There are over 3 million active real estate licensees in the U.S., according to the Association of Real Estate License Law Officials (ARELLO). As of April 2023, over half of those holding real estate licenses are licensed as REALTORS® by the National Association of REALTORS® (NAR). To use the title of REALTOR®, a real estate agent must become a NAR member and adhere to their code of ethics.

Realtors and real estate agents both perform a valuable service in their industry by facilitating real estate transactions. But despite their best efforts to react to real estate market changes, they may face errors & omissions claims from clients due to a number of factors, many of which are induced by the impact of changing market conditions.

As the market for real estate agents has continued to change, one of the results has been an increase in the frequency and severity of claims made against them.

“From 2020 to 2022, we observed a consistent rise in the frequency of litigation in the real estate professionals' E&O segment," says Steven Stecker, real estate program manager, Victor. “And despite the potential challenges posed by higher interest rates and an increase in median home sale prices in 2024, we anticipate a double-digit increase in both existing and new home sales. As a result, we expect the frequency of litigation to rise accordingly."

This forecast underscores the volatility of the real estate industry. Lawsuits targeting real estate professionals increased 9% between 2021 to 2022 as home prices fell, according to Victor Insurance Managers, a global insurance underwriter.

What followed in 2023 was a slew of antitrust lawsuits. One was Redfin, an online brokerage and real estate services company that agreed to pay $9.25 million to settle federal lawsuits that claimed that U.S. homeowners paid artificially high broker commissions. Another high-profile, high-impact case was the $418 million settlement against the NAR to eliminate decades-old rules on commissions.

The lawsuit filed against the NAR “serves as a reminder to realtors about the importance of maintaining adequate E&O insurance coverage," Stecker says. “E&O insurance is specifically designed to provide financial protection to real estate professionals in the event of claims arising from errors, omissions or negligence in their professional services."

“The potential implications of this lawsuit and the changing dynamics of how real estate agents are compensated could lead to increased scrutiny, the need for new or additional services to offset lost income, and a shift in how business is conducted," he says.

Some buyers may be impacted by changes to real estate agent compensation as well. “I believe there could be an effect on lower income and first-time home buyers, where the couple of percentage points—typically a 2%-2.5% commission rate—make a bigger difference and is a burden to put the cash down up front," says Kunal Mallik, area assistant vice president, Risk Placement Services (RPS). “Sellers will have to bake in some concessions to help pay the broker compensation and we will most likely see realtors start leaving the space."

And “with lower revenues and lower numbers of NAR agents, we will see more competition for business possibly leading to increased claims frequency simply because there will be more agreements in place addressing fees," Mallik explains.

As real estate agents grapple with industry changes, independent insurance agents can help them find the insurance protection they need.

“It is crucial for real estate professionals to reassess their E&O insurance coverage and ensure it aligns with their evolving needs," Stecker says.

According to Mallik, tips to make sure realtors have E&O protection are to: “ensure agent-owned property sales and agent-owned property management is included on your insurance cover; ensure the definition of pollutants or wording via endorsement includes all mold and fungi, because different carriers have different levels of defining these pollutants and this can get tricky when clients are in a suit involving failure to disclose issues; and provide detailed coverage comparisons between insurance carriers."

Also, “consulting with insurance providers and legal advisers who specialize in real estate can provide valuable insights and guidance tailored to individual circumstances," Stecker adds. “These professionals can help agents assess their specific risks, review insurance coverage options and develop effective risk management strategies. By leveraging the expertise of these professionals, real estate agents can make informed decisions to protect themselves and their agencies from potential liabilities."

Olivia Overman is IA content editor.