When person A agrees to sell to person B, it starts the scrum where persons C,D,E,F,G all jump in and claim their portion of the transaction. Some claims are earned; agents for example. Others claims are so silly they should be considered criminal. Looking at you Title insurance!
But today, we focus on the multi-million dollar gift agents annually give to Insurance companies called: errors and omissions. (E&O) The concept of E&O insurance, while valid in other industries, has virtually no use within real estate. How it got started, no one really knows. I have always suspected the “semi-requirement” for agents to have E&O insurance came from the National Association of Realtors (NAR)
In NARs effort to “elevate” the status of a Realtor, requiring E&O would put sales agents on the same job wrung as Accountants, Architects, Lawyers and other serious professionals. That would be good for Realtors, right?
Long ago, we studied the insurance issue and wondered; what could a sales agent do, working with a legally pre-approved, fill-in-the-blank form, that would create an E&O situation. We asked two different law firms. Both law firms cited the same two scenarios: lying and disclosure-related matters, as the only two viable E&O situations an agent could fall into. Want to take a wild stab at what two things are NOT covered by your standard E&O policy? Yep: lying and disclosure-related matters.
So why do agents need E&O? They don’t. Only franchise agents are told they need it. So what good is E&O insurance? No one knows. But, aren’t you feeling elevated about it.
Sadly, it’s a fact, “fear-driven” selling is a major part of our everyday lives. But, if you thought your Termite salesperson was pushy, wait till you meet an E&O salesperson. I once had a salesman tell me that one in three agents will have an E&O experience within their career. Wow, what a lie! Yet, for unknown reasons, that company is allowed to cite it.
Unfortunately, our own industry has also been a partner in setting up the questionable E&O narrative. Real estate schools need to teach discipline and respect for the trade. A dose of fear is healthy in their hands. Its critical agents learn to be careful and aware of what they are doing and saying. But, no matter where you took your real estate course, I bet it included some story of a sad-sack agent who did something wrong and lost their entire life savings. Much like the “bloody hook” that ends every children’s campfire story, the agent losing everything over a simple slip-up is a well repeated urban legend. Interesting for discussion, but not grounded in reality.
Insurance companies, NAR and Big Franchise pounded the E&O narrative for decades to the point long-time sales agents were paralyzed at the thought of operating without E&O. Like someone on the ledge, those agents needed to be assured all is safe and there is nothing to fear. Unless of course there’re lying bastards.
Presumably, for decades, hundreds of thousands of agents have been paying into various E&O insurance programs. For the most part, these E&O fees were paid through dues an agent pays to their franchise. Grasp the magnitude of hundreds of thousands of people paying into something for decades. Ever read an article about the E&O market? Ever see any ads for E&O? E&O conventions? Ever see any statistics published on E&O?
Name another industry that takes in billions dollars over the decades and has yet to publish any success statistics? How many E&O claims against agents are brought every year? How many of those cases are successfully batted away with effective insurance? Try to find any significant data documenting this industry?
By all accounts, E&O insurance appears to be a multi-million dollar a year product accountable to no one. Insurance companies can’t prove their E&O’s value or worth, but they are the first to tell you, you can’t live without them. Now that is a business model!