As a professional in the real estate business, your primary focus is on running your business smoothly and delivering top-notch service to your clients. Problems, errors, and negativity are the last thing on your mind. However, there are certain liabilities associated with operating any business, and even the best-run operations can still become exposed to legal troubles. Therefore, having a good, comprehensive insurance plan for your business can be a saving grace in bad or otherwise unforeseen situations.
You may already have coverage for Errors & Omissions for your real estate business. The following article will cover other common categories of insurance coverage available for real estate professionals and businesses, including:
- General Liability Insurance
- Commercial Property Insurance
- Data Breach Insurance
- Commercial Auto Insurance
- Umbrella Insurance
General Liability Insurance
General liability insurance protects against cases where a client or other third-party alleges bodily injury or property damage caused by your business or its employees.
What does general liability insurance cover?
General liability coverage addresses three separate categories of liability:
- Property damage
- Bodily injury
- Personal and advertising injury
General liability insurance comes into play when you or your business causes bodily injury to or damages property belonging to a client or other party.
For instance, if you’re a home inspector and during a run-through of the kitchen, you happen to knock over an expensive decorative ornament, this would fall under the property damage coverage of general liability insurance. Your insurer would cover the costs of repairing or replacing the ornament.
General liability insurance also covers bodily injuries suffered by others while doing business with your firm.
For instance, if a client enters your real estate firm’s offices and, on the way out, trips over an unfortunately-placed computer wire, general liability coverage would protect you. Should the client choose to sue your firm for the costs of their medical expenses, your firm would be covered by your insurer. Being covered is especially important when considering that such costs may go well past paying for a simple medical visit, extending to, say, income lost from being unable to work, financial compensation for pain and suffering, and, in cases more serious than trips, even funeral costs.
General liability can also extend to personal and advertising-related damages caused by your business. Malicious prosecution, libel, slander, false arrest, wrongful entry, wrongful eviction, copyright infringement, and publications that violate personal privacy are some examples of where this form of coverage would come into play.
For instance, if your business provides damaging information about a competing business to a local newspaper, but it’s later revealed not to be true, your insurance would cover the resulting libel suit you potentially face.
Deductible and Limit of Insurance
General liability coverage is unique, in that plans often come without any deductible. What this means for your business is that your insurer will cover the full costs of any potential claims you submit, up to the limit of your plan for the policy year.
A policy limit is the maximum amount your insurer is responsible for covering under the plan you’ve agreed to with them. Insurance limits are typically broken down into a per-year basis—how much they’re willing to pay in an annual time frame; and per-occurrence—how much they’re willing to pay for a single claim. The limit of insurance associated with your plan can be negotiated with your provider. You can expect that the higher the limit associated with your plan, the higher your premium costs will be. Therefore, consider it a risk-reward variable that you should consider before agreeing to any plan.
While general liability does cover many potential unforeseen problems that may crop up over the course of your doing business, there are some common exclusions which aren’t covered under these plans. For instance, damage to company-owned or leased property is not included. Other exclusions include but are not limited to:
- Intentional damages
- Liability resulting from intentional lawbreaking
- Professional errors
- Employee injuries
- Employee discrimination lawsuits
- Vehicles used for business purposes
Almost every successful business will inevitably face legal troubles at some point. Insurers are there to cover attorney fees, witness fees, and other costs associated with legal cases brought by former clients or other third parties. If someone sues your business for a cause covered by your general liability policy, the insurance company will cover these legal fees.
Whether or not you’re at fault in these cases is not entirely relevant—clients can file suit for whatever they feel qualifies, and your insurer must cover your costs regardless of the nature of the suit. As an added bonus, under many general liability policies, legal costs are not counted against your coverage limit.
Do your real estate business need general liability coverage?
In most states, general liability insurance is not required for most real estate professions. However, that doesn’t mean that it is wise to operate your business without it. Certain clients in the know may be hesitant to do business with you if you aren’t insured.
Real estate businesses with office space may find difficulty finalizing a lease without coverage to back it up. Therefore, even if it’s not legally required of you, it is in any real estate professional and business’ best interests to be covered. Otherwise, the financial damages you may be exposing yourself to could be significant.
Property insurance covers a key component of your real estate practice not included in general liability insurance: your physical assets. Property insurance ensures that you will be reimbursed for the costs associated with fixing or replacing damaged property owned by your business.
Naturally, property insurance is most important for real estate businesses that own or lease office space, or own valuable property such as expensive furniture or artwork, computers, or other operational equipment.
What does commercial property insurance cover?
Simply put, property insurance covers your business’ building and its contents.
If your business owns the building or office condo that you occupy, commercial property insurance provides coverage for damage to the building. In addition to damage to buildings, many plans also cover the costs of improvements to your work environment, including landscaping, new fences, and refinished interiors.
For instance, say your title company owns your building and is located in an area hit particularly hard during the winter season. Following the season’s passing, it’s discovered that the roof of your building is damaged from the weight of snow, and water is leaking into the top floor. Property insurance is what would save your business from the costs associated with such repairs.
“Property” extends past office buildings themselves to items of value owned by the company. Such property can include work supplies, decorative artwork, computers, and more. If your business involves the managing and storage of valuable documents, that too would generally fall under property coverage.
For instance, if that same snow season that damaged your office building’s roof caused additional damage to equipment stored on the top floor, that equipment, too, would be covered under your same property insurance plan.
In addition to the stated benefits of property insurance, many landlords require tenants to be covered before signing onto leases, and some vendors require this same insurance in order to lease outside equipment.
What risks are covered by commercial property insurance?
There are two types of property coverage plans: open perils and named perils.
“Open perils” policies cover any risks to your business not specifically excluded, by name, in the body of your policy contract. “Named perils” are the opposite, covering only the specific types of potential claims detailed, by name, in your policy. You may correctly deduce from this that open policies offer much broader coverage, while also being higher-cost. Common exclusions to all property insurance policies include damage from earthquakes and flooding, and employee theft or dishonesty.
Typically, named perils will cover some of, but are not limited to, the following:
- Lightning damage
- Vehicular damage
- Leakage from pipes and HVAC systems
- Damage from airplanes
- Building collapse
The above list covers some of the most common instances of named perils, but different providers may offer plans with different sets of covered perils. Some of the most common exclusions in named perils policies include, but are not limited to:
- Normal wear and tear
- Robbery or burglary
- Power failure
- Computer failure
- Inventory shortages without physical evidence of the inventory
- Intentional losses
- Nuclear reaction or war
Open perils policies generally include the same exclusions you’d find in named perils policies. Additionally, open perils will often exclude damage caused by the following list items:
- Mold and fungus
- Government-caused losses
- Animal infestations
- Mechanical problems
- Sewer backups
Replacement Cost vs. Actual Cash Value
Another factor to take under consideration when choosing your property insurance policy is the method by which your insurer will calculate their coverage costs. There are two ways insurers can cover for damaged property: Actual Cash Value (ACV) and Replacement Cost (RC).
ACV is calculated according to the market value of your damaged items, while taking into consideration factors such as usage, depreciation, and obsolescence. RC addresses cost by replacing your property with something similar in kind and quality, without accounting for depreciation. RC premiums are higher-cost than ACV because the costs to the insurance company to replace an item are higher than the market value in most cases.
Most property insurance policies, unlike general liability policies, come with deductibles. Your deductible represents the amount of financial loss you or your business must cover for yourself before your insurance coverage activates. Deductibles have the effect of discouraging real estate professionals from being careless and taking out unnecessary claims, therefore reducing costs and risk for insurance companies. Choosing a higher deductible generally lowers your premiums.
Data Breach Insurance
If your real estate business involves digital storage of sensitive information from clients, you’ll want data breach insurance. Data breach insurance can’t stop a malicious hacker, but it can help cover the expenses involved in recovering from getting hacked. Those expenses tend to add up, too.
You or your business may be exposed to legal action for having taken insufficient care over your data. You may not be able to operate your business for a period of time after a hack, while recovering from it. Private company documents can be exposed, important documents lost, and sensitive financial information divulged to those who’d seek to use it to steal from your pockets. There’s also “ransomware”—viruses designed to hold ransom your company’s data unless you pay a hefty fee for its release.
Data breach insurance will cover costs ranging from lost computers containing sensitive data, repair, and replacement of computers broken by a virus, legal costs necessary to defend against claims brought by clients whose personal information was exposed, and more. These sorts of instances are generally excluded from general liability policies, which is why data breach policies become necessary to keeping you cyber-safe.
Commercial Auto Insurance
Commercial auto insurance covers any vehicles you use for business. Most states require commercial auto insurance of any business that owns a car, just as they do regular auto insurance for any individual that owns a car.
Commercial auto insurance has both liability and property coverages. The property coverage will cover damage to your company’s vehicles, such as in the case of a crash or theft. The liability coverage covers damage caused by your vehicle in crashes. Whether your company car damages someone else’s car or causes some sort of bodily injury, commercial auto is there to cover it.
For instance, say you’re a property appraiser whose job requires travel to and from multiple homes during a typical work week. On the way to an upcoming assignment, you get into an accident with another car, and you are judged to be at fault for the incident. Commercial auto will cover any costs of vehicle repair, legal fees, and medical bills for which you’re responsible.
In addition to standard commercial auto, there are what’s called “hired and non-owned” coverage plans. If you have employees who use their personal cars for company business, or if your business uses rental cars for employee trips, hired and non-owned policies will cover any uses of such vehicles for business matters.
If you or your real estate business file claims which exceed the policy limits on your current plans, umbrella insurance kicks in to cover any excess. Umbrella requires that you have active underlying liability policies such as general liability and auto liability insurance (if applicable).
For instance, imagine your real estate firm is sued for $1.5 million dollars, but your existing liability policy covers only up to $1 million. An umbrella policy of $2 million dollars, would mean that instead of covering that extra $500,000 yourself, you’d be covered in full for all $1.5 million of the liability.
Umbrella policy premiums tend to be lower than those of primary insurance policies because they tend to be used less often. If your business is at risk of significant financial claims, you might consider umbrella a worthwhile investment.
Important to note: umbrella insurance generally does not include coverage for professional liability cases. Some other notable exclusions from many umbrella policies include, but are not limited to:
- Data breaches
- Aircraft, watercraft, and product recalls