From the April 2008 issue of Investment Advisor • Subscribe!

Expensive To Omit

Errors and omissions insurance generally has been necessary because of issues more related to actual physical problems with homes--everything from mold and pollutants, septic problems, and defects in construction, to lack of maintenance. There was even a case in which failure to disclose the presence of a pet in the household of a previous owner led to a lawsuit; it seems that cat urine can penetrate not just carpeting but also padding and even concrete, and the buyers sued once they took possession because they weren't advised that the cat had been a member of the household.

There are also issues concerning contracts and problems arising from acting as a "dual agent," i.e., agents who represent both the buyer and the seller in a transaction. An agent selling his own home independently can get into trouble if he uses forms from his agency, thus giving his buyer the impression that his firm is party to the deal. Now there's the potential for your real estate clients to be sued over the prices of the homes they sold. If such a scenario plays out and lawsuits become common, also at issue will be the cost of E&O coverage.

Currently, E&O insurance premiums vary wildly. In some companies, they are based on revenue in gross commissions for the most recent 12-month period. This means it can change drastically from firm to firm, and even within the same firm from year to year. Other insurers will set premiums based on how many licensed agents in the firm, how many years the insured firm has been in business, and what its prior claims history looks like.

But the cost of doing business without it, when calculated against the cost of legal defense and the possibility of losing a courtroom fight, may be far higher.

Reprints Discuss this story
This is where the comments go.