Risk Management for Real Estate: Insurance Requirements

Working as a real estate agent or broker comes with an inherent amount of legal risk. That's why real estate professionals need insurance. Learn about risk management for real estate and how much insurance you need.

Malpractice Liability Risks Faced by Real Estate Pros

The single greatest liability exposure most real estate agents and brokers face is for malpractice lawsuits by dissatisfied buyers or sellers. They could allege things like fraud, misrepresentations, negligence, failure to disclose and other violations of the agent's or broker's legal and fiduciary duties. Even if you're innocent, a malpractice lawsuit can cost hundreds of thousands of dollars.

If you're a sole proprietor or partner in a partnership, you'll be personally liable for malpractice lawsuits. You can avoid personal liability if you form a corporation or limited liability company LLC. But, not as much as you might think.

No limited liability entity protects you from personal liability for your own malpractice or other personal wrongdoing. If your business doesn't have enough assets to pay a judgment obtained against you, your personal assets are liable. Thus, your personal assets will always be on the line if you're being sued for malpractice. This is why you should always have errors and omissions insurance.

Example: Janet, a real estate broker, forms a corporation of which she is the sole shareholder. She represents a client in the sale of a home. After a sale closes, the buyer discovers that severe building defects were not disclosed. The buyer sues Janet and her client, the seller, for fraud. Janet is incorporated but she could be held personally liable (along with her corporation) for any damages caused by her alleged fraud. Both Janet's personal assets and those of her corporation are at risk.