Publication Date: Friday, October
Does your broker have insurance?
If not, you could be left with major liability
by J. Robert Taylor, J. D.
is a continuing crisis in the insurance industry with respect to
errors-and-omissions and liability coverage. This applies to all
of the major professions involved in the real estate industry including
attorneys, real estate brokers, contractors and other professionals.
In many cases insurance companies have refused coverage or have
increased the cost of the insurance by 100% even if the insured
has never made a claim.
It is prudent therefore for consumers to request that their
service provider show evidence of insurance prior to signing any
contract. Anyone can make a mistake and anyone can be sued even
if there was no negligence.
With the exception of attorneys, I am not aware of any other profession that
must disclose to the consumer that they are uninsured. Growth of new agents and
brokers entering the real estate industry over the last few years has been phenomenal;
the growth in the number in uninsured or underinsured agents is without a doubt
greater than ever before.
Errors-and-omissions insurance provides a wide range of liability coverage for
brokers and their agents in case there is negligence by the agent in performance
of his duties. This issue recently came up in my legal practice where I was representing
a co-owner of a property in a circumstance where the other co-owner was a licensed
real estate agent and was going to list and sell the property. I wrote an addendum
to the listing contract that required the agent to confirm that the transaction
would be covered by his broker's errors-and-omissions insurance.
The company was part of a nationally known franchised real estate firm that regularly
advertises in the media. I was shocked when I got the addendum back and the agent
crossed out the provision that related to errors-and-omissions insurance indicating
that the company/broker did not carry any insurance and hadn't done so for several
My client's reaction was, "ABC has signs all over the place. Don't they
have to have insurance?" Just because a company has a recognizable
name does not mean that that firm has insurance. It is not currently
required by law. Ironically the law requires agents to disclose when
they see a
plaster, but have no duty to tell you that they have no insurance if
they make a mistake.
This means that even if you as the buyer or seller are only slightly negligent
and your agent was mostly at fault, you could still have to pay the entire judgment
if the broker is insolvent. Defense costs alone could render some brokers insolvent.
Buyers and sellers can protect themselves by insisting that their agent provide
evidence of insurance coverage, typically up to at least one million dollars.
Given the typical commission on a transaction in this area, this is the minimum
that your broker should provide. In particular, consumers should be cautious
of brokers who are offering their services at a steep discount; you could be
getting what you pay for.
Typical buyers or sellers would not dream of being without liability insurance
on their car or home, but are perfectly willing to engage in the largest purchase
of their life without knowing if their broker is covered by insurance.
There are usually two different brokerages in every transaction, since both buyer
and seller have separate representation. Unfortunately, it is difficult to protect
yourself from an uninsured broker when they do not represent you. In the typical
lawsuit the buyer is suing all the brokers involved and the seller. Depending
on the outcome, either the seller or the buyer may be left holding the bag if
one or more of the brokers was negligent and is insolvent.
Ideally the broker or other professional you use will have a long
history of maintaining adequate insurance. This will be indicated
on the policy
coverage the brokerage has for prior acts. Almost all insurance
coverage today is "claims
made" type coverage, meaning that only claims made during
the policy period are covered. This means that if the broker fails
that a claim
made after the insurance policy expires will not be covered even
if the negligent act occurred when the policy was in force.
Working with a broker that has full prior acts coverage shows
a consistency and professionalism that will protect you as a consumer.
J. Robert Taylor, J. D., a real estate attorney
and broker for more than 20 years, has served as an expert witness
and is on
the judicial arbitration panel for Santa Clara County Superior
Court. He is 2004
chairman of the Palo Alto district for the Silicon Valley Board
of Realtors. Send questions to Taylor c/o Palo Alto Weekly, P.O.
1610, Palo Alto,
CA, or via e-mail at firstname.lastname@example.org.