Real Estate Brokers and Sales Agents Should Read Their E&O Policies

Last week, I attended the 52nd Annual Fund Assembly. The Assembly is a three-day long continuing legal education conference attended by around 2,000 Florida dirt lawyers like Yours Truly. I enjoy the Assembly because I always learn something new. This year, as it has for the past five years, the Assembly focused on CFPB regulations, TRID, the somewhat-new Closing Disclosure, and in-depth title insurance claims issues.

However, we also had the pleasure of hearing an attorney who represents real estate agents and brokers when they are sued for malpractice. She reviewed a typical E&O Insurance Policy and its terms, and we learned some of the issues that land agents and their brokers in litigation most often.

Here are some tips she asked us to tell REALTORs who refer business to our title agencies or our law firms for real estate matters:

1. Once the closing is over, don’t continue to be overly helpful to your customers. If they call and request a copy of their contract, don’t feel the need to send them a copy of your entire file. Just send them exactly what they need, and — before you send anything that they may not be entitled to as they would a contract or another document they executed (i.e. your e-mails to and from a home inspector) — speak with your attorney.
2. Don’t keep more than one file for a transaction. Some agencies have a file at the reception desk, one in the broker’s office, and another in the agent’s car’s trunk. Keep one file, electronically if possible, that has all of the communications and documents related to the transaction in one place.
3. Be careful when trying to save money by using procedures manuals or even file folders that were prepared for other brokerages. Those manuals and file folders (if they have checklists on them) set the standard of care that you are to follow in the transaction. If your firm is small, and the manual and checklists came from large firms with large compliance budgets, you are setting yourself up to fail to comply with your own standards of care.
4. Don’t scrimp on E&O insurance. Make sure you get coverage that covers everyone in your firm and not just the broker. Look for a deductible waiver clause in the policy. If this is present, your deductible could be waived so long as you had the following in your file:
   • a seller disclosure form signed by the buyer and seller prior to closing;
   • a home warranty purchased prior to closing (if you have to pay for it, do so)
   • a state or local board approved standard sales contract was used for the transaction; and either
     • a home inspection was completed and a copy provided to the buyer prior to closing; or
     • you acted solely as a buyer’s agent, and advised them in writing that they should obtain a home inspection, and provided a list of at least three home inspection companies on the disclosure.
5. Always check the brokerage records to see if the property you’re listing now was ever listed with the brokerage in the past. If so, pull that prior file and review the seller’s disclosure statement to make sure the same things are disclosed again in this listing. You’re automatically presumed to have knowledge of the property simply because it has been listed with your brokerage before, so you should take steps to ensure you disclose everything your brokerage learned about the property in the prior listing.
6. Avoid listing your own properties or properties of family members for sale. Many E&O policies specifically exclude coverage for such transactions.
7. Judges are skeptical of transaction brokerage in the first place, so when the defendant REALTOR in a lawsuit is also a part owner of the title agency, the mortgage brokerage, or any other settlement services provider in the transaction, it doesn’t help the REALTOR’s credibility in the lawsuit.
8. Report all potential claims to your E&O carrier as quickly as possible. The carrier may be able to assist with claims repair or avoidance to prevent it from becoming a major claim.

Also, be prepared that, if you are sued as a sales agent or broker, your life will be disrupted with depositions, meetings, mediations, and hearings. It will not be a “piece of cake” by any means. However, if you’re prepared with well-documented evidence, and disclosures signed and acknowledged by the parties, you should be ahead of the game.

— JES