Real estate is a high-investment and often high-risk industry. The nature of the business involves hundreds of thousands to multi-millions of dollars on the line and complex legal transactions, making investors, residents, and other associates more likely to pull the trigger on a costly lawsuit if they feel the company was in any way negligent. Having the right insurance in place is essential to keeping a real estate company from paying exorbitant lawyer fees and judgments which could drive the business into insolvency. While there are several policies that should be in place, one of the most important for the real estate industry is professional liability insurance.

Professional liability insurance—also sometimes referred to as professional indemnity or errors & omissions—covers real estate companies against lawsuits claiming negligence, misrepresentation, bad-faith negotiation, inaccurate or misleading advice, and other professional mistakes. Keep in mind that these claims do not need to be true for the insurance to cover the legal costs. In fact, professional liability insurance covering the real estate company against groundless lawsuits is a very common occurrence. Professional liability is often combined or overlapped with directors & officers insurance (a type of policy that exclusively protects executives from personal financial responsibility), and it serves to fill in coverage gaps in general liability policies.

Let’s look at a few real-world examples that indicate the need for real estate companies to carry professional liability policies.

In one case, the owner of a recently purchased home sues the real estate company claiming his agent failed to notify him of existing water damage. In another scenario, a potential tenant sues a real estate company claiming they lost their promised apartment due to discrimination. In the case of real estate developers, the homeowners can sue years down the line if they believe the construction was mismanaged and caused preventable damages. There are even cases where investors may sue a developer if they believe they were misled about the costs of a project—a tricky situation because construction often runs over-budget with no inherent negligence on the part of the developer. These are just a few of the many examples in which professional liability insurance can protect a real estate company.

It is important for real estate companies to review their insurance policies carefully. Common exclusions may be applied in the case of criminal intent (such as a case of fraud or otherwise knowingly wrongful acts), injuries resulting in death, or property damage caused directly by an agent. It is important for real estate companies to work with an experienced insurance agent to ensure there are no coverage gaps between the various necessary policies.