Owned Property Issues for Commercial Real Estate

by Mike W. Smith, President

Many of our larger commercial real estate clients are involved in businesses other than their primary real estate brokerage.  Often our commercial real estate clients will create one company for property management, one for real estate sales and leasing and then also multiple joint ventures and partnerships which own real estate or interests in real estate.  Several insurance related issues occur in this situation.  I have addressed some of them below:

Most E&O policies exclude coverage for services provided relating to owned property.

If your company provides professional real estate services for one of these related companies, or a piece of property where any “insured” has a financial interest, then you may have a gap in your E&O coverage.  There is an inherent conflict of interest between an owner of a piece of property and that of a real estate broker who should independently represent a third party.  That conflict of interest is a fine line which is often crossed when an individual or Firm is on both sides of a transaction.  This is a similar conflict to that of a dual agency, however, insurers look at it less favorably. Courts look at it even less favorably.

Owned property exclusions in an E&O insurance policy usually apply not only to the Company, but its principals, employees and also independent contractor sales personnel.  Basically anyone covered as an “insured” on the policy.  Some companies may find themselves without any coverage for the sale of a piece of property owned by a sales agent, even if the company didn’t know that the agent had any financial interest in the related property.  This can be a big problem with any large real estate brokerage.

Take the example of an independent contractor sales person (IC) that has a 33% ownership interest in an LLC that owns a building with their best friend.  The IC sells the property as the licensed agent and a third party sues the brokerage. The suit will not only be against the agent, but also the brokerage that is responsible for the agent. Under most E&O policies the brokerage would not have any E&O insurance protection because of the ownership interest of the agent.
Common misconceptions regarding owned property exclusions in an E&O policy:

1. Property Owned by a family member is not owned property

2. The Company doesn’t own any properties, people do.

3. The ownership interest is in an LLC. The LLC owns property.

4. Ownership Interest is only a small percentage

Although policy provisions vary by carrier, each of the above owned property scenarios would cause a resulting claim to be excluded under most real estate E&O policies.  The exclusions in most policies include the wording directly or indirectly.  We encourage our clients to review their policy provisions very carefully and to call us to discuss any issues or concerns.

How can I help protect my brokerage in owned property transactions?

1.    Develop a written policy for requiring all agents\personnel to disclose in writing to the Company any listings (sales, lease or Property Management) for which they have a financial interest.  This would include owners, principals and other employees.

2.     Develop a similar procedure for transactions where your agents are not the listing agent.

3.     Develop a procedure and policy for informing all parties to a transaction of any financial interest.

4.     If your Brokerage has exposure, you should review your current E&O policy to determine how or if your E&O policy addresses this exposure.

Sale of Joint Venture Interest is not the sale of real estate.
Most of our clients form Limited Liability Companies (LLC’s) for the purpose of buying and selling real estate.  They own the LLC and the LLC owns the property.  This is often done to insulate owners from liability associated with the property and for tax purposes.  An insurance issue arises if real estate agents sell the ownership interests in the LLC as opposed to the underlying real estate.  It may appear on the surface to be the same thing, but from an insurance perspective it is not.  Selling the interests of a LLC is tantamount to selling a business, which is excluded from most E&O policies.

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