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Liability Insurance: Proper coverage is critical


No matter how careful you are, don’t underestimate the importance of professional liability insurance. People sue even when they don’t have much of a case, and the financial drain can be crippling. Here are two actual cases and tips on how to prevent these nightmares from happening to you.

Case 1: Three months after a closing, Kate received this letter from her buyer clients: “Remember when you recommended an engineer to look at those cracks in the basement? Well, they’re getting worse, and we think you should have insisted on us hiring an engineer to look at the defect.”

Kate immediately went to the buyers’ home to examine the cracks. The cracks had definitely expanded, so Kate arranged for an engineer. The buyers seemed satisfied.

A year later, Kate and her broker, Dan, were now in litigation, with the buyers claiming that Kate had a “duty to insist on an engineer.” Legally, Kate had no such duty, and the case ultimately would be settled. But in the meantime, there were court costs, depositions, and attorneys’ fees.

Dan’s defense costs were covered by his insurer, because he filed a claim as soon as he learned about the case. Kate’s coverage was denied, however, because she hadn’t filed a claim when she received the initial letter. Kate had feared filing a claim would cause her premiums to increase. Was she right to worry? No. If your state has an endorsed or mandatory insurance program, you should be able to file a claim without fear of a premium increase. Generally, the carrier must insure all licensees in the state regardless of claims history-but check your carrier’s practices and the terms of its policy.

Case 2: Aaron, a broker, listed his best friend’s grossly overpriced property. Since it was probably worth $300,000, a listing at $625,000 was crazy, but, Aaron told himself, who knows?

Monica, a relatively new salesperson in Aaron’s office, was on floor duty when the buyers entered. They viewed Aaron’s new listing, and Monica’s heart raced when they indicated that they loved it and would like to write a contract, full price, all cash.

Back at the office, Monica drafted the offer letter and presented it to the buyers for their signature. Aaron took it to his friend, who signed it. When he returned to the office, Aaron told Monica to deposit the $25,000 earnest money check. Oops. In her excitement, Monica had indicated on the offer that the earnest money was a check, but she hadn’t actually received a check. The buyers, who were from out of town, didn’t have a check with them. Not to worry, they’d sign an earnest money note due in three days, which would give them time to get home to send the check.

Nervously, Monica told Aaron, who then called the seller, who indicated that this plan was just fine. However, the buyers left town and never sent the earnest money. The deal didn’t close. The friend sued Aaron and Monica for $25,000.

Negligence? Yes. Proper action would’ve been to amend the contract to provide for the plan for earnest money payment.

Covered by insurance? Yes. This claim was well within the coverage limits of $100,000 under many state policy minimum limits used by so many real estate professionals today.

However, the seller then amended his claim from $25,000 to $325,000. Apparently, the seller had sold the house as a FSBO for $300,000 and wanted the entire “benefit of the lost bargain.” He had no legal case, but it didn’t matter. The attorneys’ fees to prepare to defend against his suit would be high, and the potential existed – no matter how slight – for a large settlement or judgment.

The seller and his attorney delayed, danced, and tried everything to drag the case out. More than a year later, we finally settled for $25,000. By then, my attorneys’ fees were more than $45,000.

To avoid this type of nightmare scenario, heed the following advice:

  • Understand that every real estate salesperson is at risk for a crazy case, so make sure you’re covered.
  • Know your policy limitations. Most salespeople have no idea who their carrier is, what the coverage limits are, and what the rules for timely filing of claims are.
  • Make sure you have enough insurance. My rule of thumb: Coverage should be the same amount as the largest deal you do in a year, with a minimum $250,000. The $100,000 level is just for those who don’t sell much real estate.
  • Always buy state-endorsed coverage if it’s available. (Often it provides coverage up to $100,000 for about $100 a year.) Also, if your company offers a policy, buy it. Should you have a claim, the primary policy (state-endorsed or -mandated) will cover you first, and then the company policy will kick in.

Remember: No one expects to file an E&O insurance claim. But the entire purpose of the insurance is to protect you from the unexpected crisis. It’s well worth the cost: After you’re sued, you won’t be able to buy coverage at any price

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