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| Dan Page | Image Source: online.wsj.com |
When real-estate agents Fran Day and Tom O'Neill agreed to help a couple sell their home in upscale rural Pennsylvania, they didn't expect a seven-year legal battle that went all the way to the state's highest court.
But that's what happened after the buyer sued the agents for not informing her that the stately house she bought had been the scene of a grisly murder-suicide a year and a half earlier.
"[T]he cost of litigating this was substantial," said attorney Timothy J. Bloh, who represented the Re/Max agents. Fortunately for his clients, who ultimately won the case, they had an insurance policy that paid for most of the legal bills, he said.
Ms. Day and Mr. O'Neill didn't respond to requests for comments.
Professional liability insurance in the real-estate world—known as errors and omissions coverage or E&O—is akin to medical malpractice insurance for doctors. Helping a client sell a home may not require the precision of brain surgery, but even simple property deals come with pitfalls that can land the most scrupulous real-estate professional in court. An E&O policy offers agents and brokers protection against the costs of getting sued for a mistake made in the course of doing their job.
As the name suggests, E&O policies don't cover claims of outright fraud. Typically, they come in handy when a disgruntled buyer sues an agent or broker for failing to disclose a defect in a property, for misleading the purchaser about what they're buying, or for a breach of contract.
Undisclosed termite infestations, mold contamination, or hidden water damage are typical sources of litigation. Boundary disputes are another flash point. With those, the property could be in fine shape, but the buyer alleges that the square footage of the home or surrounding property is smaller than advertised. Brokers and agents also get sued for failing to disclose that a property is encumbered by a lien, entangling the property in the old owner's debts.
Real-estate industry groups strongly encourage their members to get coverage—by buying a policy individually or through their broker.
If an agent is covered, the insurer assumes the bulk of the legal costs, typically up to $1 million with a deductible. When an agent is targeted with a claim, the insurer hires an attorney and takes the lead in crafting a defense strategy or negotiating a settlement.
Agents whose annual revenues fall below $500,000 can buy policies with annual premiums starting around $600. But if they handle more business or operate in more expensive areas like California, premiums can run in the thousands.
A lack of information about E&O insurance—and differences in local laws and market conditions—makes it hard to compare policies and know what to look for in the fine print. So shopping around for a policy can be a tricky endeavor, especially for independent professionals or brokerages operating on tight margins.
About a dozen states, mostly in the Midwest and South, require agents and brokers to carry basic policies. Elsewhere, coverage is optional. Many agents and brokers go uninsured, despite the advice of trade associations. Somewhere between one-third and one-half of agents and brokers are covered by E&O policies, according to internal market data from Victor O. Schinnerer & Co., a top underwriter of E&O insurance for real-estate professionals.
Eric Myers, a vice president at Schinnerer, says 90% of their customers never see a claim filed against them. But insurance, he says, is about hedging against a small but dangerous risk. "If you're going to court, it can get expensive pretty fast," he said.
Mike W. Smith, president of Axis Insurance Services LLC, an insurance brokerage in New Jersey, said agents inquiring about a policy are often skeptical that it will pay off. Many of them, he says, assume that only sloppy professionals have to worry about getting sued.
"I find it interesting that people won't build a deck or a hire a contractor without an insurance certificate," he said, "but they'll sell a million-dollar house without thinking they need insurance."
Some agents fear that potential plaintiffs might be lured by the thought of a pile of insurance money being recovered. "There are few that feel that if they have insurance, they're more of a target," said June Barlow, vice president and general counsel of the California Association of Realtors.
Marc W. Brown, a Buffalo lawyer who defends insurers against E&O claims, advises agents to take a less complacent view of their legal exposure.
"Why risk your entire reputation? It's not worth it," he said. "There are too many people out there in a litigious society who are going to sue you."
Tony Hartman is a senior managing partner at Mark Private Capital LLC, a private equity firm that specializes in bridge financing for business and real estate projects. To know more about him, follow this Twitter page.
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