Myths about Umbrella Coverage for 1099-Employees: Real Estate Professionals Beware

What does umbrella coverage actually cover?

Personal umbrella coverage is designed to keep you safe when you damage property, cause an injury, or have a lawsuit filed against you.  However, this coverage starts and ends on you.  When you begin to act as an agent for a business, even your own, this coverage becomes unreliable.  In many cases insurance agencies will cite the ‘course and scope’ section stating that you were in the process of real estate activities during the time of the incident.


What does that mean for Real Estate Professionals?

Real estate professionals receiving a 1099 form may not be covered under their personal general liability ‘Umbrella’ coverage.  Since you receive the 1099 and are considered a business you have the same legal obligations and liability as larger firms.  In addition, you don’t have any of the protections of a larger firm!  Real estate professionals need to be extra vigilant in this area.  If you are classified as a Sole Proprietorship type business you could end up with huge legal fees and an insurance plan that won’t cover it!

What about my E&O coverage? 

Unfortunately, E&O isn’t a silver bullet catch all to protect yourself.  With only an E&O policy that brokerages generally require you may have many gaps in your policy.  These gaps include general liability, employee injury, and property damage.  For example, a client could injure themselves during the showing of an open house, general liability insurance could have protected you!


How to get coverage applicable to your real estate activities:

Small Business Owners Plans, or BOPs, are specialized plans the have the most important types of coverage bundled as a package to save you money.  A specialized Real Estate Professionals BOP is available here. To learn more about how a BOP can protect you and your assets from costly legal fees please contact us.

Real Estate Agents: Liability During an Open House

Can a Real Estate Agent be Liable for Injuries at an Open House?





Personal Injury Attorney Barry P. Goldberg weighs in on liability questions for real estate agents.


During an open house the agent “takes control” of the premises and is required to use reasonable care for the safety of potential buyers. In the event that a potential buyer is injured, you could be held liable!

According to personal injury attorney Barry P. Goldberg, “It is a relatively common occurrence for potential buyers to be wondering a property for sale and slipping or tripping on a stair or slippery floor. It is easy to understand why— potential buyers are looking around— not down. They are by definition unfamiliar with the property and are more likely to miss a step or small defect.”

Are you in good hands?







Should You Incorporate Your Real Estate Business?

If you are a realtor and operating as an independent contractor for a broker, there are two good reasons to form a corporation for your realty business:

1) Tax Savings
2) Personal Asset Protection

Tax Savings
If a real estate agent works for a broker as an independent contractor, and receives a Form 1099 from the broker for reporting of wages, then that agent is responsible for paying 15.3% self-employment tax on those wages to the IRS, along with regular income tax.
By forming an S Corporation, you can avoid paying much of those self-employment taxes.
An S Corporation is known as a “pass through” entity, which means that the profits and losses pass through the corporation and flow to the tax returns of the individual shareholders. Shareholders who actively run an S Corp must pay themselves a “reasonable” salary, which is subject to employment taxes. For example, a realtor who makes a profit of $200,000 a year and works 40 hours a week running the business to generate those profits, might pay herself a “reasonable” salary of $75,000. After that, all other income can be paid out as dividends, and is subject only to income tax.
S Corporations also pay an annual state franchise tax of 1.5% of net income in California, subject to a minimum of $800 per year.
S Corporations are also attractive because they have a very low audit risk.
It is always a good idea to discuss these issues with your CPA.

Personal Asset Protection
Unfortunately, the California Bureau of Real Estate still only recognizes broker’s corporations for the purpose of licensure. If you form a corporation, you will still need to operate through the BRE as an individual. Therefore, forming a corporation will not protect your personal assets from your own mistakes or accidents. However, if you have employees (salespeople, administrative staff, etc.), then your corporation can protect your assets from their actions.
Example A – A real estate agent operates as a sole proprietorship carrying $100,000 in liability insurance. She hires an assistant to sit at an open house. While showing the house, the assistant accidentally leaves a large window open and a subsequent torrential rain ruined the homeowner’s carpet and pricey paintings. The homeowner’s insurance company sued the broker for repayment of $200,000. The broker paid $50,000 through its insurance company but demanded the agent pay the remaining $150,000. Since the agent’s company only has $100,000 in liability insurance, the agent is personally responsible for the remaining $50,000.
Example B – A real estate agent sends his assistant to the bank to make a deposit. The assistant has a car accident while driving to the bank. People in the other car are seriously injured and they sue the realtor for $1,000,000. The limits on his auto policy are only $300,000. The agent is personally responsible for any award of damages over $300,000.
By forming a corporation, and properly maintaining it, you can protect your personal assets from all business related liabilities of your staff, and thereby prevent creditors and claimants from going after your personal assets to satisfy business debts or judgments. (Note: there are a few exceptions to this general rule which include personal guarantees, payroll taxes and fraud.)

For more information about formation, maintenance, and taxation, please call or email Joslyn Stuart, Esq. at The Small Business Law Firm, P.C. (805) 778-0206