There are approximately 2 million active real estate licenses in the United States alone, and housing sales are increasing.1 As of November 2016, the national home price index has surpassed its peak set in July 2006 before the last major recession.2 As sales increase and real estate agents become stretched, there is a potential for increased litigation from errors and omissions.
“Insurance brokers can help real estate agents prepare to protect themselves and their firm from misrepresentation, lack of disclosures, and misunderstandings,” said Nicole Greene, Director, Brokerage, Professional and Executive Liability Center of Excellence, Burns & Wilcox. “Real Estate Errors & Omissions (E&O) coverage protects against these mishaps by covering the potentially crippling costs of litigation and claims expenses.”
With this in mind, Professional Liability Real Estate E&O experts provided four housing trends that brokers and agents should know when speaking to clients.
1. Millennials are house shopping
The real estate industry is noticing that millennials are increasingly shopping for homes, with 17 percent of individuals in this group able to save enough money for a down payment within one year’s time.3
“We expect to see a surge in home buying fueled by the millennial generation,” said David Derigiotis, Corporate Vice President and Director, Professional Liability Center of Excellence, Burns & Wilcox. “Millennials have been holding back for years to save and pay off student loan debt. We tend to forget that this group grew up in a major recession.”
No matter the case, every real estate agent should have their own policy – providing a sizable opportunity for brokers and agents.
For that reason, Millennials have been staying at home with parents longer, allowing them more time to save. With the predicted swell of home buying in this generation, insurance brokers should prepare real estate clients with a reminder on the importance of stating disclosures – especially to first-time home buyers – from the onset.
2. More real estate agents are independent contractors
We are seeing large real estate firms hiring agents more as independent contractors than actual employees,” said Greene. “Large real estate firms generally require all agents to have their own Real Estate E&O policy, and usually require they are listed as an Additional Insured (AI) on the agent’s policy to be absolved of liability.”
Insurance brokers and agents should work with real estate clients to review their contractual obligations. Once this is done, the broker can determine which individual policies are appropriate. No matter the case, every real estate agent should have their own policy – providing a sizable opportunity for brokers and agents.
“Brokers working with independent contractors should advise them of the extensions that can be added to Real Estate E&O policies,” said Greene.
Extensions to Real Estate E&O policies include protection against pollution, bodily injury, property damage, personal injury, discrimination, and crime. For real estate agents that have open houses, extensions can be added for bodily injury and property damage. This may be needed if bottled water is handed out and a guest slips and falls on a spill, for example. An extension is also needed for a lockbox in case the home is not properly secured and items are stolen or the house is damaged.
Recently, real estate agents Fran Day and Tom O’Neill teamed up to sell a couple’s home in Pennsylvania. The sale of the home turned into a seven-year court ordeal, going all the way to the U.S. Supreme Court after the agents failed to disclose a murder-suicide that occurred in the house prior.4 Lawsuits such as this could happen to any agent, and a Real Estate E&O policy should be in place to minimize risk.
3. Mid-size real estate firms may have more risk
“Many real estate agents have downsized over the last five to 10 years. With the coming surge from millennial buyers, they will have to increase staff and may be compressed for resources,” said Derigiotis. “Real estate agents may overlook disclosures due to lack of time or professional experience during this in-between stage.”
Brokers should speak to real estate agents at these mid-sized organizations to help diminish potential risks. Derigiotis described that smaller offices have more control with fewer transactions, while larger firms have more resources to invest in formal protocols and training where necessary.
“There is a gray area between small and large real estate firms where they will start hiring staff to take on the influx of listings. However, they may not have the correct resources to invest in the proper IT systems and training to maintain the integrity of disclosures and representation,” said Derigiotis. “We may see a rise in real estate litigation as a result of this.”
4. Real estate coverage is becoming more complex
“Real estate agents are much more than just a sole agent working with a residential client. Many agents have branched out and are doing more than ever,” said Greene. “One real estate agent may have residential and commercial property, and also handle property management services for clients.”
Real estate agents can also act as consultants. Greene said that she has seen large investment firms hire an agent to provide expertise regarding potential investments. If a real estate agent is acting as a consultant and is involved in other activities as well, the complexities become much greater.
Lawsuits from large commercial investors, for example, may be much more expensive and complex when it comes to failure to disclose, misrepresentation, or misunderstandings. The risks in today’s real estate environment can be very intricate.
“Retail insurance brokers need to take the proper risk management strategy for their client to cover the gaps they may have,” said Derigiotis. “Since Real Estate E&O submissions can be extremely technical, it is important to seek out someone who handles these policies every day to help place necessary coverage.”