An important part of opening and running a successful real estate brokerage business includes a risk management plan. Risk management includes taking the necessary steps to deal with problems that inevitably occur in running a business. Although not a statutory requirement in Illinois, one of the wisest decisions a broker/owner can make is obtaining the appropriate insurance coverage for the wide range of potential issues that can arise for real estate brokerages.

Anneliese Fierstos
Illinois REALTORS® Legal Hotline Attorney

Most businesses carry general liability insurance or general commercial liability insurance (GCL). This coverage protects businesses from variety of claims including bodily injury, property damage and personal injury that may arise from daily business operations.

However, one unique type of insurance for personal and agency services like real estate is errors and omissions insurance (E&O). E&O is intended to provide coverage in instances where real estate professionals have allegedly failed to carry out their professional responsibilities or allegedly conducted their business in a negligent manner. E&O policies will vary from insurance company to insurance company, and each policy will have its own set of exclusions and conditions. Ideally, E&O policies provide peace of mind to brokers and the brokerages if threatened by lawsuits based upon alleged negligence or mistakes related to providing real estate services. With E&O coverages, brokerages can inform insurance companies about accusations, and the companies will evaluate the merits of potential claims. If necessary, the companies can employ legal counsel to advocate for the insured brokers/brokerages.

It is important to review your E&O policy and discuss coverage to make certain you have adequate coverage for all the services offered by your brokerage. The following items should be considered:

Who is Covered?

• Who is the “named insured” under your policy’s definition of that term?
• Are employees and independent contractors covered by the policy?
• Are personal assistants (licensed and unlicensed) covered by the policy?
• Does the company provide coverage for the brokerage, including its independent contractors; or does the company require its sponsored independent contractors to purchase their own?

What is Covered Under the Policy?

• Most E&O policies provide coverage related to the delivery of professional real estate services.
• Identify exceptions to the coverage (which will be listed in the policy) and determine if there are gaps in coverage that should be covered by a different policy or by purchasing additional coverage for that policy.
• Typical exceptions from E&O include: bodily injury (cover with GCL insurance); fraudulent or criminal acts by insureds, bankruptcy; employment related issues related to staff; title insurance issues; property management; self-dealing by brokers; failure to identify mold or environmental issues; or violation of a law (e.g., anti-trust statutes).
• Compare the exclusions in the policy to your business practices. For example, if your brokerage engages in commercial real estate transactions or provides property management services and the policy excludes those disciplines, ask for additional coverage.

When Does Coverage Begin and End?

• Make sure there are no time gaps in coverage before or after new policies are purchased.
• Consider continuing coverage after winding up a brokerage for any unforeseeable claims and consult with legal counsel about an appropriate time frame for continuing coverage. This is often called “tail” insurance or coverage.
• Understand the difference between “claims made” policies and “occurrence” policies. (Most E&Os are sold as claims made policies which cover those claims made during the terms of the policies or those filed very shortly after they expire.)

How Much Coverage is Available?  

• Coverage should be consistent with business risk assumed and legal and financial advice should be sought to assess risk.
• Do the policies cover indemnity for liability or only defense costs? Defense costs are the costs of defending lawsuits and indemnity coverage is for damages insureds may be liable for because of claims.
• Make certain you understand policy limits.

Consider the Size of Deductible

• The size of the deductible may impact cost of insurance, BUT ALSO impact accessibility if deductible amounts make it too expensive to warrant filing claims.
• Understand deductibles are applied to claims. Under some policies, deductibles apply only to indemnity payments and the costs of defense are not covered by policies. Under other policies, deductibles must be paid before insurers will pay toward the defense of claims.

Develop a Strong Risk Management Office Policy

• Strong written risk management office policies designed to eliminate or minimize exposure to liability may assist brokerages in negotiating affordable rates for E&O coverage.
• Office policy and employment or independent contractor agreements should detail the obligations of licensees if claims are filed. Employees and independent contractors should indicate they have read and agreed to all risk management policies.
• The person responsible for paying the premiums and any deductibles (brokerages or licensees) should be made clear in the office policy, and/or the independent contractor agreement.

Unique Areas of Coverage to Consider

• Discrimination Coverage: Discrimination coverage may be valuable because the National Association of REALTORS® (NAR) reports a significant increase in discrimination claims during the past year. Most E&O policies do not provide discrimination coverage but a rider or an endorsement may be available through some companies.
• Cyber Coverage: This has been a growing risk category and the pandemic has triggered an even bigger uptick in cybercrime. NAR reports that real estate fraud is a “Top 10” Internet crime. Many E&O policies do not adequately cover risks related to cybercrime. Consult with your carrier about whether your policy covers third-party losses, expenses related to loss of personal information and/or identity theft. The amount of cyber coverage needed and whether or not a second policy is a good idea will depend upon the business model. For example, a virtual brokerage may need more cyber coverage than traditional brick-and-mortar offices.