E&O Claims Examples for Real Estate Developers

Unlike real estate agents or property managers, a real estate developer—the person who plans and oversees a commercial or residential property development project from beginning to end—bears professional liability risks in all of a project’s aspects.

They bear ultimate responsibility for any mistakes made. Accordingly, real estate developers must consider Errors and Omissions (E&O) claims examples when assessing their risk management needs. Securing liability coverage is vital for developers to protect themselves from high legal expenses, and costly court judgments.

Real estate developer, general contractor, property manager, and investor holding laptop computer review blueprints at site.

The insurance policies of those with whom a developer contracts for professional services—For example, a General Contractor’s CGL (Commercial General Liability) coverage or an Architects and Engineers (A&E) policy—might be a developer’s first option for paying damages should the need arise. But, this only applies if those policies name the developer as an additional insured.

Unfortunately, developers aren’t always so identified in other parties’ professional liability policies. So, when lawsuits name only real estate developers, developers must carry adequate insurance to guard themselves in expensive litigation.

At ProWriters, we know that brokers aren’t only salespeople, but also educators. You must often make your clients aware of the liability risks to which their work exposes them before you can explain how your insurance services mitigate those risks.

Read on for E&O claims real estate developers need to consider when purchasing coverage.

Four Areas of Real Estate Developers’ Professional Liability

There is a commonly cited legal doctrine known as vicarious liability. This means that in some situations, courts can hold one party partly responsible for the actions of a third party over whom the first party held some degree of control and oversight.

Lawsuits against real estate agents frequently invoke vicarious liability. But, the concept can also be assigned to real estate developers.

Broadly speaking, real estate developers can face professional liability in four areas:

  • Investors
  • Clients and tenants
  • Design and construction professionals
  • Third parties whom development activity negatively affects

Clearly, E&O claims can easily arise in the third of these four areas.

When architects, engineers, designers, surveyors, or other design and building professionals make mistakes, the law may well find the developer who contracted with them financially responsible to some degree.

Still, vicarious liability is only one kind of professional liability. Investors, tenants, professionals, and other parties can also allege real estate developers commit their own errors and omissions, for which they would bear direct liability.

Some E&O Claim Scenarios Could Cost Developers Dearly

What are some specific examples of E&O claims real estate developers might find themselves facing?

Here are just three possible claim scenarios:

  • A developer agrees to lease her tenant a property tailored to a new tenant’s needs. When building mechanical and electrical design errors delay the tenant’s move-in, the tenant loses revenue. The developer is liable, even though she didn’t do the mechanical and electrical work herself.
  • A developer is named in a lawsuit brought by the owner of a property adjacent to his own. The claim alleges the architects and construction personnel the developer hired made design errors and building mistakes that caused property damage next door. Again, the developer is liable.
  • A developer hires an architect to design a wall on her property that passes inspection when built, but later collapses, injuring a pedestrian. The resulting lawsuit names all involved parties, including the developer. Because she hired the design and construction professionals, and wasn’t named as an additional insured on their policies, she is also liable.

Beyond issues of negligence and damage to persons or property, real estate developers may also face E&O claims related to:

  • Misrepresenting the property’s condition or value
  • Breach of duty or breach of contract
  • Escrow disputes
  • Environmental issues
  • Conflicts of interest

Buying and developing land and properties is a complicated business. Developers depend on a host of other people to coordinate, manage, and supervise the myriad aspects of design and construction. If the contractors performing those professional services fall short, developers could find themselves paying the price.

ProWriters Can Help You Get Real Estate Developers Covered

E&O policies for real estate developers “normally cap at $10 million on a primary basis and up to $50 million in total program capacity,” according to Construction Executive’s Joseph Reynolds. “Typical limits can be as little as $2 million for small, local real estate development operations, with most purchasing around $5 million in limits. In the end, the final terms are most often based upon the size, scope, project type and risk management philosophy of the customer.” The type of property being developed is an additional factor.

Developers will be named in almost every third-party lawsuit, regardless of who is at fault. It’s vital they carry a duty to defend policy to help with those claim costs.

If you can envision the E&O claims examples real estate developers face that we’ve discussed here, or similar claims scenarios, posing liability problems for your clients, you need to raise their awareness of the risk and present insurance services solutions to them now.

ProWriters can help. Give us a call today at 484-321-2335, or schedule a consult online with one of our underwriting experts.