How a policies and procedures manual protects your brokerage

As a broker, you hope the actions by your agents—and your interactions with them—result in successful sales and transactions. Yet sales and negotiating skills are hardly sufficient for either party to be fully successful in running your businesses. Today’s successful real estate practices require that communication, expectations, and procedures are fully vetted and in place for managers and agents to succeed.

The Independent Contractor Agreement for Sales Associate (TXR 2301) and the Statement of Understanding (TXR 2302) will not by themselves be sufficient to establish norms and expectations for a brokerage. Similarly, the typical insurance policies that a real estate firm might own would not cover what happens on the inside of an office. A policies and procedures manual can fill in these gaps and help avoid unfortunate misunderstandings, or worse.

Typical items of possible dispute include:

• Commission disputes
• Unfair, illegal, or discriminatory actions affecting one’s opportunity for success or ability to practice in a safe, healthy work environment
• Unauthorized professional services
• Failure to practice cybersecurity methods
• Inappropriate social media presence
• Improper marketing activities and more.

Few of these are generally covered by insurance but can still result in complicated lawsuits, failed transactions, and damage to relationships and reputations. Clearly defined and documented procedures can minimize these unfortunate consequences.

Communicating expectations also can matter when it comes to errors and omissions policies. Typically, E&O policies are purchased to protect the firm and all those who “act on its behalf.” That wording is crucial because the policy will say something like, “Coverage is contingent on an insured (an agent or employee of the firm), acting on behalf of, and with the authority of, the Named Insured (the firm).” That means if a broker does not want the firm’s agents providing property management services or engaged in commercial transactions, for example, and an agent does anyway, coverage can be denied by the insurer.

But how was the message about acceptable professional services delivered, if at all, to the agent? If not presented formally to the agent as a documented policy, the broker and agent could find themselves in a difficult and expensive situation if a lawsuit results from that property management service. Other issues often excluded from E&O policies include commission disputes, the broker and agent suing each other, employment practices like harassment or discrimination (this can sometimes be added as an endorsement to the policy), fraud (committed internally against the firm or externally against a third-party), and unauthorized tax or legal advice, which can happen when involved in foreclosed properties, tenant evictions, or mortgage default.

General liability and cyber policies also have restrictions on coverage, such as those related to use of an unauthorized website or an email service lacking proper security measures.

A well-conceived policies and procedures manual exceeds the language of the Independent Contractor Agreement and any other external requirements. It should include:

• References to authorized professional services
• Who pays what amount of an insurance deductible in the event of a claim
• Use of personal computers or devices and cybersecurity management
• Commissions
• Office and professional etiquette, including harassment and discrimination
• Use of alcohol or substances when driving or in the presence of clients
• Open carry
• Agent and client safety
• Open house procedures (especially during a pandemic)
• And other items related to your daily practice.

The manual should be formally reviewed annually with each team member and should include consequences for any policy breach.

Clear expectations benefit all members of the firm. It is helpful to consult with a legal and insurance advisor to make sure that no provisions violate any statute or regulation (including independent contractor status), and to address any coverage implications. Planning for the unexpected of even the most routine task is always time well spent!