Learn 8 key ways to avoid the most common areas of litigation in this webinar with lots of examples (complete transcript appears below). Some details are specific to Texas, but the overall 8 points apply to every state.
Dave Miller, Regional Vice President with Fidelity National Home Warranty, talks to Tom O’Connell, an attorney with Gauntt, Koen, Binney & Kidd. Tom has been defending real estate professionals since 1986 and has been a valued member of the CRES legal panel for more than 20 years.
In this informative webinar, Dave and Tom discuss:
- The pitfalls of being involved in transactions or taking on responsibilities beyond your expertise How to decide if you should disclose something (including prior reports on a property)
- How to include details of a property in marketing materials and protect yourself
- How long should you keep client files
- The importance of an attorney that specializes in real estate E&O should you have issues
- When should you tell your E&O carrier about an issue?
- How real estate E&O insurance can help you keep your real estate license
Tom shares real-life litigation scenarios from cases he has defended. He also provides valuable tips so you can minimize risk in your real estate business.
To find out more, watch the full webinar , listen to the podcast, or see the transcript below.
Laura Prouse:
Thank you for joining us today for some ccommon steps you can take to avoid litigation.
I’m Laura Prouse with CRES. Today, we welcome attorney Tom O’Connell from Gauntt, Koen, Binney & Kidd, which has offices in the Woodlands and Dallas. Tom has been defending real estate professionals since 1986 and has been a valued member of the CRES legal panel for more than 20 years. He’s also a licensed TREK instructor. Along with Tom, we have Dave Miller, regional vice president with Fidelity National Home Warranty. Dave manages the CRES Advantage Home Warranty Plan. When CRES E&O members purchase a Fidelity Home Warranty, they reduce their out-of-pocket claims costs by $2,500. We have a lot to cover today. So, Dave, I’ll let you get started.
Dave Miller:
Thanks, Laura, for having us today. I am so excited about talking with my good friend, Tom O’Connell. We’re lucky to have you because you bring such a wealth of knowledge and you’ve perhaps “seen it all.” So Tom, welcome today.
Step #1: Stay within the scope of your expertise
I know that real estate licensees always want to do everything they can for their customers. And sometimes this means stepping out of their primary specialty or maybe getting into a geographical area that is not theirs. Can you explain the importance of licensees staying in their lane and some of the pitfalls that occur when they try to do too much?
Tom O’Connell:
One quick way to get embroiled in a lawsuit as a real estate licensee is be involved in transactions far beyond your expertise or in unfamiliar geographical areas.
And it seems to happen most often in commercial transactions. As a real estate licensee, if you’ve never heard of something called an Estoppel letter, you probably shouldn’t be handling commercial transactions.
Let me give you an example of an actual lawsuit I was involved in. An agent with experience in handling residential transactions is contacted by an individual to have an agent assist him in purchasing a small commercial office building.
And there are other agents in the brokerage that can help you as far as opportunity to be included in this. But you’re thinking I’m going to get a big commission here, so I’m not going to enlist their help.
So, the transaction ends up closing and afterwards litigation ensues. There may be numerous problems that pop up with an office building. And in a subsequent lawsuit against the agent by the buyer, it’s determined that there were numerous steps that you, the agent, did not take in the transaction, that would’ve been the custom and practice of a commercial real estate agent.
So. what should you do if this type of opportunity occurs? I’d say don’t be involved at all. But I know that’s probably not going to happen. So, what you need to do in that situation is enlist the aid of a qualified agent to assist you in that transaction. Otherwise, you may become mired in litigation. So that’s the first simple step to avoid litigation.
Dave Miller:
We’ve talked in the past about agents trying to wear so many different hats in the transaction, maybe a little bit of the Transaction Coordinator work, getting involved with the home inspector, getting involved with escrow. What are some of the downfalls of an agent trying to wear too many hats in the transaction?
Tom O’Connell:
I see this a lot too, because real estate agents always want to come across as being knowledgeable and helpful to their client. But as you probably already know, you can create more problems trying to become too knowledgeable or too helpful.
One example: ordinarily, you’re not under a duty to conduct your own independent investigations under Texas law, but you could be responsible if you assume that duty. Let’s go over an example of another lawsuit that I was involved with. An agent assisted his client in locating property suitable for building a large residence. The client notices pipeline mistakes on the property, and asks the agent to determine the width of the easement, because the available survey only states that it is an undeterminable width. The agent agrees to do so, rather than suggesting that they retain a separate surveyor.
The agent visits with the pipeline company and informs the client that the pipeline company says the easement is 50 foot in width. But the client later alleges that the agent said it was only 25 feet, and they only discovered it was 50 feet after they get an angry letter from the pipeline company demanding they stop construction.
What should have been done in that situation? Well, the agent should have politely declined the client’s request to determine the width of the easement and suggested that the client retain a surveyor.
It’s as simple as that. And that’s one thing that the agent could have done that she didn’t. She assumed duties and responsibilities that she normally isn’t required to under Texas law. But since she assumed that responsibility or duty, then she’s responsible for that as well. So that’s an example of how an agent trying to be too helpful can mire themselves in additional problems.
Step #2: Get errors and Omissions Insurance to protect you – and keep your license
Dave Miller:
I believe that only about 50% of the real estate offices and agents carry Errors and Omissions insurance in Texas. Why do you think it’s always been historically so low? And obviously give us some education on why it’s so important to carry it?
Tom O’Connell:
I hear this a lot from agents and brokers that they don’t carry E and O insurance for two reasons. Number one, because of the cost. But, also for some odd reason, they think it makes them a target for litigation.
I also get told this by a lot of agents: “Hey, I’m judgment proof. You can’t squeeze blood out of a turnip. So let them go after me and get a judgment against me. I’m just going to keep selling real estate.”
So, here’s another litigation example. A listing agent was sued by a buyer alleging that the agent failed to disclose a defect. The agent doesn’t have E and O insurance and decides he can’t afford an attorney, after every attorney he visits wants a minimum $10,000 retainer.
So, the agent files his own answer to the lawsuit. The buyer’s attorney then takes the agent’s deposition. The agent makes numerous admissions against his interest, that he may not have made, if he had the benefit of counsel. Now, the buyer’s attorney discovers for the first time the agent doesn’t carry E and O insurance. And that’s usually the way E&O comes up, in the middle of discovery, not at the beginning of litigation. And so because they don’t have counsel or maybe they have a counsel that doesn’t know what they’re doing, they end up getting a judgment against them. And what’s the problem with that? Have you heard of the Real Estate Recovery Fund?
If you end up with a judgment against you as the agent, and you don’t have E&O, if the plaintiff’s attorney knows what he’s doing, he’s going to apply to the Fund for them to get paid.
The last time I checked, it pays up to $50,000 per incident. So you may be thinking, “Well, that sounds pretty good to me. Somebody else is going to pay for it. And I’m just going to keep selling real estate.” No, that’s not the way it works.
The way it works is that TREK’s going to look at the judgment against you. They’re going to suspend your license. They’re not going to consider giving you back your license until you pay them back.
Even then, your conduct may be so egregious, they may never give your license back.
So, this idea you’re not going to get sued because you don’t have E and O insurance, that’s just a total crock. In my example I gave you, it wasn’t until well into the discovery process where they actually found that out.
Step 3: When you need an attorney, be sure they’re experienced in real estate Errors and Omissions
Another good point is that if you have E and O insurance, you’re more likely to have an attorney be retained that knows E and O litigation. And you’re more likely to get an attorney that knows what they’re doing. So those are a couple of reasons why you should always have E and O insurance.
Dave Miller:
That’s a great point. For members that have CRES for their E and O insurance, if there’s a claim, they’re going to get an experienced real estate attorney like yourself.
But for those that don’t have E and O insurance, why is it really important that they seek counsel from a real estate E and O attorney versus maybe just a general counsel?
Tom O’Connell:
Well, I have an example where the insurance carrier that was involved didn’t do a very good job of retaining counsel. The real estate agent sued worked in a rural area. The agent proposed to the E and O adjuster handling the file that they retain an attorney that’s been licensed for 30 years (and according to the agent knows all the judges in the area.)
As the attorney gets into the litigation, a couple months before he actually goes to trial, he realizes he’s way over his head. That’s because he’s a probate attorney who knows nothing about handling E and O matters. He calls the insurance carrier and wants to get out of the assignment.
I get the phone call from the insurance carrier. It’s 60 days before trial. The problem is the damage has probably already done. Maybe he didn’t designate the proper expert or maybe the probate attorney didn’t take the proper depositions and so forth.
This is why it’s so important for you as a real estate professional to have an attorney that’s well versed in handling real estate E and O matters.
Sometimes some of the big law firms are notorious for this. If a really big law firm gets hired to represent you, you might be thinking, “Oh, that’s wonderful. I’ve heard of them before.” They give you this well-known partner that’s going to handle your case.
And so, they tell you they’re going to send a lawyer out to handle this matter. The lawyer shows up at your office, and he looks like he just got out of law school. And the problem is he probably did just get out of law school. The big law firm is going to have this young attorney cut his teeth on your case. And does that sound like a very good option?
So, you need to make sure that the attorney that comes out to visit with you is well versed in handling real estate E and O matters.
When he’s looking at the seller’s disclosure statement, he doesn’t have a confused look on his face. He knows the proper questions to ask. And so, it’s very important that the attorney that gets retained on your behalf is well versed in handling real estate E and O matters.
Step 4: It you know it, disclose it
Dave Miller:
What are some of the duties of real estate licensees (and what should they avoid) when disclosing defects under Texas case law?
Tom O’Connell:
Well, I can’t emphasize this enough: when in doubt, disclose, disclose, disclose. You should always disclose any potential of defects.
In Texas, basically the case law says you can’t disclose what you don’t know about. Under the Texas Deceptive Trade Practices Act (DTPA), you can only disclose what you have actual knowledge of in order to be actionable. So, it’s not even enough to say that you should have known about it. You have to have actual knowledge.
And the other thing I wanted to mention: you’re not under a duty to conduct independent investigations regarding the character or condition of the property, unless you assume those duties.
Let’s say that your client is looking at a piece of property and there are spider cracks in the corner. And we all know that this can mean normal settlement, but let’s say there’s an inspection. Your client buys the property, and then it turns out that it’s a bad foundation.
You end up getting a demand letter from your client’s attorneys saying, “Well, maybe you didn’t actually know about it, but you should have known that this had a cracked foundation.”
No, you have to have actual knowledge.
Or they might say, “Well, additionally, you should have known about it. They might say that you neglected your duty in not conducting a thorough investigation.”
But no, you’re not under a duty to conduct independent investigations, unless you assume that duty.
So, if I’m handling that case for you and I get a copy of that demand letter, I’m going to tell that lawyer that obviously you’re not familiar with real estate case law. We don’t assume those duties and responsibilities, and you don’t have a case against us unless we have actual knowledge of the defect.
And if they file suit, not only are we going to respond to that, we’re going to go after them for attorney’s fees under the prevailing party clause in the contract.
So, your duties are actually more limited than you may be thinking, but it only requires disclosure as far as things you have actual knowledge of.
Step 5: Always indicate source of information
Dave Miller:
How does a real estate professional limit liability when putting information in a marketing piece that was obtained from another source and, of course, square footage comes to mind first, but what are some other examples?
Tom O’Connell:
This might be one of those times you might want to wake up a little bit, because this is going to actually affect your pocketbook. The problem with you utilizing information from other sources about the character or condition of the property is if it’s wrong, you may be held liable.
Let’s say you’re the listing agent, and your client tells you the square footage without knowing if it’s correct. They tell you it’s 5,500 square feet. You advertise in your flyer that the square footage is 5,500 square feet. The potential purchaser sees that, relies on that and buys the property, and it turns out it’s actually 4,500 square feet.
They’re going to end up suing, because unfortunately you made an actual representation that it was 5,500 square feet and it wasn’t. Now, there are some potential defenses though under the Texas Deceptive Trade Practice Act:
If you provide notice in writing to the buyer that the information was obtained from another source, and you did not know, or could not have known the accuracy of the information.
In the example where your client told you it was 5,500 square feet? Say in that flyer, “5,500 square feet per owner.” It’s as simple as that, but you’d be amazed at how many times the agents don’t do that.
Remember though, you cannot have known or have reason to believe to know that the information was false.
In a lawsuit I handled, the agent said in a flyer, “5500 square feet per builder,” because the builder was his client. The problem was he had a prior appraisal report that indicated it was actually 4,000 square feet. So, remember, for it to be a defense, you cannot know or have reason to believe to know that the information was false.
Whenever you get information from your seller client, make sure the seller always signs off on those representations. Anywhere that you have the information — the flyer, your website, or the MLS. Make sure the seller signs off on it, because later when they’re getting deposed and the buyer’s attorney asks your good friend client, “Well, where did this agent get that information?”
Your client is going to say, “Well, I don’t know. I haven’t the slightest idea. I certainly didn’t tell him that.” So, you want to make sure that clients sign off on that so they don’t say later on, “Well, I wasn’t aware of that.” (So print out the information and have the client sign it, or have them approve it via email, and place those sign-offs and approvals in the client file.)
Another common marketing issue is those flyers that say, “horses allowed”. I had a lawsuit where the agent’s flyer said horses allowed. He likely got that information from his client. Well, guess what? Horses weren’t allowed.
All that agent had to do in that example was to say, “horses allowed per owner.” It’s a simple as that, but they didn’t do it that way.
Step 6: Disclose any prior reports on the property
Dave Miller:
What percentage of your lawsuits are a failure to disclose? Is it 40, 50%?
Tom O’Connell:
Probably about 75 to 80%.
We already went over that it’s always essential for you to disclose any material issues or defects regarding the property. But what I always tell licensees is, if you’re asking yourself, “Is this something that I should disclose?” Just disclose it. You don’t have to worry about it. I mean, you already answered the question.
Another lawsuit that I handled was where a contract comes in on a listing that an agent has. An inspection is done by a licensed inspector, which reveals potential problems with the foundation. That deal falls through when the potential buyer fails to obtain financing. Another contract comes in and this time you’re the smart real estate agent.
You’re going to get a structural engineer to look at it. The structural engineer takes a look at it and doesn’t see a problem. And you’re thinking to yourself, “Well, structural engineers know a lot more about it than a regular inspector. So, I don’t think I even need to disclose that earlier inspection report.” The property closes, and there are problems.
It’s going to come up later on when they take your deposition that this prior report that wasn’t disclosed. So, keep yourself out of litigation by just disclosing everything. Make sure you disclose any prior reports.
There’s a section of the seller’s disclosure where you have to put in that information anyway. So if you’re asking yourself if you need to disclose it, then you probably answered your question.
Step 7: Keep those client files “forever”
Dave Miller:
How long should a real estate agent keep client files? Should they ever delete them, or should they just keep them in case something pops up later? Are there statutes in Texas that are two and three years?
Tom O’Connell:
That’s the statute of limitations in Texas. I get asked that question a lot. The statute of limitations is how long they have to sue you. It depends on the type of claim that you have. If it’s under the Texas Deceptive Trade Practice Act or a negligence claim, it’s two years.
But if it’s for fraud or breach of contract, it’s a four year statute of limitations. But the way that really works is: it’s two or four years from when they DISCOVER they have a claim against you.
Let’s say these people buy a piece of property. Five years later, they decide they want to do some renovation. They tear down a wall and it turns out that there’s a termite infestation there. They do a little bit of digging. They hire a lawyer, and it turns out that you as a real estate agent had a prior report from way back when that indicated that there was termite infestation there.
Now, you may be thinking to yourself, “Now, Tom said the longest they could sue us is four years. Right?” No, you’re not okay, because it’s 2 or 4 years from when they DISCOVER it.
And it’s what a reasonable person would’ve discovered under the same or similar circumstances. And I think it’s more than reasonable that they don’t discover it until they tear down a wall. So ,there’s no basis for why or how they should have ever known about that issue or problem back then.
So as far as how long you need to keep your records, you never expunge them.
I mean, I hear this a lot from the real estate agents that say, “Well, I generally follow the IRS rule. Keep records for seven years.” And I think that if you go by that, you should probably be fine. Usually, a defect is going to manifest itself by then.
But, if I had my way, I’d just keep your records.
I get this a lot where the agent says, “But what if I put down on my records something that illustrates I did something wrong. Should I really be putting down that information?”
Well, if you’re doing your job right and you put down the information you’re supposed to be doing, then you shouldn’t be worried about that. So, you should always be putting details in writing.
The other thing I also always like to include is make sure you always include a chronological log of events when they happen at the time that they transpire.
Step 8: Report every potential claim, especially on your E&O renewal
Dave Miller:
E and O insurance defines a claim as a demand for money or services. What exactly does that mean? How does an agent really know if they’re getting named in a lawsuit or if they have somebody who’s unhappy? Because it can come via email, phone call, text.
Tom O’Connell:
The question is what’s a claim? You should look at how that term is defined in your policy.
Generally, it’s when a reasonable person in the same or similar circumstances has an indication that there may be a claim for money damages now or in the future.
But if you get a subpoena or a request to provide documents, don’t just think because that’s not a money claim, you shouldn’t report it. Let your E and O carrier know about that. Let them figure it out. More likely than not, they’re going to send it over to somebody like me to handle it on your behalf. And then you get the benefit of counsel without just floundering around without an attorney to assist you.
(Should you ever get a subpoena or a request for documents, never answer questions from the opposing attorney without benefit of having your own counsel. You can take notes on the questions the attorney has, and advise you’ll get back to him or her.)
So, a potential claim could involve any kind of consideration. If you’re asking yourself the question, “should I report this?” You need to notify your carrier and let them figure it out.
If you do have a potential claim or whatever, and you come up for renewal, you want to make sure you always include that information in that renewal. Because you don’t want them later on saying, “Well, you didn’t include that information,” and litigation pops up. If you don’t report it and you later have a problem, you won’t have coverage.
Dave Miller:
We always suggest that if you have anything in your transaction that doesn’t sound right or look right, go to your management team and let them address it. As CRES members, your management team (if you have E&O through your firm) or you (if you have an individual E&O policy) have access to the CRES risk management hotline. You can just call and ask, “Do I have something here? Did I do something wrong? Or do I have a potential problem here?”
Laura Prouse:
Thank you both. As always very, very informative, great information, especially on the insurance side. If you have something, whether it’s a text message, writing, email, whatever, hand it over to your insurance carrier and let them take a look at it and advise you on the next step. Thank you all for watching.
