Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

If the designated broker does not directly own at least 10% of the entity, what type of insurance must the business maintain?

1. General liability insurance

2. Professional liability insurance

3. Errors and omissions insurance

4. Workers’ compensation insurance

The correct answer is: Errors and omissions insurance

The requirement for a business to maintain errors and omissions insurance (E&O) when the designated broker does not own at least 10% of the entity relates to the specific risks associated with real estate operations. Errors and omissions insurance provides coverage for claims arising from professional services rendered by a real estate professional, including mistakes or oversights that may occur during the transaction process. In Texas, the regulatory framework establishes that if a designated broker does not have a meaningful ownership stake in the brokerage entity, the risk is heightened that decisions may not fully align with best practices or ethical obligations. Consequently, E&O insurance becomes essential, ensuring that the brokerage is protected against potential lawsuits or claims from clients who may be adversely affected by the actions of the firm's agents. By requiring this specific type of insurance, the state ensures that brokerages with less accountable ownership structures have adequate coverage to address claims of negligence or inadequate services provided by their agents. This ultimately protects consumers and maintains a standard of professionalism within the industry. Other types of insurance mentioned, while relevant to various aspects of operating a business, do not provide the same coverage specifically for professional services in the context of real estate transactions.