What’s lurking underwater for real estate professional liability?
Today's complex property market translates into potential coverage gaps for real estate professionals.
More than 2 million real estate agents are active in the United States, according to a recent estimate, and the National Association of Realtors® reports membership of 1.56 million.
Real estate agents are a disparate group of professionals: They range from part-time dabblers to full-time, vastly experienced professionals. Their educational levels range from high-school diplomas only (8%) to graduate degrees and above (13%). Most tend to focus primarily either on residential or commercial properties, but a few work both markets.
The COVID-19 pandemic, along with resulting technological advances, strongly affected real estate professionals. Starting in 2020, demand for commercial property dropped and values flattened or decreased, but demand for residential property increased dramatically, according to fortunebuilders.com. There was a sizable exodus of residents, particularly ages 24–44, from urban areas to suburban and even rural areas. The Wall Street Journal reported that more than 7 million households moved to a different county. This demand coupled with an extremely low prevailing mortgage interest rate resulted in escalating home prices and a shortage of available listings.
It’s important to note that residential property sales involve more emotional factors than commercial sales because a home purchase affects nearly every facet of a buyer’s life, including the length of their commute, their children’s school, the level of community support available, and the character of the neighborhood where they can most conveniently socialize.
Tensions during the home-buying process rose along with demand. Multiple purchase offers became the norm. Desperate buyers began offering over the asking price and some agreed to waive the home inspection. Fluid and emotional back-and-forth negotiating conversations tend to be less rigorously documented, which can be legally problematic if an issue with the sale arises months or years down the road.
Professional liability claims likely to increase
Consequently, the outlook is for higher levels of professional liability claims for residential real estate agents. Unfortunately, many insurance agents view real estate professional liability insurance as a “vanilla coverage.” The reality is much different. Professional liability coverage uses a complex policy form that will usually involve sublimits for specific coverages.
Here are some of the major exposures that are lurking below the water that insurance agents need to consider for their clients:
- Tenant discrimination. Real estate agents must adhere to rules of ethics as specified in the Fair Housing Act. Professional liability policies may have lower sublimits for this specific coverage.
- Pollution. Failure to disclose pollutants has increased as a professional liability exposure. This is also a coverage that tends to have a sublimit included.
- Owned property. Today more real estate firms own real estate as an investment. Typically, the real estate agents’ role is as a third-party. When the real estate agent or firm owns a property, it is difficult to claim lack of knowledge as a defense during a claim. As a result, the carriers may attach conditions requiring disclosures and limitations related to the amount of owned real estate that they will cover and/or require. For example, the carrier may require that a real estate agent who does not own the property be involved in the transaction.
- Property management. Real estate agents are often property managers. As a result of the pandemic, many of their tenants have been unable to pay rent. COVID legislation permitted the tenants to remain in the property and avoid eviction. As COVID’s impact lessened, evictions could and did resume. Collecting rent from financially devastated tenants and instigating evictions as set forth in the lease is both awkward and difficult.
- Social engineering and fraudulent transfer sublimit. This is another area of coverage where insurance companies are offering a small sublimit on the policy, if not completely excluding it. For example, a real estate agents’ professional liability policy with a $1 million limit could have a $100,000 social engineering/fraudulent transfer sublimit. If the real estate agent’s client was the victim, the amount of the loss could easily exceed the real estate agent’s policy Typically, a monoline cyber policy will provide much broader protection than what is offered on the professional liability policy form.
Several coverages should be considered:
- Retention reduction. This can result in a reduction of the amount of the deductible based on certain conditions.
- Hammer clause. This provides the insured who prefers not to settle a claim, thereby admitting liability, the option to allow the carrier to continue fighting on their behalf. Generally, this contract condition would present how the payment would appear beyond that point. Most policies with this endorsement will have anywhere from a 50/50 to 80/20 split in the insured’s favor of all incurred costs beyond the point the settlement occurred.
- Open house lock box. If there is damage to a home related to the unauthorized or negligent use of the lock box, this endorsement provides coverage.
- Sale of developed property. This endorsement covers situations where the real estate firm is involved in the construction of the property.
- Contingent bodily Injury and property damage. When property damage or bodily injury occurs as a result of negligence, this endorsement will provide coverage that would normally be excluded under the professional liability policy.
Many potential coverage traps indeed lurk below the water’s surface. Insurance agents should understand and be able to recommend the many different types of coverage.
Ed Mirra is managing advisor and Xpro practice leader of Connected Risk Solutions. This article is published with permission from the author an may not be reproduced.
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