Publication Date: Friday, October 1, 2004

Does your broker have insurance?
If not, you could be left with major liability

by J. Robert Taylor, J. D.

There 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 years.

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 crack in your 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 by the 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 to stay insured 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 mediator 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. Box 1610, Palo Alto, CA, or via e-mail at btaylor@taylorproperties.com.