Strategic protections real estate agents can take to mitigate risk.

Professional liability coverage, also known as errors and omissions (E&O) insurance, protects real estate agents, brokers and property managers against claims related to mistakes or negligence that arise in their professional activities. This type of insurance offers experienced legal support and coverage to help safeguard real estate professionals from financial losses that may result from errors, omissions or issues with contractual paperwork.

Understand the range of risks

In summer 2023, Insurance Journal reported an increase in the frequency of E&O-related claims – linked to higher staff turnover and training deficiencies. This is because it’s common for new real estate professionals to learn on the job, but without clear procedures, attention to details and accuracy often fall short.

Resulting errors and consequential risks that may emerge include:

• Litigation – Transactions can be complex, giving way to title issues, contractual disputes or breaches of fiduciary duty from poorly versed real estate professionals.
• Exceeding purchase and sale timelines – Laws often require agents to provide their clients with all material facts about a property in a timely manner. Failure to promptly disclose relevant facts or withholding key information may result in legal action.
• Electronic data mismanagement – Real estate professionals regularly handle sensitive personal and financial data. When data is mismanaged, a breach of compliance regulations can result in legal action and fines – on top of consequent financial and reputational damage.
• Injury – Agents and property managers may be held liable when an individual is injured while on a property.
• Property damage – Negligible advice relating to poor property conditions or failure to meet contractual obligations for property repairs may also lead to legal claims.

While awareness of potential risks can help empower real estate agents to make more informed decisions, professional liability coverage provides an additional line of defense against some potential legal challenges.

Recognize the differences in coverage

Professional liability insurance policies vary, but coverage typically includes legal defense costs, settlements and judgements from covered claims.

It’s important to note that while professional liability coverage is a critical protective measure for real estate professionals, agents typically need to have general liability insurance to cover any medical or legal defense costs that stem from injury or property damage-related claims.

While some states (or real estate boards) require agents to carry a professional liability insurance policy, in others it’s a voluntary decision made by the agent or their brokerage. Premium costs can differ state to state, and selling commercial versus residential real estate can potentially impact premium costs.

Staying informed about local real estate laws and regulations can prevent potentially damaging compliance issues.

Take the right steps to avoid business disruption

Financial strain and legal challenges can be disruptive to a real estate business in the event of a professional liability claim. Choosing the right professional liability insurance is a proactive measure that can protect real estate professionals, preserve client trust and help ensure business continuity.

Collaborating with an insurance specialist alongside your financial advisor can help you make informed decisions that align with your risk tolerance and overall financial goals. Contact your advisor to learn more.

Sources: travelers.com; insurancejournal.com; coverwallet.com; coverhound.com 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.