What E&O Means to the Real Estate Professional
Attorney or accounting malpractice makes the headlines. Certainly we’ve all heard of high profile medical malpractice cases. But the real estate professional community faces its own challenges. Real estate professionals face significant exposure to claims that may fall under E&O coverage. In particular, E&O coverage is useful when a buyer brings suit against an agent/broker for failure to disclose a property defect, for misleading the buyer about the purchase, or for breach of contract. Most commonly, E&O policies are useful for the real estate professional community when termite infestations, mold, hidden water damage, title problems, or disputes about square footage, easements, or property boundaries emerge.
From time-to-time, real estate professionals face litigation for the alleged failure to disclose other, unusual “defects” such as the recent case in which a buyer purchased a home that was the site of a murder. In fact, misrepresentation is the most common basis of suit against agents and brokers. Misrepresentations come in three types: innocent, negligent, and fraudulent. Negligent misrepresentations, those covered by E&O insurance include failure to disclose significant property flaws out of ignorance.
With E&O coverage, the insurer usually funds the bulk of any legal costs, by hiring an attorney to assess and defend the case. Premiums often depend on the market in which the agent or broker works. The divergence in local laws and market conditions makes comparison between policies difficult, but here are some general guidelines:
- Money is (mostly) marginal. Agents whose annual revenues fall below $500,000 can typically purchase policies with annual premiums starting around $600, but this figure can be higher in more expensive areas.
- Better safe than sorry. Basic E&O coverage is required in roughly 12 states, mostly located in the Midwest and South. Elsewhere, coverage is optional, but that does not mean it is not necessary. While the risk of a claim is minimal, the cost of that claim can quickly escalate. Even if the allegations are found to be groundless, considerable dollars may be needed to defend the lawsuit. The cost to your reputation can be even more severe. As illustrated above, not only careless or fraudulent professionals get sued.
- Going it alone?
- Cite the source. Even without E&O insurance, you are normally entitled to rely on statements the seller makes to you, unless you have reason to doubt their veracity. Thus, if you receive property information from a third-party source, attribute the information to that source, saying, for example, “According to the seller, the roof is three years old.” To be sued for misrepresentation, the misstatement has to involve a material fact and not just your opinion. Material facts are those that a reasonable purchaser would rely on in making a purchase.
- Document the disclosures. To limit misrepresentation liability, use seller disclosure forms (and ensure that the seller fills out the form). Document sellers’ sources of information and encourage the use of other professionals, such as inspectors and attorneys, whenever appropriate. Avoid making predictions, such as “This tile will never need to be replaced” or “The value of this house is sure to appreciate.”