The ins and outs of E&O
by ELYSE UMLAUF-GARNEAU
Real estate is risky business, but that doesn’t mean you have to break your budget for an errors & omissions policy that meets your needs.
Errors & omissions insurance is a necessity, regardless of whether it’s required in your state, experts say. After all, just one lawsuit can jeopardize your career and financial stability.
“Going without E&O is taking a gamble,” says Greg Leffard, vice present at Hartford Financial Products, in Hartford, Conn. He’s seen defense costs for real estate lawsuits range from a couple thousand dollars to the mid $100,000s.
Misrepresentation and failure to disclose are among the most common claims, but even if you follow the law meticulously there’s no guarantee you won’t get sued. “Of all the claims we defend, one-quarter to one-third are situations in which the real estate practitioner has done nothing wrong,” says Karen Chambers, managing director of real estate professional liability for Travelers, an insurance agency based in St. Paul, Minn.
Unfortunately, staying safe comes with a price. E&O insurance premiums have been steadily rising, in part because of an increase in lawsuits and legal costs. But there are discounts if you can prove you’re taking steps to reduce your risk. “We like to see prevention methods in place,” Leffard says.
9 Ways to Reduce Legal Risk
1. Meet the four requirements. Many insurers offer discounts or additional benefits if you meet four requirements for every transaction: Recommend qualified home inspectors use home warranties, standard contracts, and seller disclosure forms. “Insurance companies are obviously sending a message. Why not make these practices standard?” says Lisa Robinson, president of Pinnacle Insurance Consultants, a Scottsdale, Ariz.-based Insurance brokerage specializing in real estate E&O insurance.
2. Create written customer service policies. Such policies show you’re organized and thorough, and will help you build strong customer rapport. Remember, clients are less likely to complain when they’re treated well. “Management can’t tolerate sloppy record-keeping or associates not delivering papers on time or returning calls,” says Bob Read, CRB, GRI, principal broker with RE/MAX Equity Group Inc., Lake Oswego, Ore., and author of Risk Hotline for Real Estate. “It’s important to have pro-active management and a policy of doing the right thing.”
3. Take classes. Some E&O insurance providers offer discounts for continuing education and professional designations. “It shows commitment to the industry,” says Chambers. Education should focus on risk reduction topics such as ethics, writing listing agreements, and disclosure laws.
4. Keep paper trails. Maintain transaction logs to record what you discussed with clients and save electronic copies of every document related to a transaction (For a list of items to include, see 12 Things Every Transaction File Should Have). Follow up client conversations with e-mails summarizing the phone or in-person discussion. “If a complaint comes up that leads to a lawsuit, the question then becomes: How defensible are you?” says Robert N. Bass, a Phoenix-based attorney specializing in broker defense. “You want a well-documented file to defend yourself.”
5. Ask a lawyer for advice. Bring in a lawyer who’s experienced in litigating real estate matters to examine your risk areas and advise you on risk management policies. Lawyers also can conduct seminars at brokerages, Read says, whose company hired an attorney to keep practitioners up-to-date on hot issues and provides advice on staying out of trouble.
6. Use board-approved forms — not your own. When it comes to disclosures and purchase agreements, it’s critical to use the approved forms. “Insurers prefer forms that have been scrutinized by the industry,” says Ron Jenson, an independent insurance broker who specializes in real estate E&O insurance at Sentry West Insurance Services, Salt Lake City, Utah. Also, don’t change the language in standard contracts.
7. Have your broker review and sign off on every transaction. An extra set of eyes can prevent problems and catch mistakes.
8. Make sure everyone on your team is licensed and insured. Your “team” includes appraisers, lawyers, inspectors, and anyone else involved in the purchase or sale of a home. Each of these team members should be properly licensed and protected by their own E&O insurance. “It gives us an outer shield of protection and insulates us from claims that we negligently referred clients to someone,” says Bass, also vice president and general counsel for Phoenix-based Dan Schwartz Realty, Inc.
9. Stay within the scope of your expertise. Don’t advise clients on issues outside your area of expertise, such as taxes and legal topics.
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