Most Real Estate Broker/Owners purchase their Errors and Omissions insurance, along with the rest of their professional insurance program – office general liability, workers compensation, cybercrime – with the basic understanding that these insurance policies protect the firm, and typically the individuals involved, from a lawsuit alleging malpractice, bodily injury or cybercrime. With the understanding that it is typically the real estate agent who is allegedly perpetrating the wrongdoing, all parties should know when, if and how coverage might apply, before something goes wrong. One shouldn’t assume broad generalities about any coverage. For example, one type of policy might cover an instance of bodily injury (a client slips and falls and gets hurt) during an open house, but not during a showing. Another type of policy offers coverage for the exact opposite scenario. (yes, that is one reason why people are not fond of insurance…).
One of the most important items all parties must understand is that for coverage to be applicable, the representative of the real estate firm must be acting on behalf of and with the authority of the “Named Insured”. In other words, if an agent does something without the permission of the broker/owner and a claim results, coverage can be denied. A risk management tip is to put all permissible activities and responsibilities of the agent in the Independent Contractor Agreement, so everybody knows up front if property management, commercial sales, broker price opinions or anything else are allowed, forbidden, or require special approval.
TIP: Put all of the permissible activities and responsibilities of the agent in the Independent Contractor Agreement
If there is a claim resulting from the alleged (in)actions of an agent, who is responsible for the deductible? We suggest that explanation also be a part of the ICA to avoid an ugly dispute during the already stressful time of a lawsuit. As policy requirements dictate when and how a claim must be filed, brokers should inform company representatives of the importance of timely and accurate reporting of a potential problem. If a lawsuit is filed, only the broker or a designated representative should be speaking with the attorneys, all other communications should be locked down. Please do not go on Facebook expressing your indignation and professing your innocence!
As computer network breaches and wire fraud become almost commonplace in the real estate industry, broker/owners can help lessen the risk by establishing clear and expected protocols. Almost all cybercrime is the result of human behavior. Training on the recognition of fraudulent emails, links and attachments can be of considerable benefit. Requiring the use of company approved and secured email addresses and websites can be extremely helpful (goodbye @google,com).
The above only offers a brief overview of the insurance issues and resulting potential conflicts (for example, commission disputes between agent and broker, or between different brokerages, are not covered. Special conditions may apply to coverage for agent-owned property sales). If you are a broker, bite the bullet and take a dep dive into your policies and convey the coverage as best possible to agents and employees. If you are an agent, it is OK to ask what your share of the deductible is or how you might be covered for certain activities.
Consult with an insurance representative that is familiar with your industry and how it is insured. The wrong time to find out about any of this is when you are holding the letter from the Plaintiff’s attorney. Like many things in life, a little knowledge, and prevention, goes a long way!
John Torvi is the Vice President of Marketing & Sales at the Herbert H. Landy Insurance Agency of Needham, MA. John has been in the insurance industry, focusing on the needs of business owners, for over 27 years. He holds a Bachelors Degree from Providence College and a Masters Degree from Springfield College and is a frequent speaker and contributor to professional journals and conferences for the legal, accounting, real estate and insurance industries.
The Landy Insurance Agency is a national leader in providing non-medical, professional liability and cybercrime insurance for accountants, attorneys, and real estate professionals. John can be reached at 781‐292‐5417 or johnt@landy.com. Visit www.landy.com for more information.
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