What Could Possibly Go Wrong?

What Could Possibly Go Wrong? Common Pitfalls for Real Estate Professionals, and What To Do About Them – Part 1

By John Torvi

The work of “real estate” is truly a collaborative one. Every person and business are dependent on another person and business to get the job done. To state “No person is an island” could not be more true. The specialized work of agents and brokers, appraisers, lenders, attorneys, home inspectors and title agents is woven together to achieve a common goal. This collaborative effort is mostly successful , but participants should understand that their risk of problems and potential insurance claims and lawsuits is multiplied by each business, and their employees and agents, involved in the work.

With three decades in the insurance industry, including the last sixteen years working with real estate professionals, the author has witnessed thousands of insurance claims, ranging from the legitimate to the fantastical. There were few occasions when only one business or person was sued. Liability and responsibility for any damages is not determined at the time a claim is made, but after the lengthy process of interviews, depositions, mediation, hearings and/or trials. While anyone can be sued, it is what happens next that determines who wins or loses The average time for resolution of a claim against a real estate brokerage or agent, for example, is about one year. Statistics show that 25% of all real estate agents will be sued during their career.

Let us look at some of the more common claims and see who is a potential target of a lawsuit:

-Disclosure/Non-Disclosure of a property condition, defect, or characteristic. These types of claims amount to almost half of all lawsuits. Examples include (alleged) leaky roofs, cracked foundations, square footage errors of building and/or property, incorrect zoning information, title defects, and in one interesting example, the buyers’ inability to add on to their home due to protected plants on the property. Targets of these types of lawsuits are typically agents/brokerages, home inspectors, appraisers, and title agents.

-Fair Housing and Discrimination allegations result in long, expensive, and emotionally taxing proceedings. Examples can include an agent’s comments like “you won’t be happy in this neighborhood, as it’s mostly old/ young/families/single (i.e. people who I think are not like you)”, handicap discrimination, including therapy and comfort animals, not showing properties to all potential buyers, appraisal valuation allegedly based on the race of current occupants, restrictive conditions, cost and availability of rental properties based on ethnicity, gender, color, etc. of potential occupant, and other varied but similar restrictions, acts, and comments. Demonstrating how difficult some of these allegations can be to sort out, a recent lawsuit involved a claim against an agent representing a seller who had put (potentially discriminatory) conditions on the out-of-state buyer. When the seller’s agent conveyed the information to the potential buyer, that person claimed discrimination as the agent allegedly changed the conditions of the sale due to the sound of the potential buyer’s voice. Targets of Fair Housing and Discrimination suits are agents, lenders, appraisers, attorneys, and property managers.

-Dual Agency and Agent-Owned property. The primary mandate in providing a professional service is to act in the best interest of one’s client. The goal of every seller is to sell as high as possible while the goal of every buyer is to buy as low as possible. How does a dual agency listing reconcile that? What if the listing agent is also the owner of the home? In these types of situations, it becomes most difficult to prove that bias did not exist. The defendant will almost always be found to have some liability, and the primary defendant will be the agent/brokerage. In the spirit of most lawsuits, however, the appraiser and lender may be brought in if the price paid is the basis of the suit, or the appraiser, home inspector and/or title agent if the basis of the claim is property defect or characteristic.

-Property Damage or Bodily Injury. The question of who is responsible for injury of a person or property is complicated. Who bears responsibility for a faulty stair railing if a tenant falls down the stairs and is injured, the property owner or property manager? Another scenario might be a potential buyer being injured during a showing or open house, or the property being damaged because a window was left open and water came in. Note that there are different implications and obligations for the listing agent and buyers’ agent for both open houses and showings, as well as claims related to improper lockbox protocols. Bodily injury and property damage claims generally are directed at agents/ brokerages, though appraisers and home inspectors are vulnerable to issues that might arise during their inspections.

-Employees and Agents. The above scenarios discuss potential harm to a third party, but harm can also come to a business due to actions of an employee or agent, including fraud and embezzlement, discrimination or harassment claims or injury to an employee/agent while performing a business-related task. The latter can be especially troublesome for real estate brokerages, as few States clearly require Worker's Compensation for independent contractor agents while many States provide confusing or no direction on whether agents should be covered under Worker's Compensation. The above represents real-life risk (and we haven’t even mentioned cybercrime!). The reader may ask “Doesn’t my insurance cover this?”. It is mostly true that some insurance policy covers the examples made above. But which ones? What are the conditions of coverage; how much do they cost and where do I get them? Can I reduce my risk of being sued through better training and procedures? (That’s a big YES). Insurance policies can be confusing, and no policy covers everything (if someone tells you that a policy is “comprehensive’, run for the hills). For example, one type of policy covers damage from a showing, while another from an open house, though there also might be coverage for both in another type of policy! Confusing? Yes, but there are remedies. A business owner bears the responsibility of identifying potential risk factors and taking action to reduce them. Anyone can be sued at any time, and defense attorneys are more expensive than insurance policies (which of course provide your defense). Nevertheless, insurance policies can also be costly, and any entrepreneur should understand their coverage. Just as business people use the specialized services of attorneys and accountants, the services of an insurance advisor and risk manager who is familiar with your industry can be just as valuable.

In this piece, we discussed some of the things that can go wrong, and next we willdiscuss some risk management tools and how to obtain the most appropriate insurance coverage when the inevitable happens.

John Torvi

Owner and President of J Torvi Advisory