With the advice “seller declare” replacing “buyer beware” in home sales, some real estate agents are buying insurance for their sellers to offset the cost of lawsuits filed by disgruntled buyers.
The new insurance product is intended to defray the cost of defending and settling a lawsuit arising from honest mistakes, innocent omissions and even frivolous statements made by sellers that later prove to be false or misleading.
The plan does not pay off, however, in cases where a seller defrauds a buyer by intentionally concealing or misrepresenting material facts that could influence a buyer’s decision to purchase the property.
Skeptics, however, wonder whether the coverage is superfluous and say such suits are relatively rare.
Homeowners Marketing Services, the Hollywood, Fla., real estate services marketing firm which developed the product, patterned it after the errors and omissions insurance carried by many real estate sales agents. Professional malpractice insurance is one of the company’s main lines of business.
“When you sell a house, you want to be done with that and move on. You do not want to be dragged back and you want to keep whatever equity you got” out of the sale, said James R. Beach, field operations manager for the marketing services firm.
Home sellers cannot buy the insurance themselves. Instead, they must list their home for sale with a real estate agent affiliated with Homeowners Marketing Services.
The agent pays $10 to $30 for a package of marketing tools aimed at recruiting home-selling clients, including the insurance, discounts with major home merchandisers and educational materials. There is no direct charge to the client.
One realty firm with 550 agents in the northern Virginia suburbs of Washington is pleased with the insurance product, which it began offering to sellers in November.
“This is something we are doing to try to set us off from the rest out there,” said Tom Stevens, president of Coldwell Banker Stevens Realtors. “It is an extra piece of mind we are making available to the selling public.”
At least one Chicago area Realtor, Century 21 Champions in northwest suburban Des Plaines, has already signed on, announced Ellie Whiteman, the firm’s president.
The basic seller’s E&O policy provides $25,000 worth of protection with a $5,000 deductible for six months from the time the deal closes. Sellers can, however, elect to upgrade the policy for $200, which extends the coverage to $100,000 for one year from closing and lowers the deductible to $1,000. The policy is not otherwise renewable.
The master policy (sellers do not receive individualized policies) covers the costs of investigating, settling or defending against a claim alleging a wrongful act by the seller. Besides fraud, other exclusions include discrimination, representations made about the current or future value or suitability of a home and repair cost estimates offered by a seller.
Although the company has distributed more than 70,000 listing kits since last March, only in the last two months have any of the policies gone into force because of the time it takes to market and close a home, Beach said. Coverage is now running on about 2,500 sellers, he said.
To date, the company has received only three claims, Beach said. One involves a square footage discrepency and the others a leaky roof and a leaky shower stall.
Short of asking around, the best way to identify real estate agents offering the liability protection plan to sellers, Beach said, is to call Homeowners Marketing Services at 800-334-7454.
Some industry observers question the need for the coverage, arguing that the odds of a buyer suing a seller, or even a real estate agent, are low. Beach, however, claims such lawsuits are on the rise.
“Any real estate attorney can tell you the frequency of claims and the dollar amount of a claim is up over the past few years, but the number of sales transactions has remained constant at around 3.8 million a year,” he said.
No such lawsuit data or industry-wide professional E&O insurance figures exist, however, to settle the matter.
Laurene K. Janik, general counsel for the National Association of Realtors, said a “pure guess” on her part is that buyers sue sellers and real estate agents less frequently than in one deal out of 20.
James S. Trieschmann, a University of Georgia insurance professor, said the high deductible and low premium indicates “you are not wasting a lot of money, but clearly the insurer does not think there is a whole lot of exposure” to potential losses.
As a tool for agents to attract listings, the policies could backfire, said a real estate industry insider critical of the coverage.
“Brokers who have bought the kit (that includes the insurance coverage) have told me they are just sitting in the closet because it scares the heck out of sellers to tell them `and when you get sued we have got this covering you,”‘ he said.
