The Best of the Legal Hotline: The Value of Errors and Omissions Insurance


 Tracy Rucka  |    February 17, 2020
Best of Legal Hotline

Brokers and salespeople alike are advised to assess practice and potential risk exposure, and insurance policies should be reviewed periodically. It only takes one major cyberattack, an agent engaged in misrepresentation, or a violation of fair housing law to potentially ruin your business. Purchasing the correct insurance is a necessary step to dramatically reduce your liability and risk exposure. 

Does Wisconsin require brokers or agents to carry errors and omissions (E&O) insurance?

No. Wisconsin law does not require E&O insurance coverage to engage in real estate brokerage or to be paid a commission for doing so. 

What are the most frequent claims against licensees?

According to the National Association of REALTORS¬ģ, nearly 70 percent of all claims against real estate professionals are a result of misrepresentation concerning the disclosure of defects. Real estate buyers are filing lawsuits not only against sellers but licensees as well. Real estate practitioners increasingly find themselves in the crossfire of litigation. In the past few years, claims for cybercrime and wire fraud have been on the rise. What can real estate brokerage firms do to minimize risk? Obtain E&O insurance. If there are insurance coverage concerns, contact your insurance agent or have your private legal counsel review the policies since not all policies offer the same coverage.

What does real estate E&O insurance cover?

E&O insurance is designed to provide comprehensive professional liability insurance coverage for real estate salespeople and brokers. In essence, E&O insurance is malpractice insurance for the real estate professional since it provides coverage for errors and omissions of real estate brokers and agents in providing advice or other services to their customers or clients. The insurance is intended to protect brokers and agents against liability claims or lawsuits for damages caused by errors ‚ÄĒ something they did,¬†or omissions ‚ÄĒ something they failed to do.

E&O insurance coverage also defends the insured in lawsuits. No matter how carefully a broker or agent does his or her job, the real estate broker is at risk, even from lawsuits that may be unfounded or frivolous. Legal expenses must be paid no matter who wins in court, and those costs can be devastating to a broker’s finances. With E&O coverage, the insurance company defends the claim and pays any settlement or judgment against the insured broker up to the limits of liability stated in the policy.

What may be covered by an E&O policy? Can E&O insurance cover fraud or cyberattacks?

In addition to standard insurance protection for E&O insurance in providing brokerage services, E&O insurance may provide coverage for other risks and practices. The other risks and practices may include:

  • Appraisal and property management
  • Lockbox property damage
  • Fair housing discrimination
  • Regulatory complaints
  • Innocent partner fraud protection
  • Mortgage broker coverage
  • Failure to advise for commercial and residential environmental pollutants including asbestos, radon and lead, or wire fraud and cybercrimes

While some policies will include a portion of these risks in the standard policy, extra coverage will often be obtained through additional cost riders if they are available. 

Each E&O insurance carrier will offer different insurance protections, so it is important to make sure the E&O policy covers all the services offered by the brokerage firm. The firm may wish to consider adding cyber liability insurance coverage if it is not part of the firm’s existing business insurance policy.

Standard policy exceptions also exist. Although coverage options vary among carriers, E&O policies generally don’t cover:

  • Fraudulent and criminal acts
  • Insolvency
  • Failure to collect escrow or tax money
  • Employment contracts
  • Bodily injury claims
  • Libel, slander or defamation
  • Pollution and toxic waste
  • Violations of securities law
  • Conversion, misappropriation or commingling of funds
  • Failure to maintain adequate levels of insurance
  • Liability assumed under various indemnity agreements

A broker must be sure to understand what is covered and what is not covered before purchasing E&O insurance. 

A buyer is currently making a claim about a leaky basement from a transaction a year ago. The agent has heard the term ‚Äúclaims made coverage.‚Ä̬†What does that term mean?¬†

Most E&O insurance policies provide coverage on a claims-made basis rather than on an occurrence basis. That means the policies cover claims made during the life of the policy, regardless of when the alleged injury occurred. Coverage for claims made during the life of the policy for acts that occurred prior to the establishment of the insurance protection is called ‚Äútail insurance.‚ÄĚ Some claims-made policies exclude tail coverage completely; some policies provide limited tail coverage for acts that occurred within a specified time before the policy was created; and others provide full tail coverage for prior acts. When changing E&O insurance policies, it is important for the broker to understand the type of tail coverage provided to make sure there are no gaps in the prior-acts coverage.¬†

Must a lawsuit be filed to contact your insurance provider?

No, depending on the coverage, a broker may be required to notify the E&O carrier of a possible or potential claim. Be sure to discuss threats of litigation or possible action against a licensee or the firm with the broker or manager. It’s never too early to read your policy and follow any reporting requirements.   

Where can a WRA member get E&O insurance? 

E&O policies, terms and coverage vary, therefore, each firm should compare policies and coverage for the right fit. The WRA-endorsed carrier for E&O insurance is Pearl Insurance. For more information and a free quote, visit www.wra.org/Pearl or call Pearl at 800-289-8170. Additionally, the National Association of REALTORS¬ģ (NAR) provides an E&O insurance program to REALTOR¬ģ members under NAR‚Äôs REALTOR Benefits¬ģ Program.

An out-of-state licensee (OSL) approached a listing firm about working cooperatively on one of the firm’s listings. The listing firm is reviewing the WB-28 Cooperative Agreement, which includes a reference to E&O insurance. It E&O insurance required?

One of the negotiation points between a Wisconsin licensee and an OSL is whether the OSL will maintain E&O insurance.¬† Before entering into the WB-28, the OSL should consult with their insurance provider to determine if coverage as contemplated by the WB-28 is available. See lines 35-38, which provide,‚ÄúCooperating Firm represents that it shall maintain Errors and Omissions Insurance in a dollar amount adequate for the contemplated Wisconsin transaction throughout any transactions relative to this Agreement and the Property.‚ÄĚ

Resources

  • ‚ÄúRisk Reduction: Covering Your Assets with Errors & Omissions Insurance,‚ÄĚ in the April 2015 Wisconsin Real Estate Magazine: www.wra.org/WREM/Apr15/Hotline
  • ‚ÄúMission: Control Your Errors and Omissions,‚ÄĚ in the April 2015 Wisconsin Real Estate Magazine: www.wra.org/WREM/Apr15/Mission

Tracy Rucka is Director of Professional Standards and Practices for the WRA. 

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