Agents, brokers, and other real estate professionals aren’t alone in facing the threat of lawsuits. However, as a member of the real estate industry, you do face unique risks that require comprehensive insurance coverage. Errors & Omissions (E&O) insurance policies are designed to protect you from lawsuits that relate to the following mistakes and violations, among others:
- Allegations of Breach of Contract
- Failure to disclose property defects
Of course, it is important to make sure your agents and employees do everything within their power to prevent these claims in the first place. However, lawsuits can happen to any firm. It is your responsibility to secure insurance coverage to protect your firm from financial ruin. As you shop for coverage and debate the benefits of different policies, remember that the following four factors will ultimately affect the price of your premiums.
The Size of Your Firm
How many people work for your real estate firm? How much gross revenue does it generate? How many transactions do you process? These questions are crucial in determining the final cost of coverage, because your exposure depends your firm’s number of transactions. Your insurance policy must cover each individual who works for you, as well as the transactions that make up your firm’s revenues. The more transactions your firm completes, the more chances there are for errors to take place.
Of course, the size of any business will directly affect its risks and insurance needs, but it’s especially influential in the real estate industry because your transactions are larger and your contracts are more comprehensive. The more detailed a real estate transaction is, the more possibility there is for an error or omission to occur. Firms that buy and sell high-value homes should also expect that they would have to contend with higher dollar claims more than firms that do not deal with luxury home real estate transactions.
The same is true if you have more employees, because each additional employee will need E&O coverage. However, your firm will also be able to make more sales, handle more clients, and pursue more leads than a competitor with fewer agents. If this is the case for your agency, you will need a higher standard of protection, including E&O coverage.
The Type of Business Your Firm Handles
The type of real estate transactions your firm performs will influence how much your E&O insurance costs. If your agency handles any other type of real estate business beyond residential, your premiums will be higher than a firm that solely works with residential clients. Premiums are higher for firms that handle commercial properties and the magnitude will depend on how much of your business is with commercial clients. The mix of your firm’s commercial and residential transactions will impact the premium to varying degrees.
The Location of Your Firm
Where does your firm operate and where are the properties that you sell? Location, as the saying goes, is everything in the real estate industry. It dictates your business costs and strategies for a variety of different reasons. Your client’s location is related to property taxes, building codes, and other special considerations. Many of the specific legal obligations often depend on city or county laws as well as state laws.
According to the U.S. Small Business Administration, each state determines its own insurance requirements and litigation laws. If you sell properties in a state where judges have more legal freedom to award substantial damages, your insurance company must be prepared to help you pay these higher costs. Your premiums will reflect the likelihood of large E&O claims, as well as the requirements that prevent or enable these lawsuits in the first place.
The Claims History of Your Firm
Your firm’s claims history is going to play a role in how much you have to pay for your current coverage. Insurance premiums are influenced by how much of a risk your business is, and if you have a history of high value claims or a history of frequent claims, you are a greater risk. This means that your insurance premiums are going to be higher. On the other hand, if you do not have an extensive claims history, your premiums will be lower than a firm that does, because you are a lower risk client.
Protect Your Real Estate Business with E&O Insurance
Insurance prices obviously are not the only – or even the biggest – reason to minimize risks and prevent common real estate mistakes at your firm. Your reputation depends on your competence and integrity. However, if you want to offset future costs and make sure lawsuits cannot destroy your company irreparably, make sure you purchase E&O insurance that accommodates every possible risk.