Every real estate agent understands that the process of buying and selling property is complex, and the stakes are high. Agents are entrusted with the effective transfer of substantial assets, and clients expect flawless service at every point. When things go wrong, tensions can run high. Professional Indemnity insurance could be the key to protecting you and your reputation from a potentially large financial claim, and a prolonged period of stress.
First, let’s be clear about its purpose: Professional Indemnity insurance provides financial protection against potential losses arising out of acts, errors and omissions from professional services and advice provided, including:
- Negligence in providing professional services
- Breach of duty of care
- Allegations of misrepresentation or of creating a misleading impression
- Poor property management
- Breach of statutory provisions in various laws
- Incorrect or inadequate advice
- Not adhering to auction rules
So, we’re talking about liability for services and advice provided. Effectively, this means that if a client buys, sells or leases a commercial or residential property through a licensed agent and something goes wrong or is even perceived to have gone awry, the business could be faced with a financial claim equivalent to the client’s losses, as well as additional compensation.
All states take these issues seriously and have minimum Professional Indemnity Insurance requirements. For example, the NSW government requires all licensees under the Property, Stock and Business Agents Act (2002)1 to hold a minimum of $1 million Professional Indemnity insurance with a number of set policy inclusions. Some other states have even higher benchmarks for legislative minimum coverage, and professional associations such as the REI have similar standards.
But why is it so important?
When it comes to insurance, severity trumps probability. Whilst the likelihood of an agent or auctioneer being sued for negligence or malpractice is low, the value of the assets involved is very high. The consequences of mishandling a marquee sale could be incredibly dire, and compensation could stretch into the millions. Professional Indemnity insurance for real estate agents is there to protect all parties involved.
Another important factor here is the emotion inherent in people’s reasoning. Clients that lose money on property often feel a great deal of embarrassment and can lash out, regardless of the service level provided. This is even more common when there is a genuine suggestion that professional standards were not maintained, or the existing client relationship is contentious.
Need some scenarios?
Let’s say an agent advertises a property. They put up a large sign proclaiming “739sqm fully serviced and sewered block in corner location. Ready to build!” They sell the property and the new owner starts building a house on the property. During the build, the new owner contacts the Water Corporation and finds that there is actually no water connected to the block. In many cases, it’s the buyer’s responsibility to do research and conduct inspections. Here, however, the misrepresentation is plainly stated in the advertising material and liability on the real estate agent is easy to see.
Alternatively, imagine a Buyer’s Agent at auction failing to disclose that an associate (i.e. spouse, parent, sibling, child, business partner) is also bidding on the property. If the agent was outbid and unable to win the auction, the client may have grounds for a ‘conflict of interest’ liability case against the agent.
Leasing is also exposed to professional risk. Something as seemingly innocuous as recommending a tenant with a bad credit record could see an agent accused of poor property management. Similarly, a tenant suffering an injury due to defects in a recommended rental property could result in a serious compensation claim.
In all of these scenarios, the agent and their licensee could be liable for considerable financial reparations, as well as a raft of compensation payments. Even more concerning, however, would be the unqualifiable damage to their standing in the industry and the community at large.
Professional Indemnity insurance will keep your bottom line in check if things go wrong, and protect your reputation from going ‘under the hammer’ for all the wrong reasons.
1. NSW Government. Property, Stock and Business Agent Act 2002 No 66. [Online] https://www.legislation.nsw.gov.au/#/view/act/2002/66/whole.
BizCover™ Pty Ltd (ABN 68 127 707 975; AR 338440) is a corporate authorised representative of Mega Capital Pty Ltd (ABN 37 098 080 418; AFSL 238549). This is general advice only.