From the April 2008 issue of Investment Advisor • Subscribe!

Safe as Houses

If your clients are in the real estate industry, how protected are they?

The subprime mortgage problem is not just for houses any more, as its repercussions permeate the overall economy. There are more difficulties to consider, however, than just whether the housing market will continue to implode.

One of those difficulties may be heralded by a lawsuit wending its way through the courts in California. A San Diego County couple is suing their real estate agent, saying that he misled them as to the value of the home they bought. The suit has the potential for a very broad effect for thousands of disgruntled homeowners, their agents, and appraisers.

Not all real estate professionals carry errors and omissions insurance. According to Walter Molony, senior public affairs specialist at the National Association of Realtors (NAR), which counts more than 1.3 million members, only 24% of NAR members are covered by E&O insurance (figures come from a 2007 member survey). Firms with salaried licensees, he adds, are covered at a slightly higher rate: 29%.

However, according to an industry professional at a major E&O insurance provider who wished to remain anonymous, 13 states require real estate agents to carry insurance, and real estate franchisees are also required to carry coverage, with most carrying a million-dollar limit of liability. Some small independents, the industry professional says, have a limit of a quarter or half million dollars, but "95-plus percent carry $1 million in coverage." Indications are that this large segment of insured realtors works for national or regional chains rather than as independents.

The issue isn't limited to real estate agents. While each specialty within the real estate industry has its own insurers who specialize in that segment of risk, the levels of risk within each segment can be "very different," according to the professional. These segments include residential and commercial sales, auctioneering, appraisal, mortgage brokers, title companies, and home inspectors.

What does this mean for your clients? Plenty. Whether you have a large client base of real estate professionals or only one or two, now is a good time to review their coverage. You may think that looking at insurance now is akin to locking the barn door once the horse is out, but Travelers 1st Choice offers prior-acts coverage for qualified firms, and other firms offer "claims made" coverage with "retroactive date" and "tail" endorsements that cost extra. It's never too late to protect against situations going forward, of course. Bear in mind, though, that rates are likely to rise if there is a rash of lawsuits; underwriting will tighten, and there will be more restrictions on policies.

Something else you can do for them is to make sure they're positioned against the chance of a lawsuit. A specialty practice briefing from Guy Carpenter & Co., a reinsurance intermediary that has evaluated the risk of E&O liability state by state may help. The report, downloadable at www.guycarp.com, evaluates factors such as each state's foreclosure rate, its number of delinquent subprime mortgages, its ratio of litigation attorneys to industry professionals, and its frequency of truth-in-lending and banking-related lawsuits. What emerges is the Guy Carpenter Subprime E&O Litigation Index, which rates eleven states as "very high" for risk of lawsuits, and nine as "high." Ironically, California, the home of the landmark case under observation, is only rated as "medium."


Marlene Y. Satter, a freelance business writer who can be reached at harpwriter@verizon.net.

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