By Lana Schroeder, Esq.,
Rice Insurance Services Company, LLC
It is no secret we live in a litigious society made worse by a difficult market economy. Lawsuits are filed every day in every part of the country. There are no guarantees that you will never receive a demand letter or be named in a lawsuit concerning your professional services as a real estate agent. However, by educating and familiarizing yourself with the most common types of claims made against our insureds, you may be able to recognize and hopefully avoid similar situations.
The ten most common claims made during the period 1/1/2001 through 7/31/2010 against our insureds include:
1. Fraud;
2. Breach of Duty;
3. Breach of Contract;
4. Negligence;
5. Bodily Injury / Property Damage;
6. Misrepresentation regarding the Condition of the Property;
7. Consumer Protection Act;
8. Earnest / Escrow Money Dispute;
9. Misrepresentation regarding Flooding or Leaks; and
10. Misrepresentation regarding the Value of the Property.
Fraud
Fraud claims are the most common cause of action we see from claimants and plaintiffs. Generally speaking, fraud contains an element of intent. In other words, for a plaintiff to succeed with a fraud claim, the plaintiff must convince the judge or jury that there was an intentional act of the defendant that was designed to cause harm to the plaintiff. The “intentional act” complained of may be an affirmative statement by the real estate agent, or it could be the purposeful withholding of a material fact about which the real estate agent has knowledge.
Claimed injuries are specific to each and every situation and therefore vary from lawsuit to lawsuit, but can include diminution of value of the subject property, cost to repair the defect, replace costs, lost profits, closing costs, physical and emotional distress, loss of consortium, and the plaintiffs’ attorney’s fees associated with the litigation.
Some frequent examples of fraud claims include:
- My real estate agent knew there was a discrepancy regarding the square footage of the home, and he purposefully did not disclose the discrepancy to us, the buyers.
- The listing agent had actual knowledge the well on the property did not produce the amount of water that she represented on the MLS.
- Even though the real estate agent knew there were problems jeopardizing the future of the development that we, the buyers, invested in, he purposefully withheld that information from us.
Damages may include not only the plaintiff’s actual damages, but also punitive damages, which are meant to be a punishment to the defendant or an example to the public to deter others from acting in such a way in the future. As a matter of public policy, damages awarded for acts of fraud are not insurable. Therefore, insurance carriers will not pay a judgment based on fraud. Because the defendant will be personally responsible for those amounts, fraud claims can be very dangerous.
Breach of Duty
As you know, real estate agents have a duty to act in the best interests of his/her clients. Failure to do so may result in a claim alleging breach of fiduciary duty. A fiduciary obligation is one that involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. When a fiduciary relationship exists, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his/her own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary, who must exercise all of the skill, care and diligence at his/her disposal when acting on behalf of the client. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client. The basis for a breach of duty claim may derive from a negligent or intentional act.
Some examples of breach of duty claims include:
- My real estate agent breached her duty by failing to verify the lot I contracted to purchase was the same lot she showed me.
- The listing agent failed to disclose the propensity of the road in front of the subject property to flood and therefore breached his duty to me, the buyer.
- My real estate agent breached her duty by purposefully not disclosing the seller’s dispute with the neighboring property owner over the water rights.
(Editor’s note: This article addresses the first two claim types. The remainder will be covered in Parts Two through Five of this series.)
Reprinted with permission of Rice Insurance Services Company, LLC
For more information on affordable errors and omissions insurance for low-risk real estate agents and brokers, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.