By Kevin Kerridge, Hiscox Small Business Insurance
The real estate market in much of the country has seen a rollercoaster of ups and downs following the collapse of the housing bubble, due in part to unstable housing prices and financing issues.
New York City, however, is a unique market that has been largely immune to the real estate and financial crises, maintaining high rental prices and increasing purchase demands.
These factors may make Manhattan — and New York City’s outlying boroughs seem like a mecca for real estate agents.
However, this market presents its own unique challenges for agents, including both logistical and legal issues.
In such a large market, there are nuances that many realtors are unaware of.
For example, small real estate firms and independent agents based in the New York City metro area, unlike those who work for large firms, are not required to carry insurance.
Still, these independent brokers face a myriad of industry and location-specific risks that could pose dangers to agents and their businesses.
Many of these risks outlined below, however, can be potentially mitigated through a professional liability insurance policy.
• Increasing Brokers Fees: New York City maintains some of the nation’s highest real estate broker fees, corresponding to the price of real estate within the metro area.
Generally, brokers’ fees range from 10%-15% of the sale or yearly rental price of a property.
That means that if a tenant rents an apartment in midtown Manhattan for $2,500 (the average price of a one-bedroom apartment, according to New York Habitat), they will pay a broker fee of $4,500.
The National Association of Realtors 2011 Legal Scan, a biennial study, stated that disputes over commission payments are only expected to increase in the future.
• Negligence Lawsuits: Given the current economic conditions, clients often have less hesitation in pursuing legal action when they feel slighted by an agent, often claiming “negligent misrepresentation.”
The National Association of Realtors study also stated that clients are more likely to file claims over property condition disclosures in the current economy a fact that is not expected to improve in the near future.
• Lack of Qualifying Clients: According to online real estate website Trulia, the median sales price for homes in the New York Metro area between March 2012 and May 2012 was $1.09 million.
This represents an increase of 2.7% or $29,155 compared to the prior quarter, and an increase of 1% compared to the prior year. Sales prices have appreciated 9.1% over the last five years in New York. But, home prices are not the only number on the rise.
Although unemployment rates are improving, approximately 10,863 individuals filed for bankruptcy in New York State (according to¸ creditcards.com’s online bankruptcy statistics), representing only a -.25% change since 2005.
With the ability to secure a home loan still difficult and the stringent credit restrictions most landlords place on renters, the lack of qualified clients is increasingly becoming an issue for many real estate agents.
• Increases in regulation regarding discrimination: An increasingly diverse population, a lack of qualified clients and the low percentage of vacant units in the city are all pushing some potential residential applicants to pursue legal action if they believe they’ve been subjected to discrimination.
The New York City Council on Human Rights recently issued a statement saying that it is illegal to advertise or make any inquiry regarding the prospective purchase, rental or lease of a housing accommodation that is discriminatory.
In addition, according to New York Civil Rights Law, it is unlawful for landlords, superintendents, building managers, condo owners, cooperative owners and boards to discriminate in the sale, rental or lease of housing.
Even the slightest slip of the tongue could land an agent in hot water or even worse, facing a lawsuit — or a proceeding that could ultimately end up in the suspension of an agent’s real estate license.
With these potential dangers lurking in the NYC real estate landscape, agents and real estate firms of any size can easily protect themselves and their businesses with business insurance coverage tailored to their specific needs.
Insurers have begun to offer affordable policies that cover the special risks faced by the real estate industry and include defense costs and other services, even if a covered claim brought against an agent is groundless.
If the agent or broker is found to be at fault for the claim, the insurer will pay damages, up to the limits of the policy.
It is important for real estate professionals to make certain that their insurance coverage is specific to their industry and that their policy addresses the unique risks that they face, such as giving incorrect advice, omitting or failing to disclose material information or failing to deliver services in some way.
Professional liability and general liability policies are at the foundation of any insurance program for real estate professionals.
Professional liability, often called errors and omissions (E&O), covers risks incurred in carrying out one’s professional role and responsibilities.
Coverage may include claims for alleged or actual negligence, defense costs, personal injury, such as libel or slander and claims arising from services done by employees, temporary staff and independent contractors.
General liability insurance, also called commercial general liability insurance, covers third-party claims for bodily injury, associated medical costs and damage to someone else’s property.
Although professional liability and general liability insurance are not a guarantee against potential dangers, they do provide peace of mind that real estate professionals are protected from common risks. Insurance that is tailored to the real estate industry can help avoid ruinous claims and lawsuits, allowing agents to keep up with the fast-paced, ever moving New York City real estate market, as well as focus on what really matters: running a successful business.
* This article does not offer legal, tax, or insurance advice related to the needs of any specific business. Please consult your professional advisor.