As a real estate professional, you face many risks every day in the course of business. Claims for “breach of duty” are just one of those risks. Here’s what breach of duty is, how you might find yourself in a breach of duty situation and what you can do to avoid the risks.
What Constitutes a Breach of Duty?
Breach of duty is one of the most common reasons real estate professionals are sued by their clients. As a real estate agent, you’re in a position of great trust with your clients because of your expertise and experience. With this comes a responsibility to always act in the best interests of your client and with honesty and transparency. If you breach this duty intentionally or through negligence, you put yourself at risk of a lawsuit that can cost you financially, and even put your real estate business at risk.
Examples of breach of duty situations include:
- Cases where real estate professionals act in their own interests rather than their clients
- Where an agent receives undisclosed commissions or profits
- Failure to disclose information pertinent to the property, for example, material defects or other factors which could influence the decision to purchase or the sale price
- Dual representation (you are representing both parties) without the client’s knowledge
- When the privacy of clients is breached, either through the sharing of personal information or confidential financial details
- Not submitting an offer on a property, or declining or accepting an offer without the appropriate authorization from the client
Breaches of duty can cause significant financial loss to clients and, as a result, they can sue real estate agents for damages to recover the loss.
“Accidental” Breach of Duty Situations
Good real estate professionals can still find themselves embroiled in breach of duty situations accidentally. This can happen even if you had no intention to cause damages to your client. You can still be subject to a claim when you’ve acted in a negligent manner. For example, if you inadvertently fail to disclose a material defect or you accidentally forgot to submit an offer to a client, you will still be held responsible for your actions (or inactions). Additionally, you could face a lawsuit from a client for something that a qualified real estate agent should have known given the circumstances.
There was a case in Michigan, where a broker encouraged sellers to sell their home for a cash payment and a “viatical”, which is a stake in another’s life insurance policy. However, the actual value of the life insurance policy differed greatly from the promised value, leaving the sellers significantly out of pocket as their home was valued at much more. A court awarded the plaintiff (the sellers) damages in this case.
Other lawsuits have arisen where agents have not disclosed a relationship to the buyer or the seller. In the case of any perceived benefit to the agent or a family member of the agent, this should be disclosed in writing to avoid claims. Ethically, some agents may even choose to step aside from the transaction and allow a colleague to complete the sale in the interests of transparency.
How to Avoid a Breach of Duty Claim
You can avoid a breach of duty claim by following some simple steps to protect yourself and your real estate business:
- Always act honestly and be transparent in your dealings with clients. If you’re representing both the seller and the buyer, it’s essential that this information is disclosed.
- Disclose all facts to the client, including material defects.
- Document everything — ensure everything is in writing, including your client’s authorizations to accept or decline offers. Have effective records management processes in place, so you can find important information if called upon in court to defend yourself.
- Perform your job to the best of your abilities, always acting in your client’s best interests
- Cyber security is a growing issue for companies across the world. Make sure you have systems in place to protect your client’s confidential data and to keep it from falling into the wrong hands.
- Ensure that you have adequate insurance to protect yourself in the case of an “accidental” breach of duty or negligence.
A CRES E&O + ClaimPrevent® policy is a superior form of protection against breach of duty or negligence claims. CRES also offers an option for Cyber Liability Coverage to protect against data breaches. Contact the CRES customer service team at 800-880-2747 to find out how you can obtain a tailored insurance package for your real estate business.