While your business strives to provide the highest quality services possible, sometimes things don’t go quite as planned. Clients may be unsatisfied with your work and sue you, whether or not it is your fault. Additionally, accidents can happen, whether on the way to visit a client or at a client site itself.
When buying insurance for your real estate business, you enter an agreement with an insurance company by paying what’s called a premium for an insurance policy. In doing so, you’ll be signing a contract stating exactly what the insurance company will be covering you for and what they won’t. But it’s not quite so simple—there are a huge number of factors to consider when buying a plan. Whether you’re a solopreneur or the owner of a larger business, acquiring the right insurance coverage for you is an essential part of maintaining a healthy business and protecting your finances against rainy days.
The types of real estate professions that will be addressed in this article include:
- Real Estate Agents, Brokers, and Realtors
- Property Managers
- Mortgage Brokers
- Property Appraisers
- Home Inspectors
- Title Agents
- Title Abstractors
In order to make the right decision, it is essential to understand what types of coverage are available to real estate professionals.
Table of Contents
- Types of Insurance for Real Estate Professionals
- Additional Insurance Coverage for Real Estate Professionals
- Insurance Coverage for Your Employees
- Which Kinds of Real Estate Businesses Require Insurance?
- How to Get Insurance
Types of Insurance for Real Estate Professionals
Professional Liability Insurance (also known as Errors and Omissions Insurance) is designed to protect your business in cases of alleged negligence. Whether you believe it to be fair or not, a real estate business deals with so many customers that, inevitably, some customers may feel that they received inadequate or improper service. If those individuals feel they came into significant financial loss as a result of your service, they may choose to sue. Liability insurance covers financial losses from legal fees and damages that may arise from claims brought against you in court.
This type of insurance provides coverage if you or your employees are sued as individuals for mistakes you made while working, and it also provides coverage for the company itself. Perhaps you’re thinking: I’m part of a business, so at least my personal assets will be safe, even if they come after the company. Not true! If you’re the subject of a malpractice suit, and your company fails to hold enough assets to compensate for a judgment made in favor of the plaintiff, your own assets are liable to be put on the line to make up for the rest. Due to the associated risks, some states require professional liability insurance for real estate professionals.
Example: Following the purchase of a home, the new homeowner, who you represented in the transaction, claims structural problems within the foundation of the unit. The structural defects were overlooked and not previously disclosed in the home’s disclosures. The client sues you for negligence for not discovering these defects before the purchase of the home.
General Liability Insurance provides protection for your real estate business if someone is injured or if their property is damaged when you are conducting your business. Really, it’s the sort of insurance any business owner in any field should have.
Example: During a home inspection, you accidentally knock a wine bottle over onto the homeowner’s expensive rug. The homeowner sues for damages.
Commercial Property Insurance covers real estate businesses that rent or own office space. Commercial property insurance can provide compensation in the event of physical damage to property stored at your workspace, such as furniture, computers, and artwork, caused by anything from fires to windstorms to broken water pipes. Additionally, if you own your building or office, this insurance can provide coverage for damage to the structure.
Example: A water pipe in your building breaks, leaking water and damaging the floors and furniture.
A Business Owner’s Policy bundles general liability and commercial property together for qualified small businesses into a single plan, allowing you a discount to the cost of your premiums.
Workers’ Compensation Insurance is mandatory for businesses that hire employees in most U.S. states. Its function is to provide coverage for employees of a business in cases of work-related injury or illness. The policy will cover a portion of employees’ lost wages while he or she is unable to work, as well as the medical costs associated with their rehabilitation.
Additional Insurance Coverage for Real Estate Professionals
In addition to those most common forms of insurance for real estate professionals listed above, there are a suite of other insurance options that can provide further coverage for you and your business. The following options may or may not be applicable to your real estate business, depending on your particular circumstances.
Commercial Auto Insurance is required by law, to cover all business-owned vehicles. Auto insurance covers any accidents that occur on work time—not only in clear business matters but also, for instance, in errands run by employees using company-owned vehicles. Depending on the nature of your business, you might also consider hired and non-owned auto insurance: coverage for vehicles not directly owned by your business but related to the operations of your company. Such scenarios where hired and non-owned auto insurance would apply include: hired cars and taxis used for employee travel, employees’ personal cars used for business matters, and rented cars for business trips.
Directors and Officers Insurance gives company directors or officers legal fee and damage protection in claims of breaches of fiduciary duty. This type of insurance is applicable for larger real estate firms.
Employment Practices Liability Insurance (EPLI) provides coverage for your business in cases where employees bring claims alleging wrongful treatment. Examples of wrongful treatment include discrimination and harassment by coworkers.
Data Breach / Cyber Liability Insurance will ensure your business doesn’t take a life-threatening financial hit if your company falls victim to a data breach or hack. Insurers can help in restoring what’s lost in case of a hack, offering credit monitoring services and even paying off ransoms.
Umbrella Insurance supplements the existing coverage you own. For real estate companies with potentially significant legal exposure, umbrella insurance can provide affordable extra coverage that kicks in if the limits of your primary liability policies are exhausted. Essentially, it’s insurance for your insurance. Because every insurance policy has a “limit” (addressed later in this article), an umbrella policy can help cover the costs that would otherwise exceed the maximum payouts of a normal insurance claim. Umbrella policies tend to be inexpensive, as they are additional coverage that supplements existing policies.
Insurance Coverage for Your Employees
If you’re an employer at a small to large real estate business, your company has the option of providing group insurance plans for all your employees. Here are some of the options available:
Group health insurance provides coverage when your employees encounter medical and healthcare-related costs. Health insurance can cover everything from visits to a primary care physician all the way to hospitalizations. Offering health insurance to workers is a no-brainer: it keeps people happy, keeps them at work, and attracts better talent to your organization.
Group life insurance distributes financial compensation to an employee’s near relatives in the event of an unexpected passing, whether work-related or not. Life insurance is available to individuals, but group policies generally offer better rates.
Which Kinds of Real Estate Businesses Need Insurance?
Every real estate professional should have insurance coverage, whether you’re on your own or part of a larger organization. Not only does insurance protect you against financial loss in unexpected circumstances, but it can also demonstrate to clients that you’re serious about your work. All of the following factors can open you up to the problems that insurance accounts for:
- You work with clients
- You hire employees
- Your business owns valuable property, such as furniture or company cars
- You have digital data and networks that need to be protected
How to Get Insurance for Your Real Estate Business
Choosing an Insurance Company
Selecting the right provider for you is a vital first step in your effort to insure you or your company. As such, there are some important factors to take into consideration:
Factor 1 – The financial strength of the insurer: Perhaps getting the most adequate, lowest-price policy is your first goal in choosing your insurance plan. However, if there is a second most important consideration in your decision making process, it should be the financial health of the insurer you choose. Note that any insurance claims you may file into the future will be paid directly from the pockets of the company providing your insurance. Therefore, if the company you chose runs into financial problems of their own, you may be on the chopping block right alongside them.
It is quite a rare occurrence that an insurer goes under, but because the stakes are so high, you should make sure to buy your policy from a reputable company with a big wallet to draw from.
Now, you might be thinking: how can I know whether my insurance company is financially stable? You may assume the largest companies are the least subject to failure, but that’s not always the case—even insurance giants experience periods of financial instability. Instead, it’s worth checking out the rating agencies that grade companies based on their financial strength. The most reputable of these agencies include: Standard & Poor’s, Moody’s, Fitch, and A.M. Best.
Factor 2 – Choosing the right price: This one you probably didn’t need reminding about. As with any purchase your business has to make, you’ll want to find the lowest-cost policy that fits your needs.
Each insurer has its own method for determining how much you should pay for your premium, but there are certain industry standards they all share. Essentially, the math for an insurance provider is to calculate the risk involved with taking on your business and weighing that risk against how much money they’d reasonably expect to need from you and other real estate professionals and businesses like yours in order to turn a profit in aggregate. Insurance companies are, after all, money-making businesses.
The best way to find the right plan for you is to weigh all the options available. Speak to insurance agents and brokers, try online quote estimates, and see what the market is like and find that golden deal.
Factor 3 – Choose an insurer with a reputation for strong customer service: Beyond shopping for the best policy deal, calling up insurance agents is a great way to gauge the customer service of a particular provider. Because insurance is a long-term business arrangement, you’ll want to be associated with a company that can provide prompt and comprehensive service ad hoc. You don’t want to be dealing with below-average customer service every time you need to file a claim, update your account information, or change the specifications to your policy.
Factor 4 – Deciding between direct writers, agents & brokers: It’s not just a good policy you’ll want to look out for when shopping for insurance—it’s the individual who delivers on that policy that will also affect your experience with your insurer. There are three main categories of insurance providers:
- Insurance agents work with various companies to sell those companies’ policies but function as independent entities. Because of that fact, agents can work on behalf of multiple companies at once, offering an array of products.
- Direct writers, also called “captive agents”, are insurance agents who work on behalf of just one, dedicated company. Some insurance companies, such as State Farm, only sell insurance through captive agents and do not offer their policies to brokers.
- Insurance brokers are like insurance agents, except instead of working for different insurance companies, they work on behalf of insurance customers. Because brokers are on your team, they will presumably work toward your interests. Therefore, a good broker is a good guide through your insurance-buying process.
Insurance policies occur over a fixed period—often annually, requiring renewal after each calendar year. The fee for a year’s policy is called a premium. When your policy comes up for renewal, your insurer will offer you a new potential contract. You also have the option of shopping around for alternative policies, if you believe a better one for you exists somewhere else. You might find, during this process, that the new premium offered to you by your insurer is quite different than the one you’d paid for the year prior. This isn’t always the case, but premium costs are affected by you or your real estate business’ behavior the prior year. Did you take out a claim and require significant compensation? Or did you pay all of your bills on time and never require anything of the insurer? Did something change about you or your business that may affect the level of risk your insurer will have to take on in keeping you as a customer? All of these factors may sway the prices available to you, one way or the other.
Keep an eye out, when renewing or buying a new policy, for the details of the new contract you enter into. Important details lay within those contracts, such as: whether you can cancel a policy before the renewal period, how much notice you will need to give to your insurer in the case of a cancellation, and whether, in the case of a cancellation, the insurer will provide a refund in the case of prepaid coverage. In most cases, the contract will detail a grace period for sending in late payments—look out for that, as the grace period might be 30 days or just 24 hours! Those contracts will also underwrite the fact that insurers are allowed to cancel your policy if you don’t make your payments.
Limit of insurance
All insurance policies have some sort of predetermined limit: an amount past which the insurer will no longer be responsible for paying off your claims. Because of the gravity of an insurance limit, it’s important that you discuss this with your provider prior to entering into a contract. Your job is to look out for yourself in the event of a worst case scenario, whereas the insurer’s job is to calculate the risk associated with your business, in order to determine a limit that works for their bottom line.
In fact, there’s not just an insurance limit for commercial policies, there are two limits: “per occurrence” and “aggregate”. “Per occurrence” details the upper limit of how much the insurer will be liable to pay for any individual claim, whereas “aggregate” indicates the maximum amount they will agree to pay over the lifespan of your policy, for all claims made.