Conflicts of Interest: Don’t go there.

This should go without saying but we still receive many real estate E&O insurance claims revolving around conflicts of interest. Always be mindful of, and avoid at all costs, actual or potential conflicts of interest. You have a fiduciary duty to your client. Courts have held that a seller’s agent has a fiduciary duty to act with utmost good faith, fidelity, and loyalty in all dealings with the seller. There is no quicker way to embroil yourself in a lawsuit or grievance than acting in your own best interest to the detriment of your client (or in one client’s best interest to the detriment of another client’s interests).

Sometimes, the appearance of a conflict of interest is enough to instigate an adverse action. Thus, it is necessary to be vigilant about any potential conflicts which may arise and tell your client immediately in the event a conflict of interest arises. If the conflict of interest cannot be waived, withdraw promptly in the manner least detrimental to your client.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

The Pitfalls of Dual Agency and Bugs

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A recent residential transaction resulted is a substantial claim being paid because of an undisclosed termite infestation. Our insured was both the listing and selling agent, so when things went wrong there was no one else to look to for a defense.

When the agent listed the property, the sellers signed a disclosure indicating no past termite damage or active infestation. That being the case, the sellers ordered and received a termite inspection report. The report indicated active termites and the seller took the least costly steps to eliminate the termites. The agent received a copy of the report and reviewed the details provided. Unfortunately the agent did not understand all of the details in the report, or she would have realized the severity of the termite infestation.

After closing the buyers found extensive termite damage and active infestation. Estimates for repair exceed 50% of the value of the home, which meant that according to local ordinance, the house had to be torn down and rebuilt in compliance with current building code. The buyers claim that they received a copy of the invoice for the termite inspection but not a copy of the report. The buyers allege that the report indicated active infestation and that the agent was aware of this fact.

There are a few reasons why this transaction resulted in a substantial E&O claim. First, the agent did not question the details of the termite inspection. If she had, she would have recognized the severity of the termite problem. Second, the agent failed to provide a copy of the termite inspection report to the buyers and document delivery of the report.

The resulting claim ended up costing in excess of $350,000 in damages and attorneys fees.

Interested in PBI Group generating an E&O insurance quote for your real estate agency? Click here.

Beware of Greedy Buyer Clients Who Want The Furniture

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A spotlight on a PBI Group and Hanover Insurance claim against two real estate agents involving greedy buyers who wanted to keep staging furniture used by seller to help sell the house.

Fact Scenario:
An agent representing the seller of a residential real estate property hired a staging agent to place furniture in the house to help make the property look more marketable during the listing period. A buyer couple agreed to purchase the house without any of the staged furniture included in the
sale.The closing was set for 10 a.m. and buyers were to legally gain possession at 2 p.m. the same day. On the day of the closing, the staging agent planned to remove the furniture once the sale closed and prior to buyers taking possession. The buyers’ agent gave the keys to the buyers at
the 10 a.m. closing prior to the buyers legally having the right to possession. The staging agent arrived prior to 2 p.m. to remove the property. However, the buyers had already physically taken possession and refused to let the staging agent enter the property to remove the furniture. The staging agent later filed a lawsuit against the buyers and both real estate agents requesting damages for the value of the furniture retained by the buyers, punitive damages, fees and costs.

Can a real estate agent be legally liable for property at a residence not under the agent’s control? Or does a real estate agent have a duty to
third parties to a transaction?

Result:
First, the buyers did not have a legal right to the furniture. As to the real estate agents, while there were few cases on point, there was a concern that the seller’s agent had contracted with the staging agent and owed a duty to have the property returned to the agent. In addition, the buyers’ agent had a duty not to provide the keys to the residence prior to legal possession. After discovery, the parties went to mediation and settled the matter. The buyer agreed to return the property to the staging agent and pay $10,000. The buyers’ agent agreed to pay $25,000. The seller’s agent agreed to pay $10,000. Both real estate agents also incurred attorney’s fees in their defense of $30-40,000 each.

Best Risk Management Practices to Prevent Claim:
Both agents needed to be more careful in the removal of the staged furniture and the taking of possession by the buyers. They were no doubt
shocked that the buyers would be so greedy as to try to retain property for which they were not entitled. However, it is crucial for agents to strictly adhere to the right to possession language.

Interested in PBI Group generating an E&O insurance quote for your real estate agency? Click here.

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

Be Proactive and Start Filing your Text Messages

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Documenting conversations and decisions made during a real estate transaction is an extremely important best practice for E&O compliance. When you find yourself in the middle of a lawsuit, having proper documentation is paramount. Real estate client relationships often start off with email and signed documents which are easy to store. But eventually, in today’s mobile phone world, communication between agents and clients advance into text messaging. Since this medium is designed for limited characters and brevity is the norm, it is even more important to moralize these conversations at the end of a transaction. Furthermore, some day you will get a new phone or mobile phone carrier so it is impractical to think you are going have easy access to all your text messages forever.

There are several software tools on the market to help you export your text conversations into computer files or physical hard copies that can filed per client within their transaction folder. Doing this after each transaction will ensure that you will never be left wondering if that important decision which ultimately lead to an E&O lawsuit was discussed via text.

Here are 2 tools to consider for easy phone to computer exporting of texts Iphone    Andriod

Avoid the Extremely Difficult Client

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One of the best ways to avoid having an E&O suit filed against you is to avoid the extremely difficult clients. Yes, that means walking away from someone who wants to pay you for your services. We know how hard you work to earn a chance at a new listing or buy side client but some clients are not worth the hassle.  How does one know who to avoid? Call upon your spidey senses, if something about a client does not feel right trust your instincts.  Consider carefully whether to retain or stay with clients: who make unreasonable demands; who constantly question your analysis or advice; who refuse to communicate effectively; and/or who have fired or speak badly of your peers. Remember, a client prone to angry or irrational behavior may, eventually, direct his or her ire at you, regardless how careful you have been to provide the utmost service.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Not in my house.

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When neighbors noticed unusual activity at a recently-sold home, officers were called. They found two people engaged in sexual activity. The woman claimed to be the new owner of the house and said the man was her husband. When asked for identification, police were led by the couple to their car, which smelled of marijuana. A subsequent search turned up a glass pipe and drugs. However, the investigation then took a surprising turn.
The woman was, in fact, the real estate agent who had, the day before, sold the house to new owners. She had met the unidentified man at the home for an evening rendezvous. The new homeowners, not impressed with the realtor’s late-night showing, are pressing charges for criminal trespass. Jonathan Martinez “Real estate agent accused of hooking up with a man inside home she sold” www.click2houston.com. (Aug. 22, 2016).

Commentary
The real estate agent in the above matter faces criminal trespassing, as well as breaking and entering charges. Having access to a house for professional reasons does not mean you have the right to be in the house for personal reasons. Whether this agent faces jail time will depend on whether the district attorney wants to press charges, but there is definitely a reason to do so, especially in light of the possible drug possession charges.

Even if the home was not sold, her being in the home for personal reasons; bringing a third-party to the home of a seller; or other activities beyond the scope of performing a home sale/purchase transaction can lead to liability, especially if the home is devalued because of the agent’s acts. Agents should never show or be in a home unless the purpose is to facilitate the sale/purchase of the home. Agents representing sellers must make sure they are aware of any showing, not only to keep their clients in the loop, but also to protect themselves against any claims that they did not meet their fiduciary obligations to show the home or that the showings were for some purpose other than selling the home.

*Hanover Insurance Group, February  2017.

I’m Here For You

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Trust is paramount, develop it buy showing your clients you are there for them through the exciting and stressful journey of a real estate transaction. Let your clients know they are your top priority by keeping them informed of all significant developments in a bid, contract, or purchase, and responding promptly — within 24 hours — to clients’ messages. In this age of email, social, text and cell phones, there simply is no excuse for not keeping a client informed of all significant developments during the representation. A client, who knows he or she can get in contact with you, and that you are committed to advocating for his or her interests in purchasing or selling real estate, is less likely to pursue a lawsuit or grievance even in the event a problem with the transaction arises.

As you know, real estate is a people business and you should not underestimate the importance of how your client feels about your service. If you don’t show how much you care about them, they will do the same in reverse, especially if they have a grievance that needs a solution.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Let your Client Make the Tough Decisions

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Clients rely on their real estate agents to provide a complete and accurate assessment of all risks and benefits of any transaction, but the client must decide how to proceed in light of your assessment. Do not allow a client to say, “It is up to you,” because if your decision does not yield the result
your client wants or expects, the client may hold you responsible. Tough decisions such as whether to get a home inspection or list at a certain price are best made by the client. You can provide them an assessment of the risks and possible choices, but ultimately, the decision is up to the client. A client who is empowered to direct the deal (with your advice) is less likely to cast blame if things do not go as planned.

* McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Agents are Targets

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Unfortunately, in today’s litigious society, lawsuits and grievances against real estate agents are very common. Real estate agents are frequent Targets for lawsuits. A common lawsuit scenario involves a buyer
of property suing the seller and the seller’s agent for failure to disclose defects in the property. In some cases, the buyer also sues his or her own agent to the transaction. The lawsuit alleges not just negligence, but also alleges that the seller and the agent conspired to keep defects hidden to facilitate the sale at a higher price and earn a higher commission. The buyer may also file a disciplinary grievance against the agent. The grievance threatens not just monetary risk for the agent, but the risk of also losing their professional license. The agent may be forced to defend him or herself in two forums simultaneously.

Most times the lawsuit and grievance are highly defensible. Typically, there was absolutely no collusion or conspiracy with the seller to fail to disclose defects existing on the property. The agent likely had no knowledge of any hidden undisclosed defects. At best, the seller may be at fault. Nevertheless, a public lawsuit alleging fraud and conspiracy by the agent is unsettling at best for the accused agent. Reputation is extremely
important in a referral business like real estate brokerage. In addition, defending lawsuits is expensive and time consuming for the agent.
Every day working with defense counsel, reviewing documents and providing testimony is another day lost from practicing as a real
estate agent.

Check out some best practices to avoid being sued.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Keep Some Opinions to Yourself

blankService oriented real estate professionals can sometimes get themselves into trouble if they feel compelled to give advice on matters that are beyond their professional scope.  You are not hired to be an expert in all things pertaining to home/land/building ownership.  To help avoid a lawsuit…never offer opinions on:

Legal Issues: Encourage your client to retain an attorney early on in the transaction, they can be a valuable resource during the property evaluation phase.
Zoning: Unfortunately your client will have to do some leg work on their own to figure out the specific zoning laws pertaining to their property or they can always hire an attorney.
Property Boundaries: This can be a very detailed and complicated part of a transaction, defer to the surveyors who are the experts and attorneys who are more qualified to interrupt the reports.
Anything not on MLS: Focus your area of expertise around information in the MLS, this can be challenging enough without adding in all of the above.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

What is a deductible waiver?

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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.

About The Blog

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Errors & Omissions Insurance (E&O) is a very nuanced form of malpractice or professional liability insurance designed to protect yourself from lawsuits filed because of your work as a real estate professional. The more years of service and transactions you conduct, the higher exposure you have to being sued. Even if you think the demands are unfounded, these claims come with considerable legal expenses and potentially financial damages that can exhaust your deductible, distract you from your business and harm your reputation. Therefore, it is important to have the right coverage for your premium investment as well as be vigilant with your education and documentation.

Our Maximum E&O Insurance blog is a resource to help real estate professionals do just that. At PBI Group we care about protecting our clients and believe in a comprehensive approach to reducing our risk.

  1. Education to help avoid a lawsuit: Everyone wants to be claims free, but merely wishing for it is not good enough, there are steps you can take to improve your odds. In our blog, we will share best practices and claims scenarios and other “need to know” information to educate and increased your liability awareness.
  2. The Right Insurance Policy: A broad policy form designed to provide protection when and where you need it most based on your specific real estate services offered. Not all policies are created equal, some have considerable exclusions which could leave you without protection!
  3. Documenting the Undocumented: It is important to document the numerous conversations during a real estate transaction to provide evidence which can be referenced during a lawsuit. Today’s various forms of communications (text messages, calls, emails, social media, disclosures, contracts, etc) can make it a challenge to keep
    complete records. It is important to moralize these discussions, in the event of a claim you can be confident in your records.

About Us

PBI Group is a boutique insurance brokerage firm focused exclusively on the insurance needs of real estate professionals throughout the country. Our meticulousness care, pride in operating at the highest level in our industry, and unique knowledge of the real estate professional liability (E&O) market are what define us.

If you’d like to get in touch, please contact us at:

23114 Expedition Drive
Ashburn, VA 20148
O: (443) 502-5645

www.pbigroupsolutions.com

sales@pbigroupsolutions.com