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Real Estate Risk - October 2018

Risk Management Tip

Real Estate Professionals Best Practices: The DO NOT List

The ancient Roman historian Livy is credited with saying, “It is pleasant, when the sea is high and the winds are dashing the waves about, to watch from the shores the struggles of another.” As a real estate professional liability carrier, Travelers has been there for many real estate professionals when they have a professional liability concern. Following are highlights of lessons learned from others. Think of the following as a suggested “DO NOT” list.

  • Do not respond to a subpoena without representation. A subpoena is a legal matter and it is your professional liability carrier’s obligation to help with this type of matter.
  • Do not give a deposition without representation. Travelers can cite example after example of real estate professionals who gave depositions without representation (sometimes without even informing their brokers) because they felt that had done nothing wrong, but then things went sideways and it became costly.
  • Do not act outside your area of expertise. If a client asks for help on something that falls outside the realm of real estate professional’s services, advise them to consult with an expert in that area. Giving legal advice is a prime example.
  • Do not represent difficult clients. If apotential client is difficult when the situation is normal, what will happen if something goes wrong? Difficult clients simply represent a higher claim risk.
  • Do not direct clients to a particular vendor. If your client is substantially unhappy with the work, you can getpulled into a lawsuit because you helped them. From a risk management perspective it is best to have them source the vendor themselves. A compromise would be to give a list of vendors. The less involved you are inthe decision, the lower your chances of a professional liability claim.
  • Do not arrange for repairs. As a real estate professional this is something that you should never do. If you do this you have, in effect, become a property manager and now face exposure to claims arising from substandard work and sometimes property damage. Don’tbe the real estate professional that sent someone out to fix an air conditioner and then watched helplessly as the TV news broadcast video of the $5 million dollar house burning to the ground.
  • Do not become a property manager on the side. For example, accepting property manager duties in order to retain a listing puts you at an ongoing claim risk for as long as you are managing the property. The largest “property management” claims Travelers has seen have all come from real estate professionals acting as property managers on a part time basis.
  • Do not send emails when agitated. Remember that the written word remains. If you would be embarrassed to see it on the news, don’t send it. If you have written an email in such an agitated state, do not hit send. Instead, wait and come back to it later. Also, if you find yourself composing a lengthy and elaborate email, ask yourself if some of the content could be talked about instead.
  • Do not treat people differently. Don’t meet one new client at a coffee shop and then ask the next new client to come into the office. Discrimination is in the eye of the beholder, and uniform client screening procedures can help mitigate this risk.

News from the Profession

Fiduciary Duty- What is it? Why is it important?

Fiduciary Duty. It sounds legalistic and perhaps a bit intimidating. Indeed, as a legal concept it traces back thousands of years, but the modern application for real estate professionals is relatively straight forward. Simply stated, a real estate professional’s fiduciary duty is to act in their client’s best interest. Simple, but the real-world complexities of the real estate market place can easily trip up the unwary. We know this because so many real estate professional liability claims can be traced back to the real estate professional’s failures in this area.

More specifically, there are a number of areas that demand adherence. Paying attention to these can reduce a real estate professional’s claim risk. The fiduciary duties of real estate professionals are commonly organized in the following areas: disclosure, loyalty, obedience, confidentiality, competency, and accounting. In terms of what give rise to suits against real estate professionals, disclosure is the clear winner. The majority of real estate professional liability claims are in the “failure to disclose” category. One of the consistent runner-ups would be loyalty. So let us do a shallow dive into these two aspects of fiduciary duty.

Disclosure

Year after year, failure to disclose information about properties is what real estate professionals most commonly get sued for. Real estate professionals need to advise the seller to disclose anything that in a buyer’s opinion might be significant enough to influence their purchasing decision. Additionally, real estate professionals themselves have a duty to disclose such information as well. The key concept here is that it is the buyer’s opinion that matters, not the seller’s or their agent’s opinion. If a buyer is sufficiently aggravated by something discovered after the purchase, they can and do assert claims of professional negligence, regardless of whether the parties on the other side of the transaction thought it was relevant or needed to be disclosed.

Loyalty

Unfortunately, claims related to people accusing real estate professionals and/or their associates of unjustly profiting from real estate transactions are a source of professional liability claims. The fundamental premise of fiduciary duty is to act in the client’s best interest, but greed can be a seductive and potent force in the real estate world. Travelers see claims against agents for buying and then quickly re-selling properties at a substantial profit (without significant property improvements), for transactions that profit close associates, and perhaps most commonly, claims arising from dual agency transactions. In the real estate world the adage that a man cannot serve two masters is true (and potentially costly).

Fiduciary Duty

It is both a legal and moral imperative for real estate professionals. Failure in this arena can be costly; as real estate professional you can be accused of professional negligence and sometimes (gulp) face criminal penalties. The reputational damage alone has ended more than one career. Just remember, if you are acting in a fiduciary capacity the client truly is number one, or to put it another way, greed is not good. For more information on this topic from the National Association of Realtors.

Statistically Speaking

Misrepresentation / Failure to Disclose

Over the last 60 years Travelers has paid millions of dollars in real estate professional liability claim expenses. During the 2006 – 2015 time period alone, claim expenses incurred for allegations of either misrepresentation or failure to disclose totaled over $43 million dollars. Such incurred expenses included a firm’s deductible obligation as well as money paid for damages and defense. The average misrepresentation or failure to disclose claim rang in at almost $35,000, and the average of the top quartile was over $1 million!

Claims alleging misrepresentation or failure to disclose can arise out of many different circumstances. Consider the following example:

A real estate agent represented the sellers of an older property that had some condition issues. The sellers completed the Seller’s Property Disclosure form and the buyers had a property inspection done. The sale was completed and the buyers moved into the home, but soon discovered additional issues with the property not identified on the Seller’s Property Disclosures. These issues allegedly included non-compliant wiring, asbestos, an unidentified heating oil tank, water intrusion and foundation issues that included a missing portion of the foundation. The buyers sought damages against the seller’s real estate agent for almost $800,000, which included the cost of tearing down the existing home and rebuilding it from scratch. The buyer claimed that the real estate agent knew of the issues but did not disclose them. They subsequently demolished the house before any of the issues could be verified, which made it impossible to prove whether the issues existed or not. No damages ended up being paid, and the insured real estate agent essentially did nothing wrong, but the cost to defend the claim was still significant.

The above example illustrates the importance of disclosing all known potential issues with a property, and how professional liability policies can protect even when a real estate agent has done nothing wrong.

Tips from the Bar

Q: If a buyer or seller I represented in a real estate transaction requests that I meet with their attorney, should I have my attorney accompany me?

Edward W. Payne, Porterfield Harper Mills Motlow & Ireland

A: You should never attend such a meeting without representation by counsel. If the seller/buyer has retained an attorney and is considering some type of claim you should assume you are a potential target. If they tell you they have an attorney you should no longer discuss this matter with them. You need to advise your insurance carrier of the request for a meeting. This would ensure you are complying with any notice provision in your policy. It would also give the insurance carrier the opportunity to provide counsel for you. Once you are represented by counsel, counsel can gather information and make a decision as to whether such a meeting would be in your best interest.

Ask Brenda

Q: I have professional liability coverage. But will I ever really be sued?

A: Yes there is that possibility. Real estate professionals do get sued and Travelers has 60 years of claim history to support that statement. Buyers and sellers are getting increasingly more creative about what they will sue you for. Some real estate professionals have been fortunate to practice for decades or even their entire professional careers without having a claim brought against them. Others have not been so fortunate.

Most real estate professionals do all that they can to meet their clients’ needs and serve their interests. But, that doesn’t mean they couldn’t be sued at some point. Unfortunately, in today’s litigious society, chances are good that you or a real estate professional you know will be sued at least once in your careers. And, most who have been sued would tell you they did nothing wrong.

The following types of claims are common and while real estate agents can take steps to reduce the risk of such lawsuits, the risk can never be eliminated entirely. In a broad sense, every time a transaction occurs there is some claim risk:

  •  Property defects
  •  Property issues not identified on Seller’s Property Disclosures
  •  Allegations of discrimination
  •  Easement and boundary disputes
  •  Misidentified lots
  •  Slip and falls during open houses
  •  Water in the basement
  •  Incorrect information on the MLS
  •  Incorrect bedroom counts

These claim scenarios show that no matter how much preparation or due diligence takes place before, during and after a real estate transaction, many things can go wrong.So yes… real estate professionals can and do get sued.

Understanding Your Policy

Defining a Claim

You purchase a real estate professional liability policy to protect your business against claims of professional negligence. However, what is a claim? Defining what a claim is, while possibly not exciting reading, is essential in determining whether there is going to be coverage for the event in question. If an event does not meet the definition of a claim, the professional liability policy is not going to respond to it.

Wherever there is a dissatisfied customer, there is the potential for a claim, but only a minority of such situations evolve into claims. In the simplest sense, if someone is demanding money or services from you, that would be considered a claim. What constitutes a claim is defined in the insurance policy, and varies by carrier. Travelers has a tri-part definition of what a claim means:

1. A demand for money or services against any Insured for a Wrongful Act.

2. A civil proceeding commenced by service of a complaint or similar pleading against any Insured for a Wrongful Act.

3. A written request to toll or waive a statute of limitations relating to a potential civil or administrative proceeding against any Insured for a Wrongful Act.

So beyond a straightforward demand for money or services, in item (2) we would consider a summons, or possibly a subpoena, involving any Insured to constitute a claim. Item (3) is rare, but also meets the definition of a claim.

The bottom line is this: If you are unsure if what you are facing is a claim, contact us. If you are aware of something that might to grow into a claim, contact us. You won’t be penalized for contacting us and early reporting of claims has proven to yield the best results. Unlike wine, claims do not get better with age.

We are here to help, contact us as soon anything pops up that looks, smells or acts like it might be a claim.