Errors, Omissions, Insurance
The Real Estate Professional Guide to E&O Coverage

Part 1: How Does Errors and Omissions Insurance Protect Real Estate Professionals from Lawsuits?
Why Do Clients Initiate E&O Lawsuits?

Clients may raise an E&O lawsuit against your real estate agency if they think that you've…

  • Caused them to suffer a financial loss.
  • Breached a contract.
  • Failed to meet standard of care guidelines.
  • Posted inaccurate information in a listing.
  • Misrepresented the condition of a property.
  • Breached your fiduciary duty.
  • Violated RESPA laws.
  • Acted outside the scope of your work as an agent.
  • Treated them unfairly or failed to give them adequate attention or guidance.

There's also one rather cynical reason why clients might sue you — they think they can get a big payday from a lawsuit. By suing you, clients could potentially score thousands of dollars. That's more than enough to motivate some folks to file a lawsuit.

Let's move on to some real-life examples that show the kind of lawsuits that are often filed against real estate agents.

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Note: E&O won't cover lawsuits initiated by the federal government or a law enforcement agency over RESPA violations.

Realtor Insurance Case Studies: Why E&O Can Be Crucial for Agents

We've already listed some of the common reasons realtors might be sued, but it can be helpful to look at a few real-life examples. Below we summarize four lawsuits that show the kind of claims you might see if a client sues you.

WHAT IS THIS TABLE CALLED?

Cause of Lawsuit Description Cost Takeaway

Inaccurate listing

  • Seller told agent that the house was connected to the city's sewer system.
  • Agent relayed this information to the buyer.
  • After purchase, buyer found that the house had a septic tank and sued New browser window icon. the agent for misrepresentation.
  • The judge found in favor of the buyer, forcing the agent to pay the cost of connecting the house to the city's system

$4,200

Failing to verify information can cost you.

RESPA Violations

  • One of the nation's largest realty teams is being sued New browser window icon. for violating RESPA.
  • Among other things, RESPA prohibits agents from paying referral fees or kickbacks to parties that refer clients.
  • RESPA laws exist to protect buyers from questionable practices that could cost them extra money.

$11.2 million

Make sure you're in compliance with RESPA. The HUD's breakdown of RESPA laws New browser window icon. is helpful.

No cause (meritless)

  • Seller's agent informed buyers about a potential water intrusion problem in a house.
  • Two years later, water intrusion began causing damage.
  • Buyers sued New browser window icon. the seller's agent.
  • The lawsuit lasted for years but the court ruled in favor of the seller's agent.

$60,000 (legal fees, covered by the buyer)

Lawsuits are expensive, even if you're ultimately cleared of wrongdoing.

Misrepresentation of a property's condition

  • After purchase, buyer was asked to contribute $2,000 to the homeowner's association for roof repairs.
  • Buyer said roof repair needs should have been identified during the inspection and sued New browser window icon. in small claims court.
  • The judge found in favor of the agent, noting that the defect hadn't been identified until after closing and that the buyer had voted in favor of funding repairs!

Legal fees + time

Even when you aren't found liable for any wrongdoing, responding to a lawsuit can be a drain of time and energy.

Wait…More Lawsuits? Additional Risks to Watch out For

While the chart you just saw represents some of the more common lawsuits real estate agents face, it's by no means exhaustive. Let's look at a few less common lawsuits and whether they're covered by E&O Insurance:

  • Failure to meet standard of care guidelines / breach of fiduciary duty. A client might allege you pushed for a higher price in order to get a higher commission for yourself, but ultimately cost them money. In so doing, you breached your fiduciary duty. These lawsuits are often covered by E&O. More on this in the section "State Laws, Codes of Ethics, and Fiduciary Duty."
  • Unfair treatment of clients or failure to provide adequate guidance. Clients could allege that you dropped the ball on a deal. You were too busy working with other clients and couldn't put in an offer on time for them, causing them to lose out on a home they desperately wanted. Lawsuits like these may be covered by E&O.
  • Acting outside the scope of what an agent should do. Generally speaking, E&O Insurance only covers the work you do as a real estate agent. If you act outside the scope of your professional liabilities, E&O probably won't cover it. For instance, if a real estate agent offers to perform an inspection on a house but isn't qualified to do so, this could lead to lawsuit (one that probably isn't covered by E&O).
  • "Agency" lawsuits. A real estate agency can be sued if its agent went outside the scope of her duties as an agent. For instance, if an agent says she'll oversee a home renovation, her agency could find itself embroiled in a lawsuit, should the agent mess up the buyer's renovation. These disputes might not be covered under E&O because they have to do with work that real estate agents performed outside their professional duties.

What do these examples show us? It's important to know what is and isn't covered by E&O Insurance. Real estate agents that offer to do inspections, oversee renovations, or make recommendations about non-real estate matters could be sued in a lawsuit that won't be covered by E&O. When you work outside of the scope of real estate, you expose your business to greater risk. It's best to stick to real estate work!

Torn Paper Icon

E&O Insurance doesn't cover work performed outside the scope of an agent's duties.

What Are the Most Common Real Estate Lawsuits?

As you've seen from the examples provided so far, real estate lawsuits can run the gamut. According to information from Realtor.org [PDF] New browser window icon. and numbers published by Rice Insurance Services [PDF] New browser window icon., the most common claims against insurance agents are as follows:

Most Common Real Estate Lawsuits

  • Ethics
  • Antitrust
  • Earnest / Escrow Money Disputes
  • Technology Problems
  • Third-Party Liability (including incident covered by General Liability Insurance)
  • Deceptive Trade Practices Act / Fraud
  • Employment
  • RESPA Violations
  • Agency (suits alleging that an agent improperly owes a duty to a third party besides the buyer or seller)
  • Property Condition Disclosure (possibly filed as a breach of duty, breach of contract, negligence, or misrepresentation lawsuit)

The nice thing about E&O Insurance is that when you're sued — even if the lawsuit is unfair or completely ridiculous — your insurance can cover your legal bills. That benefit could mean the difference between bankruptcy and carrying on with business as usual.

Next: Ways to Minimize the Likelihood of Being Sued

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