Real Estate E&O Claims Spotlight: Shady Agent

In real estate transactions, both buyer and seller have a reasonable expectation of propriety. In other words, both parties expect that the transaction will be free of fraudulent practices. Unfortunately, this is not always the case – greed often compels one of the parties in a transaction to commit fraudulent activity. 

Let’s explore a claim from April, 2019 to learn more about how fraud can result in an expensive E&O insurance claim against those responsible.

The Claim

In February 2019, a real estate agency contracted with an exclusive listing agent for a residential property located in North Carolina. The listing agent was the agent of record and was authorized to serve in a dual agent capacity, representing both seller and buyer. After a short period of time on the market, the agent advised the owner (potential claimant) that he had an interested buyer, but that the asking price of the home needed to be reduced in order to secure a deal. The owner accepted and went under contract with the buyer.

In March 2019, the property closed and was conveyed to the buyer. One day later, a quit claim deeded to another entity, this time a rental company owned by the listing agent and the buyer, who is claimed in the legal dispute as a straw buyer. The discovery of fraud was made by the subsidy program advocate for the tenant currently residing in the property. At no time did the listing agent indicate verbally or in writing that the property was going to be purchased by him and his business partner. 

The potential claimant went on to file a complaint with the North Carolina Real Estate Board as well as initiating an investigation into more than 20 similar transactions conducted/completed with the listing agent. 

What Went Wrong 

The insurer of record to the real estate agency denied the claim filed by the claimant. The reasons for the denial are of several parts, including the reporting period of the policy, the definitions in the policy, the fraud exclusion contained in the policy, and the financial interest exclusion contained within the policy. 

In the claim, the alleged wrongful act occurred outside of the policy period or automatic extended reporting period. Secondly, the policy only applies to wrongful acts arising solely out of professional services rendered by the covered party for others. In the policy definition, wrongful acts are defined as alleged or actual negligent acts or errors or omissions. In this claim, the policy does not respond to intentional acts.

Thirdly, the policy’s fraud exclusion only applies if an insured had direct knowledge or participation in fraudulent conduct. In the claim, the claimant alleged a pattern of fraud, but this has not been supported by third-party investigations at the time of the denial.

Finally, the financial interest exclusion of the insurance policy was not applicable to the case, as the property owner alleged that the agent in question did not disclose to the owner his role as dual agent for both seller and buyer. In fact, this dual agent role was disclosed and is on record. 

It is clear from this claim that all parties in a real estate transaction must carefully understand applicable insurance coverage. An error or omission in a transaction may or may not be covered, depending on the policy language. If an incident should occur – including fraudulent transaction activity, you will want to ensure you have a valid insurance claim.  

The Resolution

Due to the above-mentioned issues, the agent will be liable for his own damages and have to hire his own attorney out of pocket. Whatever damages are awarded after the claim is settled, he will also be responsible for paying out of pocket. While the agent is the one who the claim is being brought against, the realty group must address it as they are the company that is named in the lawsuit. However, if they can prove they were unaware of the misconduct, their insurance policy will cover any involvement they are found liable for. This case is still ongoing, but will most likely be settled out of court as there is no definitive defense for the agent.

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