Intel | Booming Real Estate Market Could Mean Increased Error Risk for Agents
Home / Intel / Booming Real Estate Market Could Mean Increased Error Risk for Agents

Booming Real Estate Market Could Mean Increased Error Risk for Agents

Powered By

A real estate agent and realty company are being sued for their handling of a $4.6 million home sale in Sarasota, Florida. According to a report in the Sarasota Herald-Tribune, a man who wanted to buy the Bird Key neighborhood property but whose offer was not chosen is accusing real estate agent Roger Pettingell and Coldwell Banker Realty of manipulating the sellers into accepting a lower bid because it was from a buyer Pettingell also represented and would mean he could collect both sides of the commission.

In his lawsuit, would-be buyer Barry Cohen claims his offer on the waterfront property was $400,000 higher than the winning bid and that both offers waived the inspection period, WFLA-TV reported. He is seeking the difference in price between his offer and what he eventually spent on a different home purchase. The sellers have also filed a lawsuit and seek damages of more than $30,000 in addition to the return of commission fees paid. Pettingell, a top-performing agent in the area, has denied the claims and told the Herald-Tribune in a statement that he believes he will be vindicated through the legal process.

“When a real estate agent is accused of self-dealing and/or not acting with their client’s best interests in mind, these lawsuits can get quite ugly and expensive to defend,” said Melissa Martin, Broker, Professional Liability, Burns & Wilcox, Milwaukee, Wisconsin. “Even without proven intent to commit fraud or act in an illegal way, the agent has a fiduciary responsibility to their client and bad acts can still constitute a breach of this responsibility.

“Outright fraud is not the most common type of lawsuit, but unethical behavior exists in the real estate world, as in many other professions, and can be further exacerbated by a commission-based incentive structure.”

Image

The increase in competition in the market … means you have multiple individuals interested in the same house and it can turn into a bidding war. If somebody thinks they were slighted in some way, they could decide to sue.

Alleged real estate ethics violations are a prime example of why real estate agents should carry Real Estate Agents Errors & Omissions (E&O) Insurance, which is designed to cover financial losses resulting from an agent’s actions. Today’s hot real estate market, in the Sarasota area and nationally, could increase an agent’s chances of facing a lawsuit.

“In a real estate market that is booming, you will probably find more cases like this,” said Rahmad Bauldrick, Director, Professional Liability, Regional Practice Group Leader, Burns & Wilcox, Chicago, Illinois. “The increase in competition in the market, where there are more buyers than inventory, means you have multiple individuals interested in the same house and it can turn into a bidding war. If somebody thinks they were slighted in some way, they could decide to sue.”

Real estate contract errors, deadline lapses can bring costly legal battles

On Sept. 16, a couple in Dobbs Ferry, New York, filed a lawsuit against their real estate agents and broker, alleging that they were manipulated into selling their Connecticut rental home for less than it was worth, the Westchester & Farfield County Business Journals reported. The couple reportedly accuses the agents of seeking subsequent transactions with the buyer, who wanted to “flip” the property.

When a third party loses money due to a real estate agent’s errors, omissions, negligence, or lack of due diligence, Real Estate Agents E&O Insurance can help cover the cost of legal defense, settlement payments, licensing reviews, and more.

“With E&O policies, the trigger is a third party claiming financial loss,” Martin explained. “If a third party lost money or was forced to pay additional funds stemming from an error or omission on the part of a real estate professional, those would be considered E&O claims.”

In real estate, these lawsuits could stem from administrative mistakes, missing permits, failing to execute a contract properly, or omitting a detail that ends up voiding a sale or costing a buyer or seller more money in the transaction. Deadlines are another key factor; if a real estate agent does not act in a timely manner, for example, a client could lose their earnest money deposit as a result.

Image

If a third party lost money or was forced to pay additional funds stemming from an error or omission on the part of a real estate professional, those would be considered E&O claims.

“It is so important for agents to carry E&O Insurance because we live in a very litigious society,” Bauldrick said. “Whether an agent has committed negligence or not, they could be sued. They will still have to incur the legal expenses.”

Even if the agent is found not liable, legal defense alone could cost tens of thousands of dollars, Martin said. If an agent is liable, the full cost could vary widely, especially on a high-value transaction.

“If they are found to be liable and the result is a full limit loss, it could cost them quite a bit going forward as well,” she said. “If you have a $1 million policy and the insurance pays out that full amount, the real estate agent could also end up paying exponentially more in premium next year when it comes time to renew their insurance coverage.”

Real Estate Agents E&O Insurance could also help agents rebuild their reputation after they are accused of wrongdoing, Bauldrick pointed out. This can include covering the cost of public relations services, for example.

“Most E&O Insurance policies will provide a sublimit for reputation restoration,” Bauldrick said. “In real estate, your reputation is your business. It is an ethical, trust-based business and you want to be cleared of any wrongdoing in the event that something goes wrong. The way you can do that is by having the proper insurance coverage.”

Fast-moving market, less client communication could add to risk of lawsuits

According to the RE/MAX National Housing Report for August 2021, published on Sept. 17, the U.S. real estate market remains near record highs but shows some possible signs of cooling, with median sale prices dropping 1.2% compared to July. Sales totals in August were still the second highest in the report’s 13-year history, the real estate franchise reported. In Canada, the real estate market could also be slowing down slightly, CBC News reported on Sept. 15, with August sales up 13% from last year but lower than peak levels seen in March 2021.

Image

It is an ethical, trust-based business and you want to be cleared of any wrongdoing in the event that something goes wrong. The way you can do that is by having the proper insurance coverage.

When the real estate market is very active, high volume can create more opportunities for mistakes, Martin noted. “As with any industry, when you have so much you are trying to handle, the possibility for error just goes up,” she said. “When you have multiple transactions going at a time, it could be easy to lose track or confuse clients or sales. All of those things come into play with high volume.”

Less time to communicate with clients during a busy season could raise the risk of problems, as well. “If you are not servicing your client as well, what could have been a simple explanatory phone call could turn into a failure to disclose material information,” she said. “If you are not able to smooth things out on the front end, it could be more costly on the back end.”

According to a Sept. 2 report by Canadian housing news outlet Better Dwelling, the Real Estate Council of Ontario recently warned that some agents were illegally “steering” clients to homes that would involve a higher sales commission. Fines for this activity can range from $50,000 to $100,000 or result in license revocation.

Real estate agents should know that E&O Insurance generally covers negligence but usually excludes criminal and fraudulent conduct. Some policies will include “final adjudication” wording that allows the policy to continue defending their policyholder until the appeals process has been exhausted”, Martin noted. “In this case, if you are found to be criminally liable at outset, settlement of the claim itself would be excluded,” she said. “However, if there is an appeal, their insurance carrier could continue to foot the bill for defense, and if the final adjudication finds them not criminally liable, they may be able to bring the insurance carrier back in to settle that lawsuit.”

Agents may want to ask their insurance broker about open house and lockbox sublimits, third-party discrimination coverage, and other potential enhancements for their Real Estate Agents E&O Insurance. When a real estate agent named in a lawsuit is also serving in a management capacity for a real estate company, their Directors & Officers Insurance could also be involved in responding to the suit, she added.

Single lawsuit could be financially devastating to real estate agents

New technology in the industry may eventually change or add to the risks real estate agents face. According to a CNBC report published Sept. 17, many real estate firms are increasing their use of artificial intelligence to help agents with property values, home searching and more. In all types of real estate relationships, contracts are essential, Bauldrick emphasized. These should define the agent’s obligations and address potential issues such as dual agency, in which a single agent represents the buyer and seller.

“Having standard industry contracts in place is critical,” he said.

Depending on where they practice, agents may be required to carry Real Estate Agents E&O Insurance by their state or local licensing board or the real estate firm they work with. All real estate agents should plan for this coverage, Martin and Bauldrick agreed.

“You want to make sure that you are covered on all fronts and you are fully protecting your assets,” Bauldrick said. “If you are a real estate agent, you need to be carrying coverage. If you do not carry sufficient limits and you are found negligent, you potentially face the possibilities of being unable to pay the damages that are required of you.”

“Risk management procedures should be in place and reviewed regularly, including file management systems and continuing education,” Martin noted. “They should stay up to date on the latest in their field,” she said. “This can help mitigate future errors and omissions issues.”

Image

What nearly all of these policyholders have in common is that their E&O policy is now viewed as an indispensable asset to sustaining their business operations in the face of potential legal action. They have learned that the insurance more than pays for itself even after one claim...

Still, “we would counsel against even smaller real estate agents going without insurance,” Martin said. “Professional Liability products are always changing, so it is best practices for an agent/agency to have an experienced retail insurance broker who will partner with them to seek out the best coverage.”

E&O Insurance policies are generally affordable for agents but premium financing may be available for those concerned about the cost. For many real estate agents, the impact of a single large, uninsured loss would be devastating.

“Especially if you are smaller, E&O Insurance is so important. If you make $100,000 in commission in one year, one bad claim could account for $25,000 — eating up a quarter of your revenues for the entire year,” Martin said. “The result could be a loss of personal assets, or possible default on other financial obligations, especially if this is your sole source of income. In the Excess & Surplus lines market, we often come across troubled risks that have seen claims in the past.”

“What nearly all of these policyholders have in common is that their E&O policy is now viewed as an indispensable asset to sustaining their business operations in the face of potential legal action. They have learned that the insurance more than pays for itself even after one claim and can keep their doors open during troubling times,” Martin added.

Featured Solution(s)

Featured Expert

Similar Articles

Featured Solutions

Booming Real Estate Market Could Mean Increased Error Risk for Agents

Errors and Omissions

We provide access to a variety of Errors and Omissions products, aimed at limiting the exposure of business professionals when…