The real estate market is dominated by small operations, with 99% of them categorized as small or non-employee enterprises. The same group also generates 84% of the premium for all lines of insurance. While many agent/brokers operate under a national name, they frequently do so as franchisees that control how and where they place their insurance.

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Who establishes the appropriate price for a house, a commercial building or vacant land? The actual cost of building materials and the contractor’s labor are easily determined but that alone does not account for the vast difference in prices. Every real estate purchase is accompanied by a subjective value set by the market. The simple fact of the matter is that a property's value is based on what someone will pay for it. Properties worth virtually nothing today because no one is willing to buy them were worth hundreds of thousands of dollars only a year ago.

Real estate agents involved with such subjective transactions can be targets of lawsuits based on just the buyer’s or seller's disappointment. Are individual real estate agents really to blame because housing values in their marketing area dropped precipitously?

Here's an interesting possible claim scenario.

Julie and her husband have outgrown their home. Julie asks her Uncle Owen, a licensed real estate agent, to represent them in selling it. He lists it, has an open house and starts showing Julie listings of other homes for sale as she contemplates the sale of hers. Kelly, a potential purchaser, meets Owen at the open house and expresses interest in buying it. Kelly and Owen begin working together and Owen acts in the dual capacity role of representing both Julie and Kelly. Kelly isn't told, and doesn't find out, that Julie and Owen are related. Negotiations take place, both sides make concessions and compromises and the sale is finalized. Owen even helps Kelly find a mortgage broker to help her address and resolve some credit issues. Owen believes he did an excellent job representing both parties and that he deserves his sales commission.

Kelly moves into her home and is thrilled. She learns that Julie and Owen are related while attending a neighborhood block party. She suddenly begins to notice that the values of neighboring homes are declining and starts believing that she was cheated. After speaking with her lawyer, Kelly files a lawsuit against Owen for violating his professional responsibility to her.

Real estate errors and omissions coverage available to real estate agents and brokers is also available to appraisers, auctioneers, property management firms and mortgage brokers, according to Catherine Williams, program manager at Victor O. Schinnerer & Company, Inc. She adds, “All have different exposures. Agents and brokers are most often sued for misrepresentation. Appraisers are sued for valuing properties incorrectly. Discrimination claims can affect any of these groups.”

Rebecca Swanson, Quicksource underwriting manager at Markel Corporation, Inc., explains, “In many cases, the exposure is covered by the employer, but to an increasing extent we have seen agencies require employees to provide this insurance through their own individual association membership or, in hard to place cases, on their own as an independent.”

Because a real estate agent operates in a professional capacity in an increasingly litigious environment, Rochelle Elliott, professional lines manager at Burns & Wilcox's Scottsdale office, believes that individuals offering this service need to protect themselves. She says, “Coverage can be tailored to fit any client’s needs and cover claims alleging negligence arising from fee-based professional service. It can even extend to economic losses sustained by others as a result of the insured’s alleged negligence.“

Many markets provide this coverage. John Torvi, director marketing & sales at Herbert H. Landy Insurance Agency explains that they have a new product through General Star National Insurance Company called Realty Express. He explained “It is suited to smaller real estate and appraiser firms meeting revenue criteria. For larger firms, a standard Real Estate E&O policy is available that can accommodate secondary activities such as mortgage brokering and property management.”

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