The importance of errors & omissions (E&O) insurance to insure your business and insure your success has never been more apparent than in this season of considerable change and uncertainty within the real estate industry.
Claims landscape
To begin, the state of housing affordability in the US is the lowest it has been in decades. According to CNN, “this is the least affordable housing market since 1984. And it’s getting worse.” The combination of stagnant salaries, climbing home values intensified by low housing inventory, and rising interest rates has created a scenario where it now takes nearly 41% of a median household’s monthly income to cover the principal and interest payments on a median-priced home. This metric has historically averaged below 25%. For prospective first-time homebuyers, this situation is keeping their dreams of owning a home and their ability to build wealth through homeownership out of reach.
Regulators and the public-at-large are taking note, which has resulted in increased scrutiny of the entire home buying and selling process. The latest is a charge of unfair buyer representation agreements by the Consumer Federation of America (CFA) after examining 43 different buyer representation agreements across 37 states. In a press release published earlier this month, the CFA urged regulators, including state attorney generals, to review these contracts for being overly protective towards agents and brokers to the detriment of buyers.
These allegations of unfair buyer representation agreements have significant importance since a key aspect of the National Association of REALTORS® (NAR) settlement is a requirement for MLS participants (aka “agents”) working with buyers to enter into written agreements prior to touring a home. These changes are slated to take effect later this summer, on August 17, 2024, in accordance with the settlement that was preliminarily approved in April 2024. The settlement is, however, subject to final court approval in a hearing scheduled for November 2024. For more information on this requirement, visit NAR’s guide on written buyer agreements and the Victor article, Seal the deal: The power of buyer representation agreements.
Whether or not there is any merit to CFA’s claims, one thing is clear—sensitivity to high housing costs and the increased scrutiny it has generated creates increased risks for claims. Clear communication that enables a client to understand exactly what to expect and how to competently navigate their home buying or selling experience can minimize the likelihood of disgruntled clients and go a long way towards mitigating claims. However, no firm is wholly insulated from claims. In these scenarios, E&O insurance can help.
The value of E&O insurance
E&O insurance can protect you from financial losses stemming from alleged and actual mistakes, errors, omissions, negligence, or other deficiencies in the provision of your services. Examples of claims the Victor and CNA E&O policy covered in 2023 include the following:
- $2.8 million judgment against an agent for allegedly failing to advise several clients of a commercial landlord’s financial problems. The landlord defaulted and the property went into foreclosure, but not before the clients entered into long-term commercial leases with the landlord and expended significant resources to retrofit the property for their individual needs.
- $700,000 judgment against an agent for allegedly failing to disclose knowledge of termite damage on a home. The agent had advised the buyers to waive a home inspection for their offer to standout in a hot housing market.
- $600,000 paid to avoid a potential $10 million judgment against an agent for allegedly failing to disclose code violations where the agent acted as a dual agent in a transaction involving an $18 million apartment complex.
Additionally, the Victor and CNA policy provides coverage for the following, subject to the terms and conditions in our policy (state specific forms are available for CA, HI, LA, NY, PR and VI):
- Pre-claims assistance – coverage for costs incurred in investigating and addressing a situation that has the potential to turn into a claim against you.
- Public relations – reimbursement for reasonable public relations expenses incurred to manage a public relations event as it is defined in the policy.
- Real estate licensing proceedings – coverage for costs incurred in investigating or defending you in a proceeding before a real estate licensing board.
- Loss of earnings – coverage for lost earnings for each day or partial day you are asked to attend a trial, hearing, or arbitration proceeding involving a claim against you.
- Subpoena assistance – assistance in responding to subpoenas arising out of lawsuits to which you are not a party.
- Privacy breach response – coverage for costs incurred in (1) investigating the cause and extent of a network security breach or the release of confidential or personal information, and (2) providing notification as may be required by law to affected parties.
Whether or not your policy provides similar protections will depend on who your insurance provider is and the exact terms of your policy. A trusted insurance agent or broker can help you assess the coverage offered by each policy and procure one that aligns with your firm’s needs.
How Victor can help
Insure your business, insure your success, and insure your wealth with proper E&O coverage. We can help. Victor and the National Association of REALTORS® have partnered under the NAR REALTOR Benefits® Program to provide a first-class E&O insurance program. Several premium credits are available, as allowed by state law, including a credit for being an NAR member or holding select NAR designations. Receive a free quote today. Be sure to note your NAR Member ID on the application.
For more information about Victor's Real Estate E&O program, visit here or contact us at realestate.us@victorinsurance.com.
