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All in the family? Make sure you’re covered with an AOP endorsement

As a licensed real estate agent or broker, you are a seasoned professional when it comes to buying and selling properties for others. But when it’s your own property (or that of a family member), the perspective of many insurance policies and courts changes. Suddenly the familiar landscape of buying and selling is different when you have your own skin in the game. You may not be insured against claims when you sell your own or a family member’s property.

An agent owned property endorsement (AOP) is coverage for properties in which the real estate professional or their direct relatives have an ownership interest. Most E&O policies cover transactions that you do for others where your only incentive is a commission. The coverage varies by company, but can include coverage for your primary residence only, rental properties, and also commercial properties.

While many agents and brokers think that their E&O insurance will cover them on the sale of their own property, they are often surprised that it doesn’t. E&O coverage is designed to protect real estate professionals from third party claims. It is not written with the agent’s own personal real estate transactions in mind. Failure to have AOP on your policy can leave you open to a sizeable amount of risk, especially since agent-owned property transaction claims typically pay out five times more than third party claims.

So why the higher pay out on claims?

The reason is that the court system has a tendency to view transactions that include agent-owned properties as being slightly more risky for buyers or sellers than traditional transactions. The thinking is that a real estate professional who is personally invested in a property knows considerably more about the business and will be at an advantage when it comes to the listing, showing and negotiation processes. Claims that occur after the sale of an agent-owned property are met with increased scrutiny, opening the agent up to higher risk.

There are specific rules that most insurance carriers require in order for the E&O policy to cover the sale of a residential AOP:

  • A written home inspection report issued by an ASHI, CREIA, NACHI, or NAHI member inspector
  • A home warranty is provided
  • All state required property transfer disclosure statements are properly completed, signed and delivered
  • The property consists of a single home up to four residential units

How to Protect Yourself

1.  Before the listing: Make sure you have the disclosures that were given to you or your family member. There is nothing worse than claiming you were not aware of something that had been disclosed to you. Keep records and receipts of repairs, especially if there has been water damage or mold.

2. Write it down: At the onset of any agent owned transaction, everything should be put into writing. Full disclosure of your relationship to the property will keep a clear record of transparency and protect your reputation as an agent. It may also serve as additional protection should a claim arise after the sale. We have developed a Supplemental Form that you can use to thoroughly disclose potential problems.

3. Distance yourself: If, for whatever reason, you feel that the transaction is particularly risky, you can always opt to have a fellow professional handle the entire transaction for you. This reduces your risk but does not entirely erase it. Should a claim be filed after the completion of the transaction, the claim would be easier to defend.

4. Know your coverage: Check your real estate E&O policy to see if you are covered. You will also want to carefully read any sections of your policy that discuss AOP coverage when a family member is involved in the transaction. CRES covers residential property from a single family residence up to a fourplex. If you are covered under a firm policy that doesn’t have full AOP coverage, you can get that coverage through an individual E&O policy.

See also our Ultimate Guide to Understanding Real Estate Errors and Omissions Insurance

Learn more about AOP in this short video

How do you mitigate your risk when participating in an AOP transaction? Tell us in the comments below!

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