In today’s real estate marketplace, more agents and brokers are selling properties they own or are involved with. This makes it more important than ever to know how your errors and omissions insurance would cover an agent-owned property claim.
A common assumption is that real estate E&O policies automatically cover agent-owned property transactions. However, real estate E&O policies are written to protect against claims from third parties—not to cover an insured’s self-dealing.
Why is that? Agent-owned property transactions carry a much higher risk than third-party transactions. They are potentially volatile, difficult to defend, and typically pay out on average five times more than those involving third-party transactions. In addition, agent-owned property disputes are more likely to pay settlements or judgments than non-agent-owned property disputes.
Most standard insurance carriers now provide limited coverage for agent-owned property transactions if certain requirements are met. Coverage is often limited to residential transactions.
Some typical requirements include:
- The use of standard real estate contracts.
- Providing a completed Seller’s Disclosure Form signed by the seller and acknowledged by the buyer prior to the closing.
- Purchase or recommendation of a home inspection. If the home inspection is not performed, a written waiver should be signed by the buyer and included in your transaction file.
- Purchase of a home warranty.
While your policy may provide limited coverage, the coverage is extended to the real estate professionals involved in the claim in their capacity as agent or broker; it is not designed to defend the agent or broker as the seller.
Many brokers who are aware of the risk involved in these transactions require a non-owner agent in the firm to handle agent-owned property transactions.
While residential agent-owned property transactions may be covered when you meet certain requirements, be sure to review your policy to see if and how agent-owned non-residential transactions may be covered, including raw land and commercial properties.
Agent-owned property that is managed by the agent/owner may also have some limitations to trigger coverage. Be aware of your policy’s stance on an agent managing property they own.
Agents will sometimes guarantee the sale of a home within a certain number of days and will buy the home themselves if they cannot find another buyer. E&O policies may cover these types of agent-purchased properties, but they may have requirements pertaining to the length of time the property is listed for resale.
The NAR Code of Ethics and TREC rules require the disclosure of certain circumstances associated with the ownership of a property as it relates to the agents involved. It is imperative that all REALTORS® remember to disclose all special circumstances in writing to all parties at the outset of every transaction. These disclosures include situations involving agent-owned real estate or familial and business relationships between the agent and any party to the transaction.
Selling investment properties can be a lucrative business for real estate agents. Just be aware of the differences in coverage provided by E&O policies when it comes to this type of transaction. Real-estate specific policies with standard carriers tend to provide the broadest coverage for these activities.
Lisa Scoble is Vice President of Program Business for Pearl Insurance, a partner of Oregon REALTORS® since 1986.