Part 1: How Does Errors and Omissions Insurance Protect Real Estate Professionals from Lawsuits?
What Counts as "Errors and Omissions?"
An errors and omissions claim can sometimes be as much about a client's perception of your work as it is about reality. Clients can allege you did something wrong, pinning the blame on you, when in reality, you made no mistakes.
Let's go back to our metaphor about doctors and malpractice insurance. What could a surgeon be sued for? They could be sued for botching an operation, misdiagnosing a condition, inadequately informing a patient about a side effect, or failing to treat a patient in the best way.
Similarly, you could be sued by clients who claim you either made a mistake or didn't fulfill your professional duties as a real estate agent. Those two things — errors and omissions — make up your E&O liabilities.
Common Housing Headaches that Prompt E&O Lawsuits
Imagine an oak tree-lined street with picturesque Victorian homes. The crown jewel of the block boasts large bay windows, delicate dentils, and a charming turret. This house that looks beautiful on the outside could suffer from dozens of problems on the inside, including:
- Lead paint.
- Septic tank issues.
- Roof leaks.
- Insects and rodents.
- Countless other headaches.
As a real estate agent, you're required to disclose any issues to potential buyers, but this can be difficult because you don't always know when there's something wrong with a house. You can hire inspectors and appraisers, but it's still possible that they'll miss something. If a mold problem goes unnoticed, the client could sue you, claiming you faltered in your duties and owe them financial compensation.
Real estate agents have a duty to disclose property defects to potential buyers.
However, disclosure issues are only one of the common sources of real estate E&O lawsuits. Here's a list of potential reasons you could be sued:
- Failure to disclose physical and structural problems with a property.
- Breach of fiduciary duty or failing to act in a client's best financial interest.
- Failure to check that the information listed about a property is accurate.
- Failure to inform clients about liens on a property.
- RESPA violations.
These common sources of lawsuits look fairly cut and dry, but often it's not so simple.
E&O Case Study: A Property with a Gruesome Past
A strange lawsuit in Pennsylvania shows [PDF] how unpredictable these E&O realty cases can be. A buyer in Pennsylvania sued her real estate agent for failing to disclose that the house she bought had been the site of a murder / suicide. Are real estate agents required to disclose whether a serious crime has been committed at a property?
It's an interesting question. In many states, there's a law that says you don't have to disclose if a property has a "psychological stigma" — which is the law's way of saying you don't have to tell someone if the house gives you the willies.
Pennsylvania doesn't have a similar law, so the buyer was able to sue her real estate agent. The courts ultimately ruled in favor of the real estate agent, asserting that the murder/suicide was not a material defect that the seller must disclose.
What can you learn from this example? There are two main takeaways:
- Your professional duties are based on the laws in your state.
- E&O lawsuits are unpredictable because clients could sue you for failing to disclose all kinds of problems, including some you'd never even think of.
When you fail to uphold the standard of care (as established by state law) or breach your fiduciary duty, a client may sue to recover for that loss — even if a client only perceives that you have committed a transgression.
What Isn't an Errors and Omissions Dispute?
Remember that errors and omissions disputes are only about mistakes or oversights related to your professional work. Other disputes can arise that Errors and Omissions Insurance won't cover.
For instance, a potential buyer could sue you if they're injured during an open house. Say the buyer trips over a power cord and face-plants into a table. They sue you over dental bills to repair a chipped tooth. This lawsuit — many people refer to cases like this as slip-and-fall lawsuits — is typically covered under General Liability Insurance, not E&O Insurance.
While Errors and Omissions Insurance may cover your professional liabilities, keep in mind that intentional wrongdoing, crimes, and fraud aren't covered under E&O. As a rule, it's usually safe to assume that a crime or fraudulent actions won't be covered by your business insurance.
Next: Why Do Clients Initiate E&O Lawsuits?