance for real estate include:
- Customer injuries.
- Employee injuries.
- Contingent bodily injury.
- 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 Real Estate Errors and Omissions 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 when working on a deal, your errors and omissions policy will not cover you. This is considered criminal activity.
Your claim could be rejected if you deliberately omitted information about even the smallest detail. For example, if you haven’t disclosed a crack in the plaster of a wall that ends up costing a lot to repair, an insurance company may not cover you if the buyer sues you for this.
👎 Causing damage to property
Errors and omissions insurance doesn’t cover a real estate agent should they damage a property.
This kind of property 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. In almost every state, agents are legally required to disclose knowledge of waste, since it poses health and safety risks.
The waste in question 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.
🧍 Property managers.
🧍 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 insurance requirements and industry regulations vary from one state to another. For more information, contact your state’s local real estate association.
What Does E&O for Real Estate Professionals Cost?
According to The Hartford, errors and omissions coverage on average costs between $500 to $1,000 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. A small business would 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
Educating your employees on how to reduce risk can lower your insurance premium. If you can show evidence of having invested in employee training, your team is more likely to be viewed 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 typically means that your E&O will be much more expensive, or you could even be denied coverage.
➡️ Coverage limits
The extent of coverage provided and the insurance limits of the policy you opt for, will also see the total cost rise or fall. Higher insurance coverage typically 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.
Real estate businesses come in all sizes and structures; therefore, an insurance agent or broker 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 designed to protect your business.
Visit our website and try Paperless Pipeline yourself—with a free trial. We’re excited to show you how our software can help you avoid mistakes.