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Smaller companies need to manage risk in an uncertain market.
Mired in a difficult market, real estate agents, brokers,
and property managers are encountering adversarial situations and hostile
clients. When deals don’t work out as hoped, buyers and sellers look for
someone to blame. Increasingly, they are finding fault with their real estate
professionals and slapping them with lawsuits.
When that happens, real estate professionals need the
protection of a comprehensive insurance program. While most large firms require
their agents, brokers, and managers to have insurance, many independents and
small-agency personnel are uninsured. That’s a particular problem, because
small operators are especially vulnerable to the financial and professional
repercussions of litigation.
The troubled real estate market isn’t expected to improve
substantially anytime soon. As a result, there’s a greater likelihood of
disputes over property condition disclosures and commission payments, according
to the National Association of Realtors’ 2011 Legal Scan, a biennial study of
legal issues facing real estate professionals.
The huge amount of real estate-owned property in the hands
of banks and other lenders is also a potential stumbling block. Nearly 60
percent of real estate professionals surveyed say they believe REO-related
disputes will increase over the next two years, and 76 percent believe it will
be among the top three issues they will face, the survey found. The study
polled real estate agents, brokers, attorneys, and educators.
Clearly, real estate professionals at all sizes and types of
businesses face multiple risks. Among the scenarios:
Defects. After closing a sale, a new property owner finds
defects with the property. The new owner sues the real estate agent for the
diminished value of the property, alleging the agent did not disclose the
Negligence. Property values continue to fluctuate, which
leads to cases of “buyer’s remorse.” Following the close of the sale, a client
may blame the agent for what the client perceives as overpayment for the property.
The agent is then faced with claims of supposed negligence in researching the
Unlawful Discrimination. If an apartment building manager
denies a potential tenant a lease, the manager could face a claim that the
applicant was denied a lease because of race, religion, or gender.
Bodily Injury. If a potential buyer or visitor falls and is
injured in the agent’s office or property, a real estate agent could face a
bodily injury lawsuit.
Agents, brokers, and property managers need to protect
themselves with insurance, which can be difficult, particularly now, when
budgets are limited. However, some insurers are offering affordable policies
that cover the special risks real estate professionals face.
Even if a covered claim is groundless, as many are, the
insurer will still provide a defense and other services. If the agent, broker,
or property manager is found to be at fault for the claim, the insurer will pay
damages, up to the limits of the policy.
Professional liability and general liability are the
foundation of any insurance program for real estate professionals. Professional
liability, often called errors and omissions, covers risks incurred in carrying
out one’s professional duties. Risks can include giving incorrect advice,
omitting or failing to disclose material information, or failing to deliver
services in some way.
Depending on the specific policy and insurer, coverage may
include alleged or actual negligence; defense costs; personal injury, such as
libel or slander; and claims arising from services done by employees, temporary
staff, and independent contractors. Some policies cover claims arising from
services provided in the past.
General liability insurance, also called commercial general
liability insurance, covers third-party claims for bodily injury, associated
medical costs, and damage to someone else’s property.
Real estate professionals continue to face a challenging
market and demanding clients. If a claim is filed against them, and they don’t
have insurance, even before the claim is decided, they will have to devote
scarce time and limited resources to managing and defending against the claim.
Often, the real estate professional will have to hire an attorney. If they lose
the claim, the settlement or judgment could land a substantial financial blow,
putting them out of business or even into bankruptcy.
While cutting back or foregoing insurance altogether can
seem like a reasonable way to cope with the economics of today’s real estate
market, the bottom line is that lawsuits are an ever-present threat. Just one
claim, even if it’s baseless, could wipe out years of hard work and decimate an
agent, broker, or property manager’s finances. With the high stakes involved,
insurance is not an option. It’s a necessity.
Kevin Kerridge is the director for Hiscox Small Business
Insurance, located in New York. Contact him at email@example.com or visit
This article does not constitute legal, tax, or insurance
advice. Please consult your attorney or other professional adviser to discuss
your specific situation and obtain the appropriate legal or other expert