Independent agents who write real estate agent professional liability (E&O) insurance should take note: High inflation and the resulting higher interest rates are creating ripples of disruption in the real estate marketplace.
The COVID-19 pandemic resulted in hyperactive residential real estate markets in many suburban and rural areas. But a predictable slowdown in the real estate market has begun.
Average 30-year mortgage rates have doubled from 3.0% at the beginning of 2022 to over 6.0% in June 2022. In addition, the St. Louis Federal Reserve Bank shows the median price of a home has increased 15.98% from $369,800 in the first quarter of 2021 to $428,700 in the first quarter of 2022. Those increases mean that house hunters will either have to buy a substantially lower-priced home or face a much higher monthly mortgage payment.
The disruption can increase the likelihood of E&O claims, putting real estate agents under greater pressure to make sure that any pending transactions are not lost for any reason that could be argued was under their control.
How professional liability is written for real estate agents
Most real estate E&O policies are written on a “claims made” basis. This means that coverage must be in force when the claim is made, not when the incident occurred. The policies are structured in one of two ways:
- The E&O policy covers the entire real estate firm, listing each included real estate agent. The policy limits generally apply across the firm. If a $1 million or $2 million limit is chosen, it represents the combined policy limits for all agents in the firm.
- Each agent in the real estate firm has a separate E&O policy, and the policy limits apply on an individual basis, not in the aggregate.
Caution to provide agents leaving the real estate business
It can be anticipated that some real estate agents will exit the business in the current market. A departing agent who is covered under a separate E&O policy should purchase an extended reporting period (ERP) coverage extension. This allows the agent to have protection against claims that occurred prior to when their policy ended but is reported during the extended reporting period ― i.e., one additional year following the policy period.
The real estate agent who is insured through the real estate firm’s E&O policy will not need to purchase ERP because any wrongful act claim that was incurred prior to the agent departing but reported after they left will go against the firm’s policy.
Advice for independent insurance agents
Given the choppy environment that is projected for the foreseeable future, independent insurance agents should stay abreast of developments with their real estate agent clients. They should anticipate that insurance companies writing E&O may respond to rapidly evolving business conditions with exclusions or sublimits based on the emerging claim activity.
The insurance agent who does not have expertise in the nuances of real estate coverages would be wise to access a wholesaler who specializes in real estate. Connected Risk Solutions is well positioned to help independent agents proactively advise their real estate agent clients about what lies ahead.
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