Errors and omissions insurance

Key Takeaways

• Washington does not require a real estate firm or an individual licensee to carry errors and omissions insurance. The choice belongs to the firm and to the licensee.
• Washington escrow agents are treated differently. RCW 18.44.201 requires an errors and omissions policy in the minimum aggregate amount of fifty thousand dollars, or a deposit of cash or securities in that amount instead.
• Errors and omissions coverage answers claims of unintentional mistakes in professional services, such as a missed disclosure or a blown deadline. Deliberate acts such as fraud fall outside it.
• The written agreement between a Washington firm and an affiliated licensee normally spells out errors and omissions insurance along with compensation, transaction fees, and permitted activities.

What It Means

Errors and omissions insurance is professional liability coverage for people who advise clients and handle transactions for them. In real estate it answers the claim that a licensee made a mistake: a Material Fact that was known and never disclosed, a deadline that slipped past, a square footage copied from an old listing without checking the county record, an addendum that never got signed. The policy pays the cost of defending the claim and any damages owed, up to the limit written on the declarations page.

What the policy leaves out matters as much as what it covers. Errors and omissions insurance responds to unintentional error, not to deliberate acts, so a claim built on fraud, on a knowing misrepresentation, or on the conversion of trust funds usually sits outside it. Coverage also follows the entity or the person named on the policy, which is why a broker relying on the firm's policy should read the declarations rather than assume it reaches every activity. The subject normally comes up when a broker signs on with a firm, because errors and omissions insurance is one of the standard items the firm's agreement with the licensee addresses.

How It Works in Washington

Washington splits the question by license type. A real estate firm or an individual licensee may choose whether to carry errors and omissions insurance. Chapter 18.85 RCW, the licensing law for brokers, managing brokers, designated brokers, and firms, imposes no coverage requirement, and RCW 18.85.041, which lists what the Director of Licensing may require of applicants and licensees, does not condition a license on a policy. What that section does give the director is real teeth on the discipline side, including rulemaking over licensee activity and fines of up to one thousand dollars per day per violation, so going without coverage never means going without exposure.

Escrow runs the other way. RCW 18.44.201 requires an escrow agent to produce an errors and omissions policy issued to the escrow agent providing coverage in the minimum aggregate amount of fifty thousand dollars, or to deposit cash or securities in that amount with an approved depository. The same chapter layers on a surety bond and a fidelity bond, because an escrow agent holds other people's closing funds. That is why a Washington escrow business and every licensed Escrow Officer under it operate with mandatory coverage, while the broker on the same transaction may carry none. A firm that skips the coverage is self-insuring: the defense cost and any settlement come out of the firm's own funds.

Example

Marcy Vane, a broker at a Tacoma firm, lists a 1978 house and copies the square footage, 2,180, from the prior listing without pulling the county record, which reads 1,940. The Okonkwo family buys at $612,000 and finds the gap eighteen months later during a refinance. They sue the firm for $34,000, the value their appraiser assigns to the missing 240 square feet, plus fees. The firm carries a $1,000,000 errors and omissions policy with a $10,000 deductible. The insurer assigns defense counsel, spends $28,000 defending the claim, and settles for $22,000. The firm pays its $10,000 deductible and the policy covers the remaining $40,000. Had the firm gone without coverage, the same claim would have cost it $50,000 out of pocket, plus the weeks its Designated Broker spent on the file.

Common Mistakes and Exam Traps

• Errors and omissions insurance is optional for Washington real estate licensees but mandatory for Washington escrow agents. An answer saying every Washington licensee must carry it is wrong.
• Errors and omissions insurance is not a bond. A surety or fidelity bond protects the public against non-performance or dishonest acts and the bonded party repays the surety, while errors and omissions insurance pays defense costs and damages for unintentional mistakes.
• Errors and omissions insurance is professional liability coverage, not property coverage. It does not pay for damage to a listed house and it is not homeowners or general liability insurance.
• Carrying a policy does not cure a license law violation. An insurer may pay the civil claim while the Department of Licensing still disciplines the licensee for the same conduct.