Few Realtors in State Carry Liability Insurance : Lawsuits: California trails U.S. in the percentage of brokers’ offices protected against claims of errors and omissions.

It starts out as a routine transaction: A 2,400-square-foot home is sold for $220,000. But the buyers later learn that a number had been transposed in the listing, and the home is only 2,040 square feet. Or they discover after moving in that the house has a leaky roof, a broken sewer pipe or a cracked foundation.

What happens next? Lawsuits in such circumstances are common, according to Sacramento real estate broker Mike Lyon, a strong proponent of errors-and-omission insurance in an industry where only an estimated 40% of realtors nationally, and 22% statewide, carry such coverage.

Insurance provides protection against claims of negligence, which may involve an error by commission (providing a wrong estimate of the square footage, for example) or omission (failing to disclose a broken sewer pipe). With it, consumers stand a better chance of collecting on claims resulting from negligence, and agents and brokers can handle those claims without losing their livelihood.

If errors-and-omission insurance is so beneficial, why don’t more agents have it? Lyon, vice chairman of the California Assn. of Realtors insurance committee, suggested several reasons: Some think it’s too expensive, some don’t know enough about it and others don’t think they need it. “And that last excuse is the worst,” he said.

The California Department of Real Estate administers a recovery fund that enables consumers to collect court judgments--with some limits--in fraud cases against a broker or agent who has no assets.

Negligence, though, isn’t covered by the fund, and real estate commissioner James A. Edmonds Jr. doesn’t think it should be. Instead, he would prefer to see liability insurance--as errors-and-omissions insurance is also known--become mandatory in California.

In the last couple of years, Kentucky, Louisiana and Tennessee have enacted legislation requiring their real estate licensees to have errors-and-omissions insurance, and a similar law is pending in Iowa.

Edmonds, who also serves as president of the National Assn. of Licensing Law Officials, said that organization is developing a model law for states on mandatory errors-and-omissions insurance.

As California’s real estate commissioner, Edmonds added, “it bothers me that so few of the 348,000 licensees we regulate have insurance.”

The California Assn. of Realtors estimates that only 22% of its 140,000 members have coverage. By comparison, about 40% of the members of the National Assn. of Realtors are insured. Still, NAR President Norman D. Flynn, of Madison, Wis., thinks even that figure is too low, and has declared that making affordable liability insurance available for his members is one of his top priorities.

Through much of the 1980s, real estate liability insurance was costly and difficult to obtain in California, but that situation has changed, according to the state association’s president, Jim Antt Jr. Insurers, he indicated, probably were scared off by a series of state court rulings that increased the liability of real estate brokers and agents in the mid-1980s.

Since that time, however, legislation initiated by CAR has defined and limited the liability of real estate licensees. As a result, insurance carriers began to return to California in 1988, said Antt, a Bakersfield broker. But they are still wary, he noted, and “many in the real estate industry still find errors-and-omissions insurance hard to get.”

For example, he said, “if a certain percentage of your business comes from property management, commercial sales or appraisals--which (insurance companies) consider high-risk practices--you may be excluded.”

Liability insurance is written for offices rather than individuals.

“We won’t cover individuals,” said Adele Barry, a representative for North Atlantic Casualty Co. in Los Angeles. “Our policies are based on the number of people and the income of the office. Premiums start at $750 for a one- or two-man office for $100,000 per claim with a $3,500 deductible.”

Large offices with 75 or more people can get up to $2 million in coverage for $20,000 to $30,000 a year, she added.

Lyon said the CAR offers members a basic plan that costs an average of about $200 a year. But that premium pays only for defense attorney fees (up to $10,000), and “is good protection only in nuisance cases.”

Plans with deductibles starting at around $15,000 also are available, at costs ranging from $400 to $1,200. “I think they are a good sales tool. They show a consumer he’s dealing with a viable, going concern,” Lyon said.