Real Estate E&O Claims Spotlight: Be Aware of Fair Housing Testers

Potential renters and buyers are not always what they appear to be. Fair Housing Testers are individuals who pose as prospective clients in order to investigate potential discrimination in housing, particularly as it pertains to the Fair Housing Act, which prohibits denying housing based on race, color, national origin, ancestry, religion, sex, sexual orientation, disability, family status, or use of public assistance.

If a Fair Housing Tester uncovers evidence of discrimination, this could lead to a very costly claim for the property manager or brokerage. Let’s take a look at one of our recent claims relating to this subject.

The Claim

In May 2019, a fair housing tester (referred to as “Tester”) and father of two found an advertisement for a rental of one of the Properties. One key statement in the advertisement was: “…great for a single person or a couple… This property has a restriction of no one under 18.”

Because this statement was indicative of a violation of the Fair Housing Act, the Tester started investigating further. He confirmed that the Property was not located in a community that was listed as a 55-and-over community.

The Tester then posed as a potential renter and inquired over the phone about whether the Property was available. After the Listing Agent confirmed that the property was available, the Tester brought up the listing and asked whether families with children could rent the Property. The Listing Agent stated that:

  1. The Property is not in a 55-and-over-community,
  2. The Association does not allow residents under the age of 18, and
  3. Children were permitted to visit for up to seven days at a time.

The Listing Agent then mentioned that another residence in the same building was available for rent, with different lease terms. However, when prompted, he confirmed that children could not reside at this second property because of the Association’s policies.

As a result of this exchange, the Tester filed a lawsuit against the Real Estate Agency on August 27, 2019, citing a violation of the Fair Housing Act as well as emotional distress and other damages. He asks that the Agency award punitive and compensatory damages for the emotional distress and insult injury caused by the discrimination, as well as the Tester’s costs, attorney fees, and any further relief the Court deems just and proper.

Lessons to Learn from This Claim

Unfortunately, every real estate agent and broker does need to be prepared for the fact that their client could be a fair housing or another form of tester. Though this is not a common occurrence, it is something that can and does happen, and being found guilty of violations could lead to expensive claims on your end. It is absolutely crucial that you do not engage in discriminatory housing practices, or use language in listings, postings, or other communications that could be indicative of discrimination.

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

Real Estate E&O Claims Spotlight: Beware of HOA Bylaw Changes Not Allowing Short-Term Rentals

In the age of Airbnb and other home sharing services, it’s now easier (and more appealing) than ever for homeowners to rent out their property for an additional income. However, no homeowner should assume that they can rent their property out with no strings attached, and no real estate agent should provide information to potential buyers that they cannot guarantee is factual.

Let’s take a look at a recent claim, in which poor communication between a homeowners association officer and a listing agent led to an unfortunate situation.

The Claim

This claim started off as a simple real estate transaction. The Listing Agent listed the Property and represented the Sellers, while the Buyers had their own representation. During the contract period, the Buyers clearly stated that they had plans to use the Property as a short-term rental, asked for assurance that this would be permitted before closing. The Seller did not know the answer to this inquiry, so the Listing Agent and her team reached out to the Property’s homeowners association (HOA) via email, phone, and website research.

On May 20, 2019, an officer at the HOA, provided and written and signed statement that the HOA community did not have any restrictions on short-term rentals. On May 22, the officer clarified that there were no restrictions on long and short-term rentals, and provided a link to the HOA’s governing documents. The Listing Agent and her team subsequently shared this with the Buyers and their agents, who closed on the Property.

However, after closing, a neighbor informed the Buyers (now owners of the Property) that there had been a recent amendment passed in the association’s bylaws that prohibited short-term rentals. Shortly afterward, the HOA officer reached out to the Buyers’ Agents by phone and left a voicemail stating that he had made a mistake in informing them that short-term rentals were permitted in the community.

As a result of this circumstance, the Buyers are not happy and seek to take action against the HOA, and potentially the listing real estate brokerage as well.

Lessons to Take from the Claim

In this claim, the HOA representative was at fault for failing to disclose this amendment to the bylaws. However, the Buyers are also looking to take action against the Listing Agent and her brokerage, even though the Listing Agent only passed along information from the HOA. This is an example of a claims scenario for listing agents and brokerages to be aware of. We are seeing a trend of more claims around HOA and COA assessments and rules. Real Estate agents can be brought into these claims even if they were not directly at fault.  Never pass along information regarding a property and its requirements that you are not completely sure is factually accurate, and continue to communicate with all involved parties to stay aware of changes.

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

Real Estate E&O Claims Spotlight: Lost, Stolen, or Damaged Items

It’s not uncommon for the owner of a property to not be around when their home is shown to potential buyers. Under the supervision of a real estate agent (or several), potential buyers can look around the home and get a good feel for the floor plan, and the agent will be there to answer any questions about the property.

Many property owners choose to put away personal items for open houses and home viewings. However, even with precautions in place, opening a home to the public does have its risks, and it is also not uncommon for personal items to disappear during or after viewings. Some of the most commonly taken items include jewelry, prescription medications, small electronics, decorative pieces, designer accessories, and money.

We recently saw a claim in which many valuable personal items disappeared after a showing took place at a property. Let’s take a look at the claim, and what real estate agents should know about their liability in these situations.

The Claim, Explained

On May 3, 2019, a showing took place at the Seller’s home (“The Property”), in which both the Listing Agent and the Buyer’s Agent showed it to the Client. After the showing, the Seller noticed that several of his personal items had gone missing, with a combined value of over $10,000.

The Seller filed a report with his county’s police department, and requested that they pull the street video to see if anyone other than the Listing Agent and the Potential Buyer were present at the Property that day. The Seller did have video cameras in his home, but his surveillance was not able to turn up any footage of the items being taken or any evidence other than still images that established the presence of the Listing Agent and the Potential Buyer in his home on that date. The Seller did not have receipts for his missing items, but did have boxes for the majority of them.

No conclusion has been formed about the objects’ whereabouts; it is unclear whether they were taken by the agents, the potential buyers, or if there is another, alternate explanation. However, regardless of what happened, the objects did disappear and the Seller did file an E&O claim against the Firm involved, along with a police report.

Key Takeaways from this Claim

It goes without saying that agents should not take sellers’ personal belongings during showings. However, it is important to understand that agents are liable for any lost or damaged property during showings. It does not matter how it happened. Even if the agent is in no way personally responsible, they will be held liable in the claims process.

At the end of the day, potential buyers are free to roam throughout the property during their showing, to get a feel for the floor plan and to take a closer look at the features that have interested them. No real estate agent should have to closely tail their clients; this is only likely to create an unpleasant experience for the potential buyers. However, there is a middle ground between watching buyers like a hawk and leaving them completely free to their own devices. It is important for agents to be aware of who is in the home with them and what they are doing, and to keep a lookout for what is happening. Odds are, the buyers are just taking a second look around, but if something does go missing, the agent is the one who will be liable. If this happens during one of your showings, talk to a lawyer and your insurance agent.

If a property is damaged during a showing, this would be considered an E&O “lockbox” claim. Keep in mind that not every errors & omissions policy contains this language, so this is not a guaranteed coverage. Check your policy carefully; don’t just assume you will be covered.

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

Real Estate E&O Claims Spotlight: Disclosures in Real Estate Transactions

While real estate agents have many responsibilities, there are some things that should not be addressed by agents during the buying and selling process, as they can lead to costly claims and lawsuits. Disclosures or representations made by the agent based on their own experience or knowledge of a property, and not taken directly from the seller is a particularly important example.

Let’s take a look at one of our recent claims for an example of improperly-handled disclosures in real estate transactions.

The Claim

In the late spring of 2017, the Buyers purchased their first home (“the Property”) from the Listing Agent (a longtime friend of the Seller and her family), located in South Carolina. Prior to the purchase, the Listing Agent informed the Buyers that the Property, based on her own personal knowledge, had never been affected by flood waters in the past. The Buyers and the Buyer’s Agent further asked through their agent whether the home had ever been flooded, and the Listing Agent stated that the home had never been flooded, even during notable storms such as Hurricane Hugo and the 1,000-year flood.

In September of 2017, Hurricane Irma struck. The Property experienced significant damage; in addition to flooding, the Property’s HVAC unit was destroyed, mold and sewage affected the residence, and the Property’s crawlspace received additional damage.

Since Hurricane Irma, the Buyers have learned from neighbors who have resided near the Property for years that the Property had been significantly affected by water damage in the past. The Property was damaged during Hurricane Hugo, Hurricane Matthew, and the 1,000-year flood of 2016.

In addition, the Listing Agent, who acknowledged during the selling process that she has had a close and long-lasting personal relationship with the Seller and her family and a considerable knowledge about the Property, represented that the Property was built in 1969 by the Seller’s family and had been cared for and maintained in its original condition until the Buyers purchased it. However, the Property underwent extensive renovations in 1990 after the aforementioned flood damage, to the point of nearly being rebuilt altogether. The Buyers were told that the Property had never experienced flood damage, and did not expect that the Property would have undergone this level of reconstruction.

The Buyers’ total damages from the situation exceeded $100,000, but they have offered to settle for $75,000.

Lessons from the Claim

In this claim, the Listing Agent knew the Seller and her family well, and felt that she could make certain representations about the property from her own personal knowledge/experience. Failure to disclose water damage is indeed one of the most frequent causes of errors & omissions (E&O) claims in the real estate process, but though water damage had occurred and rebuilding had been done, the agent should not have been the one to provide any affirmations to the Buyers.  Even if a listing agent knows the property and the seller well, as in this claim, it’s important that agents not make their own representations about the condition or history of the property that aren’t directly provided by the seller.

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

Real Estate E&O Claims Spotlight: Wholesaling: What Can Go Wrong?

Purchasing homes for the purpose of increasing their value and reselling them at a profit, also referred to as wholesale, is a popular practice that can be beneficial for both the buyer and the real estate agent involved in the transaction. However, if it is not done properly, with complete communication and transparency between all the involved parties, it could lead to incredibly costly and time-consuming claims for real estate agents and their companies. Let’s take a look at one of our recent claims to see what can go wrong in this process and what agents should be mindful of.

The Claim

In May of 2018, an individual (“The Buyer”) began communicating with a real estate agent and property manager (“The Selling Agent”) in an effort to find homes to renovate and resell. After viewing several homes, the Investor opted to purchase a single-family home (“the Property”) for $52,000 on June 13, 2018, after being informed by the Selling Agent that purchasing, renovating, and reselling this Property would yield a potential profit margin of $60,000.

On June 19, 2018, the Buyer and the Selling Agent entered into a contract surrounding their plans for the home. This contract stated that:

  • The Buyer would be responsible for providing money to purchase the Property, to provide $61,500 in “rehabilitation money” to renovate the Property, and to sign an exclusive listing agreement with the Selling Agent for the home’s future sale.
  • The Project Manager would assist in purchasing the Property,  handle all rehabilitation work to prepare the property for resale, to have the Property ready for sale in no more than 100 days from the date of purchase, to provide the Buyer with receipts for bookkeeping purposes, and to market and sell the Property for a flat commission of $1,000.
  • Upon sale of the Property, the Buyer agreed to provide the Selling Agent 50% of the net profit within 2 business days of closing.

Though the home was purchased and the Buyer provided the Selling Agent with installment payments totalling $58,545 for property renovations (upon Selling Agent’s request), no rehabilitation was performed at the Property, and the Selling Agent did not pull any permits for future renovations. As a result of this, the Selling Agent did not have the property ready for sale in 100 days or under, and did not market and list the property. The Selling Agent also did not produce any receipts for the Buyer.

In addition, though the Buyer provided the Selling Agent with money to renovate the Property, it was not used for that purpose. The Selling Agent converted the money for her own use, and has not refunded the Buyer for the expense, even though the money was not used for its intended purpose.

As a result of this situation, the Buyer has filed a complaint against the Selling Agent as well as her real estate brokerage firm (“The Firm”) and its two brokers-in-charge (“The Brokers”) for failing to adequately supervise the Selling Agent in her transactions.

What Went Wrong?

The Buyer and the Selling Agent had a legally binding agreement. While the Buyer followed through with what was required of him, the Selling Agent did not. The Buyer provided the Selling Agent with money, but she did not get the permits for renovations, did not handle any rehabilitation of the Property, and did not list it and sell it within the agreed-upon period. As a result, the Buyer has lost money, resources, and time, and is now seeking damages from the Selling Agent as well as The Firm and The Brokers.

When engaging with clients in the wholesale process, it is crucial that agents communicate with their clients and are completely informed on what is expected of them and when it is expected to be completed. It was never made clear what happened to make the Selling Agent fail to obtain permits, initiate renovations, and re-sell the Property, but because the Selling Agent had a legally binding contract with the Buyer, the Selling Agent and her company are now on the bad side of a claim.

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

Real Estate E&O Claims Spotlight: Misrepresentation in the Buying Process

Real Estate E&O Insurance

What does a misrepresentation claim look like in the real world, and what kind of consequences does it have for an agent? Let’s take a look at one of our recent claims.

The buyer, represented by a real estate agent, entered into a Residential Condo Real Estate Agreement with the seller to purchase a property. This property was purchased for $241,000, with the understanding that it would not undergo any special HOA assessments.

However, just four months after the transaction, the buyers were notified of an impending $32,867.14 special assessment, and were informed that payments were to begin in two weeks. The association had taken out a $1.38 million loan for renovations, and this assessment and its associated payments were a pro-rata share.

The buyer’s agent had a duty to disclose these imminent assessments and what they would entail for the buyers. The agent failed to inform them of these planned assessments and renovations, one of which being repairs to property sidings. Specifically, he had an affirmative duty to disclose “material facts known by the buyers’ agent and not apparent or readily ascertainable to a party.” The buyer’s agent instead represented that the siding repairs had been paid for already.

The sellers also did not disclose the planned renovations and assessments. They represented, “Seller has no notice of any liens or assessments to be levied against the Property, including but not limited to liens or assessments to be levied by the HOA.” In the Seller’s Property Disclosure statement, they stated that the status of any pending or proposed assessments was “unknown”.

Neither the sellers nor the buyer’s agent made any attempt to correct this misrepresentation, though the sellers were contractually obligated to notify the buyers in a timely manner if they received notice of any forthcoming event or condition that would make previously disclosed information misleading or factually incorrect.

As a result of this situation, the buyers filed claims for misrepresentation against both the sellers and the agent. The buyers have requested a settlement of $35,000. If they do not accept, the buyer’s attorney will file a formal claim for damages.

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

Lead Paint Exposure: Errors And Omissions Risk For Real Estate Agents

When a family with a two-year-old boy moved into a house that was more than 100 years old, they had no idea that the house was covered in lead-based paint. The reason they were unaware of this was because the real estate agent never informed them of the contamination when they purchased the house.

Seventeen months after moving in, the child was diagnosed with lead poisoning.

The home’s seller had notified the agent of the presence of lead paint when the house first went on the market. The agent disclosed the information to a previous potential buyer, who later backed out of the sale after reviewing the lead paint inspection results. When the second buyers, the family with the little boy, made an offer on the house, the agent withheld the lead paint report from the new buyers, who bought the home in 2014.

Recently, the 73-year-old Niagara County, New York, real estate agent pled guilty in U.S. District Court to failing to disclose an inspection report, which disclosed the lead paint. She was fined $1,000 and ordered to pay restitution of $53,326.

The buyers have also sued for civil damages, naming the agent and the seller for damages equaling the $132,000 sale price, plus triple damages for violating the law, and general negligence. Thomas J. Prohaska “Lockport couple sues real estate agent, home seller over lead poisoning” www.buffalonews.com (Apr. 13, 2018).

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

Hanover Insurance Group

Is your Neighborhood Garage Sale covered by your E&O?

We have been asked over the years if events such as ice cream socials, holiday toy drives, garage sales, etc, conducted by real estate agents within their communities to market their personal/team brand are covered under their E&O policy. What if someone comes to an event and gets injured or worse, is the real estate agent/agency liability covered by their E&O policy? The short answer is no. Garage sales, come visit Santa, 5k charity races, wine tastings, etc. are communal events which are not “normal” activities performed by an agent providing real estate services.

Understandability many of these events are great ways to keep your name top of mind and create goodwill within your market but they have their own risk exposures. This liability can be address by a special event rider to your existing GL policy. Often these riders are a few hundred dollars and can cover multiple types of events over the yearly term of the policy. Considering most agents don’t carry a GL policy themselves, your agency can obtain a rider and pass through the incremental premium increase/ expense to those agents who conduct these types of community outreach events. Stay safe and covered because sometimes remorse is what you DON’T buy.

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

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.

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

Convicted Sex Offender: To Rent or Not to Rent, that is the Question (Part 1)

What should you do if a convicted sex offender, out of jail for 10 years, applies to rent one of your listings? Ask the owner of the property?… but what if he/she does not give you a clear decision To Rent or Not to Rent? Does approving this application create additional liability for yourself and your agency?

We know that the Civil Rights Act (Fair Housing Act) of 1968, Sec. 804. [42 U.S.C. 3604], and all subsequent amendments, does not identify sex offenders as a protected class like race, color, religion, age, gender, but does that mean you are cleared to disqualify the candidate? Does the public registration requirement of sex offenders provide adequate notice to the community to obviate any liability? All 50 states require convicted sex offenders to register their residency. Many states have laws that restrict residency within a certain distance of a school or daycare based on their conviction tier. Here are the 3 levels:

  1.  Tier 1 offenders: Must update their whereabouts every year with 15 years of registration
  2.  Tier 2 offenders: Must update their whereabouts every six months with 25 years of registration
  3. Tier 3 offenders: Must update their whereabouts every three months with lifetime registration requirements.

Stay tuned for the conclusions on this topic…we are working to figure out an E&O insurance coverage position on this topic but in the meantime here are some links to educate yourself on this topic:

Sex Offender Registration
Adam Walsh Child Protection and Safety Act
Sex Offender Registration and Notification Act
National Sex Offender Public Website
State-specific Registry Sites
Guide to Fair Housing
The Fair Housing Act
“Megan’s Law”

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.

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

Hanover Insurance Group

Protecting Client Property: Real Estate Agent’s Ethics Violation Turns Criminal

During the Christmas season, neighbors in a Connecticut town spotted two men carrying large sacks in and out of a home. According to police, one was a local realtor and the other, his accomplice. The men were in the process of stealing from an unoccupied house.

Police arrested the real estate agent on charges of third-degree burglary, conspiracy to commit third-degree burglary, and possession of burglary tools. The home belonged to a recently deceased man, and the agent had access to the home as a realtor.

Police are investigating whether the real estate professional abused access to other homes, which had recently experienced burglaries. Ben Lane “Connecticut real estate agent arrested for allegedly abusing access to rob homes-Authorities investigating a string of burglaries” clarionledger.com (Dec. 29, 2016).

Commentary

The realtor in the above-cited article likely violated at least two professional standards of practice, which led to his criminal liability as well. The 2017 Code of Ethics of the National Association of Realtors includes the following:

Standard of Practice 1-10

REALTORS® shall, consistent with the terms and conditions of their real estate licensure and their property management agreement, competently manage the property of clients with due regard for the rights, safety and health of tenants and others lawfully on the premises.

Standard of Practice 1-11

REALTORS® who are employed to maintain or manage a client’s property shall exercise due diligence and make reasonable efforts to protect it against reasonably foreseeable contingencies and losses.

The particular types of ethics violations in Connecticut are not as common as violations relating to representation and honesty. And, the agent-turned-burglar incident is an extreme and obvious case of an agent failing to properly manage or protect a client’s property.

However, these days, protecting a client’s property is not just about preventing physical access. Real estate professionals must also protect a client’s privacy. During an open house, for example, hide not only the obvious things, like jewelry and small electronics, but also hide any medications in the bathroom, checkbooks, garage door remotes, or any kind of document with your client’s personal information on it. Shut off the homeowners’ Wi-Fi while crowds are present to minimize network hacking attempts.

Consider using security cameras and alarms. It is now possible to easily equip the home with not only security alarms, but also with portable or temporary security cameras can be quickly set up, viewed from a smartphone, and removed when the home is no longer being shown.

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.

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, 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.

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

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

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

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

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

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.

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

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


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

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

Service 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.