Brokers who employ agents need to consider the types of insurances they carry. Here’s a quick breakdown of what’s required (workers’ compensation) and what’s necessary (most everything else).

A broker’s management of insurable risks

The types of insurance coverage a broker needs varies depending on the broker’s business model. A broker may operate as:

  • an employing broker who hires licensed agents and brokers to work for them;
  • an independent broker who does not employ other licensees, is not employed by another broker and owns their own brokerage, whether corporate or a sole proprietorship; and
  • a broker associate, who works as an employee of another broker.

Employing and independent brokers carry insurance to cover risks that come with operating a brokerage business. Brokers employing licensed individuals, such as sales agents or broker associates, or unlicensed individuals are exposed to increased risks of doing business, which require the broker to carry insurance to manage those risks.

The different types of coverage a broker considers include:

  • general liability insurance;
  • errors & omissions insurance;
  • workers’ compensation insurance;
  • auto insurance; and
  • health insurance.

Brokers operating independently without employees do not need workers’ compensation insurance, but do need to consider carrying errors & omissions insurance and general liability coverage. These types of policies provide a defense or settlement of claims against the broker based on negligence in their business conduct as a licensee.

Health insurance is required to be carried by all individuals unless they are covered under a plan offered by the employing broker. Also, all vehicles licensed in California are required to be separately insured by the owner of the vehicle.

Broker associates covered as licensed employees

Broker associates are licensed brokers who choose to work for another broker. Their status with the employing broker is essentially the same as sales agents employed by the broker. Thus, their supervising broker provides general liability, E&O and worker’s compensation insurance coverage.

Employing brokers carry workers’ compensation coverage

Workers’ compensation coverage is insurance an employing broker is required to carry since they have employees, whether or not they are licensed. [Calif. Labor Code §2750.5]

Although sales agents and broker associates nearly always enter into independent contractor (IC) employment agreements with an employing broker, they are considered employees under the control and supervision of their employing broker. As employees, they are entitled to workers’ compensation coverage provided by their employer. The IC variety of employment agreements is selected by the broker to avoid income tax withholding and unemployment insurance premiums during the employment. [Lab C §3200 et seq.]

Owners are not required to carry workers’ compensation insurance for themselves.

Immediate relatives, like spouses or children, employed by the broker and who do not have ownership in the brokerage company are required to be covered by workers’ compensation insurance. [Lab C §3700]

However, if an immediate relative shares with a broker sole ownership of an independently owned or corporate brokerage company as a co-owner, they are exempt from workers’ compensation coverage for themselves. Only sole owners are privy to this exemption. [Lab C §4150]

Officers and directors are not required to be covered by workers’ compensation when they only participate in corporate business as owners. However, workers’ compensation is required for officers and directors when they render services to members of the public as a licensee acting on behalf of the corporation, or the brokerage corporation is co-owned by a non-officer. [Lab C §3351(c)]

Brokers who fail to provide required workers’ compensation coverage at all times for their employees face:

While workers’ compensation is the only insurance employing brokers are required to carry, several other types of insurance are beneficial or even necessary for brokers to purchase.

E&O insurance: necessary for all active brokers

Though not required, all prudent brokerage operations carry errors & omissions insurance (E&O insurance). E&O coverage provides a defense against claims made when the broker or an employed agent is sued for negligent real estate practice.

Even the best agents are exposed to litigation at some point in their careers, so E&O insurance is not only practical but necessary for brokerages — regardless of whether the broker employs others. Common suits include claims of negligence for undisclosed property conditions or breach of agency duties.

Most E&O policies function as “claims made” coverage, meaning only conduct occurring and reported during the period of coverage stated in the policy is covered. Thus, brokers need to purchase E&O insurance before conducting any licensed activity to ensure they have protection from possible claims.

E&O insurance premiums can appear costly, depending on the size of the brokerage. However, brokers may take risk reduction steps to earn discounts, such as tracking agent compliance and using industry-standard forms provided by publishers.

E&O insurance doesn’t cover everything – intentional misconduct, for example, is not covered.

General liability coverage is for all businesses

General liability insurance for business owners covers business operating liabilities and related claims.

General liability insurance covers claims of property loss or bodily injury. For example, if a member of the public gets injured at your brokerage office by tripping over a step, a general liability policy will cover any medical costs and court expenses.

If the broker’s computer or client records are damaged by a leaking waterline in the office, the broker’s loss of personal property will be covered.

General liability coverage also covers mishaps that occur with a client’s property. An agent who accidentally knocks over and breaks an expensive clock or lamp during an open house, for example, is covered for the value of client’s property loss.

A comprehensive general liability policy also covers personal or advertising injury and claims of copyright or libel.

Auto insurance naming the employing brokers

Real estate agents spend much of their time on the road, showing properties and meeting with clients. If an agent gets in an accident while acting within the course and scope of the broker’s business, victims typically make a claim on the broker to be compensated for their losses.

Brokers are not required to provide auto insurance for their agents. However, if an agent gets into an accident while conducting licensee activities on behalf of the broker, the broker is exposed to liability for losses others suffer. In California, anyone owning a vehicle is required to carry auto insurance for the vehicle to be licensed. Thus, licensees with vehicles already carry auto insurance.

However, as a condition stated in their employment agreements, an employing broker needs to confirm their agents have the broker listed as a named insured on each agent’s individual auto insurance policy. Brokers need to receive written documentation from the auto insurer as proof the broker is covered.

Employing brokers only need to list their brokerage company as a named insured on their individual auto policy when they also use their personal vehicle while acting as an agent for the company. An employing broker participating in their business only as a supervising broker need not add their company name to their auto policy.

Optional coverage: Health insurance

All Californians are required to carry health insurance. Thus, it is rare for a brokerage to provide this coverage.

However, one goal of a brokerage is to employ as many efficient and skilled agents as possible. One way to attract quality agents is to provide insurance coverage that other brokerages do not. Brokers may want to consider providing health insurance coverage. But the premium expense will need to be taken into consideration when negotiating fee arrangements and setting production and fee generating levels.

Brokers need to determine which insurance coverages are most beneficial to their practice. Workers’ compensation, general liability coverage, E&O insurance and auto insurance are necessities for protecting your agents, your practice and your assets. Providing optional coverages may entice more and better agents and brokers-associates to your brokerage operation.