Here's something most new real estate agents don't realize until it's too late: even if you do everything right, you can still get sued. A client misunderstands advice you gave six months ago. A buyer claims you didn't disclose a property defect you never knew existed. A permit issue surfaces years after closing. Suddenly, you're facing an $80,000 lawsuit—and that's just the average. Some claims run into the millions.
That's where professional liability insurance—commonly called errors and omissions (E&O) insurance—comes in. It protects you from claims alleging mistakes, negligence, or failure to perform your professional duties. Whether you're an independent agent or part of a brokerage, understanding E&O coverage isn't optional. It's the financial safety net that keeps one mistake from derailing your entire career.
What Professional Liability Insurance Covers
E&O insurance covers civil lawsuits alleging negligence, errors, omissions, misrepresentation, and breach of duty in your real estate services. The most common claims fall into several categories. Property condition misrepresentation tops the list—a buyer claims you failed to disclose known defects or misrepresented the property's condition. Permit-related issues account for one in five claims, often surfacing when unpermitted work is discovered post-sale.
Other frequent claims include open house and showing damages, breach of contract allegations, and failure to perform professional duties like conducting proper due diligence. Agent-owned property transactions generate many claims because there's more incentive to withhold information when you're selling your own property. Even small oversights—missing a deadline, failing to communicate an offer, or providing incomplete disclosures—can trigger expensive lawsuits.
Your policy typically provides two critical protections: coverage for damages awarded in settlements or judgments, and payment of defense costs including attorney fees, court costs, and investigation expenses. That second part matters more than you might think. Attorney fees alone can quickly hit $10,000 or more, and those bills start the moment a claim is filed—not when you lose a case.
Claims-Made vs. Occurrence: Why This Matters
Most professional liability policies for real estate agents operate on a claims-made basis, and understanding this structure is critical. A claims-made policy only covers you if two conditions are met: the alleged error occurred on or after your retroactive date, and the claim is filed while your policy is active. This differs fundamentally from occurrence policies, which cover incidents that happen during the policy period regardless of when claims are filed.
Your retroactive date—the date you first obtained continuous E&O coverage—becomes your career-long anchor point. Any professional services you performed before this date won't be covered, even if you have a policy when the claim arrives. More importantly, if you let your coverage lapse even for one day, you create a gap. That gap eliminates coverage for all work performed before and through the last day of the lapse, even if you had coverage when you did the work and when the claim is filed.
This makes continuous coverage non-negotiable. Real estate claims can surface years after a transaction closes. A structural issue might not appear until the next owner does renovations. A boundary dispute could emerge when the property sells again. If your policy lapsed during any period, you're exposed for all the work you did during that time—forever.
When you do leave the industry or retire, you'll need tail coverage (also called an extended reporting period). This allows you to report claims for incidents that occurred during your policy period but are filed after your policy expires. Without tail coverage, you're unprotected the day you stop renewing your policy, even though claims can still arise from your past work.
Defense Costs: Inside or Outside Your Limits
Here's a policy detail that can make or break your financial protection: whether defense costs count against your coverage limits. By default, most policies include defense costs within your limit of liability. If you have a $1 million policy and your attorney bills $30,000 defending a claim, you now have $970,000 left to pay any settlement or judgment. The costs of defending yourself reduce what's available to resolve the claim.
Better policies offer an endorsement for defense costs outside the limits. This gives you an additional limit—typically equal to your total liability limit—specifically for defense expenses. With this endorsement on a $1 million policy, you effectively have $1 million for defense costs plus $1 million for damages. That's double the protection where you need it most, since defense costs can run into tens of thousands of dollars even for claims you ultimately win.
Some state-mandated programs provide unlimited defense costs, recognizing that legal fees shouldn't erode your protection. Louisiana, for example, requires a separate limit for defense costs with no deductible applied. When comparing policies, this distinction matters as much as your coverage limits. A $1 million policy with defense outside limits provides substantially more protection than a $2 million policy with defense inside limits.
What E&O Insurance Costs
For individual agents, E&O insurance is remarkably affordable given the protection it provides. The average cost runs about $665 annually or $55 per month. Most individual policies range from $100 to $500 per year depending on your state, insurance company, and coverage selections. Among real estate businesses purchasing E&O through major insurers, 34% pay less than $50 monthly and 68% pay under $100 monthly.
Your premium depends primarily on your gross commission income (GCI) from the past 12 months and your transaction volume. A new agent projecting less than $1 million in first-year GCI might pay $600-$2,000 for a $1 million limit policy. As your business grows, premiums scale accordingly. A firm generating $5 million in revenue might pay $7,000-$15,000 annually, while a $10 million agency could see premiums between $15,000-$30,000.
Your claims history significantly impacts pricing. One professional liability claim increases your rates by 25-50% for three to five years. Other factors include your coverage limits, deductible choices, and specific industry exposures. Agents working in commercial real estate or handling high-value properties typically pay more than residential agents. Additional coverages like cyber liability or employment practices liability also increase premiums.
How to Get Started with E&O Coverage
Start by checking your state's requirements. Some states mandate E&O coverage for licensed agents, while others make it optional but strongly recommended. Your brokerage may also require coverage or provide firm-level policies that cover all agents. If you're covered under a firm policy, verify what happens to your retroactive date if you leave—you'll likely need to purchase your own tail coverage or new policy to maintain continuous protection.
When shopping for coverage, focus on three key policy features. First, confirm whether defense costs are inside or outside your limits—this matters more than you might expect. Second, understand your retroactive date and how coverage continuity works. Third, review the per-claim and aggregate limits. A typical policy might offer $1 million per individual claim with a $1 million aggregate (total) limit for all claims during the policy period.
Work with an insurance agent or broker who specializes in professional liability for real estate. They can help you navigate state-specific requirements, compare policies from multiple carriers, and ensure you're not paying for unnecessary coverage or leaving critical gaps. The National Association of Realtors offers resources and endorsed programs that may provide competitive rates for members.
Professional liability insurance isn't just a box to check for licensing requirements. It's the difference between a covered claim that your insurance handles and a lawsuit that costs you everything you've built. At $100-$500 annually for most individual agents, it's one of the smartest investments you can make in your real estate career. Get covered, maintain continuous coverage, and understand your policy's key features. Your future self will thank you.
