What is BI/PD Coverage and why do I need it?

BI/PD stands for Bodily Injury and Property Damage. Most Real Estate E&O policies include some measure of BI/PD coverage, such as limited lockbox coverage or open house coverage, but the broadest E&O policies include BI/PD coverage across the policy form. So in addition to coverage for your use of a lockbox or hosting an open house, the BI/PD coverage extends to property management services, REOs, foreclosures and relocation services, as well as residential sales.

The reason the E&O policy extends to provide coverage for Bodily Injury and Property Damage is that most General Liability insurance policies exclude coverage for claims arising from professional services. That said, most E&O policies do require you to have a General Liability policy in force before your E&O BI/PD coverage will respond to a claim.

So if you are listing a foreclosure and don’t turn off the water, and the pipes freeze, the General Liability policy won’t respond and there is no homeowner’s policy to make a claim under. The same applies if you lease an apartment and the tenants then become sick due to mold in the unit. Everyone is familiar with the nightmare scenario when the agent fails to advise the buyer of the rickety stairs and the buyer ends up injured or the foreclosure cleanout that occurred at the wrong house. The inclusion of BI/PD coverage in your E&O policy addresses these situations before a lawsuit is filed so when you are reviewing your E&O insurance policy be sure to check the coverage terms that apply to the BI/PD coverage.

Real Estate Fraud And The Fiduciary Responsibilities Of Real Estate Agents

A Hazleton, Pennsylvania realtor could serve up to ten years in prison after pleading guilty to conspiracy to commit wire fraud. The realtor was arrested in Florida after fleeing there to avoid prosecution.

The realtor preyed on mostly Spanish-speaking, first-time homebuyers, telling them he was authorized to sell to them homes that were vacant or were in foreclosure. The victims agreed to buy the homes and paid the realtor, as well as other parties, for what the victims believed to be their new homes. In fact, the realtor was not authorized to sell the homes, and the fraud began to unravel when the victims began receiving eviction notices from the true owners.

Many of the victims have filed a federal lawsuit seeking civil damages against the realtor and many of the realty companies with which he was associated. James Halpin “Real estate agent admits to scam”    standardspeaker.com (May 26, 2017).

Commentary
The realtor-client relationship is that of a fiduciary. The realtor owes the duties of loyalty, honesty, prudence, full disclosure, confidentiality, good faith, reasonable care and diligence, and accounting.

Obviously, the real estate agent in the case above did not adhere to his fiduciary duties, and his unsuspecting clients suffered for it, as well as the real property owners.

Be aware of the types of real estate fraud that might be perpetrated on your clients:

  • Foreclosure rescue companies that convince distressed homeowners to “temporarily” transfer title or “leaseback” their own home to obtain relief.
  • Mortgage elimination schemes involving “loopholes” to help homeowners eliminate mortgages within an unreasonably short time.
  • Home improvement fraud committed by unscrupulous realtors who obtain a loan in the name of fictitious people or previous clients.
  • Equity skimming: where a buyer convinces a seller to relist the house at twice its true value. The buyer gets a larger mortgage, pays seller the original list price, and skips with rest of mortgage money, leaving the house to go into foreclosure.
  • Illegal flipping: flipping for profit is fine, but flipping for a price well above appraised value is not.
  • Equity fraud happens when crooks take stolen personal information and use it to obtain fraudulent loans.
  • Fraudulent loan origination happens when realtors help unqualified buyers get mortgages they are unable to pay in exchange for a larger sales commission.
  • Predatory lending and aggressive sales pressure: beware of “no money down” or “no credit check” schemes, which usually prey on the elderly, the unsophisticated, or those who are desperate.

Protect your clients from these scams by knowing your market, the true property values, and your client’s needs and motivations. Keep a watchful eye on how everyone involved in the transaction performs his or her job.

Hanover Insurance Group

Dual Agency on Agricultural Land Deal proves to be Risky Business

Land for Sale

A spotlight on a claim against a real estate agent who acted as a dual agent for both the seller and the buyer of 1000 acres of agricultural land for $10 million dollars ($10,000 per acre).

Fact Scenario:

Prior to the sale, the seller told the agent that the property line was his fence surrounding all 1000 acres. The agent relayed that information to the buyer. The buyer never ordered a survey despite being told to do so by the agent. None of these communications were in writing.

After the sale of the land, the buyer began planting orange trees within the fence lines surrounding the property for his business. Soon after the buyer starting planting, a neighbor to the north complained that the buyer was planting on 100 acres of his property that was within the fence boundary.

The buyer refused to stop planting and continued to develop the disputed property. The neighbor filed a lawsuit against the buyer to quiet title and for trespass. The buyer and the seller filed cross complaints against each other and the agent and his brokerage.

The buyer said he was told that the property line was the fence. The seller said he never told the agent that the property line was the fence. Both the buyer and the seller independently accused the agent of not looking out for their respective interests to help facilitate the sale and earn both commissions for himself.

In addition, the damages for the buyer were not just for the potential loss of 100 acres, they also included the lost revenue for the crop planted on the disputed property line. The buyer claimed that the combination of lost property and revenue was two times the original purchase price per acre. The lack of documentation and the $2 million dollars in damages made the case difficult to settle and very expensive for all parties to defend.

Result:

Ultimately, after a bench trial, the court found that the disputed property belonged to the neighbor. The court noted that the neighbor had been paying taxes on the disputed land.

However, the court split the buyer’s damages three ways ($666K each) between the agent, the seller and the buyer. The judge found the seller at fault for not being clear about the property line in light of his fence on his neighbor’s property, the buyer at fault for not purchasing a survey and the agent for not documenting all communications about the property line and survey.

Best Risk Management Practices:

In cases of dual agency, an agent has duties to both the seller and the buyer. It is incumbent upon an agent to thoroughly document all communications. Any doubts as to what was communicated to the parties will be construed against the agent.

*Charlton-Perrin, Gawain, “Real Estate Agent Claim Spotlight: Helping Real Estate Professionals Manage Their Claim Exposures,” Hanover Insurance Group, November 2017.

Who needs Construction/Development coverage?

New Construction

Construction/Development coverage extends the E&O policy to provide coverage for the sale of residential property that has been built or developed by an insured agent or broker. The practice of building spec homes has become common in the real estate industry and purchasing Construction/Development coverage will address the specific risk involved in the sale of this type of property. Defending an E&O claim where the agent is also the builder is challenging at best.

The basic E&O policy excludes the sale or property in which an insured agent or broker has an ownership interest, and includes several exceptions to the exclusion, with specific caveats that must be satisfied for coverage to apply. With Construction/Development coverage to apply, the policy usually requires that there must be a specific separate business that does the construction, so an individual cannot be the builder. The policy will also require a specific written disclosure of the relationship of the agent, insured and builder/developer. Keep in mind that every insurer words the coverage a little differently, so read the policy thoroughly.

Keep in mind that while many agents will say that that are not builders, but they sell the houses that their husband or wife builds, they own the construction company as community property. So when you are completing the E&O application and you see the question regarding the sale of property built or developed by an insured, be sure to consider the agents that are selling spec homes and whether or not that agent has an ownership in that construction company.

Know your “Hammer Clause”

There really is no such thing as a “Hammer Clause”, but that is the common term for the Consent to Settle Clause in your E&O policy. The Consent to Settle clause dictates what the insurance company will do when the company and a party making a claim against you agree on a settlement, but for whatever reason, you decide not to settle. Remember, the insurance company cannot settle a claim without your agreement, so there is a provision in the policy that determines what happens if this situation occurs.

There are various reasons why this might come up. The insurance company is interested in settling claims with the least amount paid in attorney’s fees and damages and that is not always what is best for you as an insured. Think about a transaction where you did your job perfectly and your client turned around and sued you for some nonexistent undisclosed defect in the property. The insurer might want to offer the claimant $5,000 to sign a waiver and drop the suit rather than hire an attorney and defend you. Some agents, in the interest of time and aggravation, may agree to settle. But you have the option to fight the claim. This is where the Consent to Settle clause comes into play.

When an insured refuses to agree to a settlement, the policy dictates the amount that the policy will pay over and above the amount that the claim could have been settled for. A standard Consent to Settle limits the insurer’s liability to the amount that the claim could have been settled for plus legal fees up to the time the settlement offer was made. Some policies have what’s known as a “Modified Hammer” in that the insurance company agrees to pay up to what the claim could have been settled for plus 50% of the damages in excess of the original settlement offer.
The important thing to remember if you are faced with this situation is that, by refusing to settle, you are taking on the chance that a court or arbitration may find in the favor of the claimant, and you could end up paying out of pocket for damages that could have been avoided.

 

What does DOL (Defense Outside The Limit) Mean?

One of the options you have when buying E&O insurance is Defense Outside the Limit (DOL) or Defense Within the Limit (DWL). It is important to understand this option clearly because this will impact coverage under your E&O policy significantly as well as the premium charged.

Defense Outside the Limit, which is sometimes referred to as Claims Expenses Outside the Limit provides substantially more protection than Defense Within the Limit which can also be referred to as Claims Expenses Inside the Limit. The difference is how the expenses incurred defending you or your agent against an E&O claim impacts your limit and what you have available to pay in damages, if any, when that claim is resolved.
Under either option, DOL or DWL, any costs incurred defending a covered claim will be paid by the E&O policy, after any deductible is paid, but with the DOL option the payment of these costs will not reduce the limit of liability that you have available to pay damages that may be awarded to the person making a claim against you. If you choose DWL any costs incurred will reduce the amount you have available under your policy to pay damages.

As an example consider a claim involving a buyer that claims an agent failed to disclose a leaky basement. The insurance company hires an attorney to defend the agent and between information discovery and depositions the attorney’s fees and costs amount to $100,000. It becomes apparent that the agent should have known and disclosed previous water infiltration problems with the house and the claimants are awarded $200,000.

Assuming the agent’s policy has a $250,000 limit, the E&O policy that is written with Defense Outside the Limit will pay $100,000 in attorney’s fees and $200,000 in damages. Under this same claim example if the agent had a DWL policy the $100,000 in attorney’s fees would be covered under the E&O policy but only $150,000 in damages would be covered. The difference is that with DOL the attorney’s fees are covered IN ADDITION TO the limit of liability available to pay damages.

It is also important to note that the aggregate limit of liability is the maximum amount available to pay damages for any one policy period. So, while unlikely, it is possible to have one or more claims during a policy period that exhausts your policy limit

What is a deductible waiver?

Does your E&O policy have a deductible waiver? It should if the following conditions are met:

  1. Seller disclosure form signed by Seller & acknowledged in writing by Buyer prior to closing;
  2. Home warranty purchased or waived in writing by Buyer prior to closing;
  3. Written Home Inspection Report was issued by licensed or certified home inspector, or waived in writing by Buyer prior to closing; and
  4. State/local board approved standard sales contract utilized

*Based on policy information provided by Hanover Insurance.