Errors and omissions lawsuit tips for real estate professionals
Real estate and title business owners are especially susceptible to errors and omissions (professional liability) lawsuits because they handle expensive property transactions. Because there are thousands of ways a real estate transaction can go awry, there are also limitless possibilities for bringing a lawsuit against your small business.
You could be sued if:
- A disgruntled buyer gets buyer’s remorse and alleges you didn’t act in their best interests.
- Your advice fails to meet a client’s expectations.
- You fail to document decisions or actions.
- A client alleges you didn’t tell them about water damage in the house and tries to recover the cost of mold remediation from you.
You don’t have to actually make a mistake to be sued for professional liability, either. As long as the client perceives that your services led to financial losses, they could bring a lawsuit against you.
It's important to understand how to recognize the events that can lead to E&O lawsuits and how you can manage your professional liability risks.
Reasons why real estate and title brokers are sued
What can put your real estate or title brokering business at the center of a million-dollar lawsuit? Here are some common triggers for E&O claims:
- Misrepresentation of the property condition, boundaries, or size
- Nondisclosure
- Failure to verify information given by the seller to the buyer
- Undisclosed or undetected water damage, infestation, or sewage or septic problem
- Errors in the home inspection (the inspector failed to note cracks in the foundation, a leaky roof, etc.)
- Violations of your state’s real estate regulations (such as fair housing rules)
- Error in zoning interpretation
- Error in comparative market research report
- Inaccurate appraisal
- Inadvertently offering bad or inaccurate advice
- Bank mortgage error
- Breach of confidentiality
For example, if a homebuyer alleges that your MLS listing embellished the property’s features, they might sue your real estate business and claim that your description misrepresented what the listing had to offer.
How to manage real estate professional liability risks
Keep those common errors and omissions triggers at bay with a thorough risk management plan. This might include:
Create universal standard procedures
Be sure to treat all clients equally, regardless of their spending abilities. You should always keep up to date on fair housing laws so you don’t accidentally make a mistake when helping someone buy or sell a home.
Document client communications
When you are sued for professional liability, you will need records to prove your business isn’t liable for negligence or other wrongdoing. Be sure to document and properly store all client communications, but especially any challenges that arose during the process.
Be careful when choosing inspectors on behalf of your clients
Let’s say you facilitate the sale of a newly constructed home. After closing, the buyer discovered water intrusion defects on the property. However, the inspector you hired didn’t make note of any of these alleged defects.
The buyer then decides to sue you because it was your responsibility to select an inspector who specializes in roofing and foundations. To avoid this scenario, be sure to vet your specialists based on their reputation, expertise, and references.
Don't offer advice outside your realm of expertise
Buyers rely on your expertise to guide their purchasing decisions. So if you encounter a situation where you’re not sure what the correct answer may be, avoid offering an opinion. Instead, refer your client to someone who can offer the advice they’re looking for.
Don't misrepresent or exaggerating a property’s features
Always verify the information you receive from a seller before you inform the buyer. If you accidentally repeat a seller’s exaggerated claims about the property, you could be sued for someone’s oversights (or outright deceptions).
Say, for example, a seller claims the property is 1,582 square feet, and you list the property as such. If the property turns out to be only 1,282 square feet, the buyer could sue for the diminished value of the property based on the square footage discrepancy.
Disclose flaws in the property
To avoid being sued for negligence and breaching fiduciary duty, be sure you disclose a property’s flaws before a sale ever takes place.
Let’s say you are a real estate agent representing sellers in the sale of their residential property. If undisclosed flaws are discovered after closing, the buyer could try to recover current and future repair costs from your small business.
Keep your promises
Never make a promise you can’t keep, lest you want to risk a lawsuit. This means never promising that a property could be bought or sold for a certain price or preemptively saying a seller will pay for closing costs when you are still waiting on confirmation.
Make your deadlines
A real estate transaction is punctuated with deadlines to ensure a smooth sale. To ensure you aren’t the reason for any delays, be sure to submit paperwork by the stated due date to avoid unexpected cancelled agreements.
How E&O insurance saves your real estate business money
A realtor who appeared on the ‘Million Dollar Listing' TV show was hit with a lawsuit that accused him of flooding a clients' home. According to the lawsuit, realtor Matt Isbell showed a vacant condo to a potential buyer, but failed to turn off a gas fireplace when he left. A few days later, heat from the fireplace caused the sprinkler system to turn on, which filled the residence with water and caused about $200,000 in damage.
Make sure a client’s dissatisfaction isn’t the downfall of your small real estate or title business. Instead, implement a thorough risk management plan, and be sure to carry errors & omissions insurance as a fail-safe for when your prevention efforts simply aren’t enough.
An E&O policy offers your real estate brokerage business coverage for:
- Legal defense costs
- Damages payable to clients because of problems with your work or advice
- Third-party discrimination
- Punitive damages
- Joint ventures as insureds
- Final adjudication language for fraud claims
- Spousal liability
- Personal injury offenses
- Bilateral extended reporting period
- Duty to defend (i.e., your provider orchestrates your business’s defense for you)
Other important policies for small businesses that purchase E&O insurance
While errors and omissions insurance can be an important part of your risk management plan, you should consider these other small business insurance policies to fully protect your business from financial losses:
General liability insurance: This covers common business risks like customer injury, customer property damage, advertising injury, and copyright infringement. It protects your small business from the high costs of lawsuits and helps you qualify for leases and contracts.
Business owner's policy: A BOP bundles general liability coverage and commercial property insurance together at a discount. It protects against the most common third-party lawsuits and property damage.
Commercial auto insurance: Vehicle insurance is required in most states for businesses that own vehicles. This policy covers your legal bills, medical expenses, and property damage if a business vehicle is involved in an accident.
Hired and non-owned auto insurance (HNOA): This provides liability coverage for accidents involving personal, leased, or rented vehicles used by your business.
Cyber insurance: Also known as cyber liability insurance, this policy insures against the costs of data breaches and cyberattacks. It covers things like customer notification, credit monitoring, legal fees, and fines.
Get real estate business quotes from trusted carriers with Insureon
Complete Insureon’s easy online application today to compare quotes from top-rated U.S. carriers for E&O and other types of business insurance. Once you find the right policy for your small business, you can begin coverage and get your E&O certificate in less than 24 hours.
