How to help realtor clients avoid liability risks
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Loading... - Samira Hicham
- 14 Jul 2022
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Independent insurance agents have an opportunity to grow their book in real estate — by providing the highest-quality real estate liability risk-management to carriers and by helping realty clients avoid potentially costly exposures.
Rising interest rates, high home prices, a tight labor market, and a possible recession can all put pressure on realtors to perform fast and bend the rules. Some may even be tempted to take on the roles of other professionals to provide a quick answer or expedite a transaction.
Insurance agents who place real estate professional liability coverage need to be on top of the situation for their clients’ sake and for their own relationships with carrier partners.
Insurance agents who keep realtor “mission creep” top of mind will maximize their value to both realtor clients and underwriters.
Are there adequate guardrails?
Real estate agents sometimes find themselves delving into legal, financial and technical areas related to the sale of a property. It may be that they are trying to get a deal done expeditiously. Or, it may be they do not have easy access to a group of independent experts. Or the client may refuse to follow the realtor’s recommendation that an expert be engaged. When a realtor takes on the role of other professional advisors to a transaction, they increase their professional liability exposure.
Insurance advisors should know their realtor accounts. They should be aware of such details as:
- Do they have an adequate team behind them?
- Are they up to date on their continuing education?
- Do they have specialty certifications?
- Do their vendor contracts align with their own E&O policy?
Understanding the realtor can help insurance agents discern and potentially correct, the level of liability exposure they have.
An insurance advisor should work with realty clientele to help them understand their errors and omissions insurance policy as well as their obligations to work within the confines of their stated professional specialty. Ideally, real estate agents should have an attorney and mortgage specialist involved in all transactions to answer legal and financial questions and keep everyone focused on their areas of expertise.
For example, for realtors acting as a buyer’s agent, it is crucial that they alert the buyer to the need for a review of permits for work that has been performed on a property. Realtors know property flaws very well and may be perfectly competent to comment on problems and solutions. By doing so, however, the realtor may step into the inspector’s role and assume associated liability.
The insurance agent should inquire about the use of home and building inspectors, contractors, the guarantees that such professionals provide to the buyer and any indemnity they provide to the realtor.
Careful when sharing or holding information
A topic for the insurance advisor to broach is the real estate agent’s duty to disclose information that would influence a sale. These types of disclosures are dictated by federal law (e.g., pre-1978 homes that have lead-based paint) and state laws that might involve the following items:
- Environmental contaminants;
- Structural defects, like foundation issues;
- Plumbing problems;
- Presence of mold;
- Termite or pest issues; and
- Whether the house is in a flood zone.
Disclosure shortcuts or workarounds may be tempting, especially when a seller is looking to expedite the sale — and possibly avoid spending money to remedy issues raised by an inspection. The realtor can get caught up in the pressure to close and end up with a liability complaint. For example, when there are multiple bids, the realtor may point out a buyer who is willing to waive various inspections, such as those of the home, roof and septic system. Without an as-is clause in the sales contract, this is a liability complaint in the making.
The insurance agent should know if the realty client conducts transactions without inspections, permit reviews, tests, etc. If so, there should be a conversation on how these waivers are documented so liability exposure is minimized.
Accidental disclosure of information is another liability minefield. An insurance agent should discuss cyber risk insurance with real estate clients. Once a realtor starts taking part in financially qualifying a buyer, moving settlement paperwork, or storing or transmitting financial information on any party, there is the potential for liability problems, especially cyber liability. An insurance agent should know what role the realtor intends to play regarding financial information storage and transmission and should advise the client on the value of cyber insurance. Many realtors opt to stay out of the financial qualification side altogether, turning that duty over to the lender. If that’s not the preference of your client, you’ll need to work on dovetailing cyber and professional liability coverage to guard against errors, omissions, negligence and theft of data.
Due diligence on the real estate team
With all that goes on into a real estate deal, realtors must rely on independent partners to handle niche aspects of transactions. Attorneys, inspectors, staging companies, title agents, lenders, repairmen — the list is pretty extensive. While those individuals should have their own E&O coverage, a little vetting of insurance coverage is worth the time. Read More...
