How to Avoid a Real Estate Claim Due to Disclosure Confusion

man on phone figuring out real estate disclosure confusion

Has a property you were selling ever received an unfavorable inspection report? You know that you need to disclose negative reports, but how do you do that legally? Let’s take a look at what happened when one of our clients faced that issue.

The buyer received the inspection report and was unhappy with the amount of repair needed. As a result, the buyer cancelled escrow.

The listing agent knew she needed to disclose the negative reports to the next buyer, but the report stated that it was copyright protected and could not be disclosed without permission from the creator/inspector. She wondered how to balance out her obligation to disclose the reports with the protection notice on the report.

The agent called CRES Legal Advisory Services for Risk Management — a component of every CRES Real Estate E&O + ClaimPrevent® policy. Counsel advised that under the California civil code, the client and the seller have a duty to disclose all items materially affecting the price paid and the desirability of a parcel to all future buyers. That means the agent was obligated to disclose what she knew of a prior inspection report and that a buyer cancelled escrow because of the amount of repairs. (And any attempt to limit the dissemination of a third-party expert report was deemed to be in violation of California law.) This overrode the agent’s obligation to obtain permission to share the copyright protected report, and the agent could not be sued for sharing it confidentially with future buyers under the obligation to disclose.

The insured agent needed to create a disclosure referencing the reports of the buyer who cancelled, attach reports, and send the disclosure and related reports to all potential buyers or their agents.

If the negative reports weren’t disclosed, the listing agent could have faced a real estate lawsuit. Situations like these are exactly why we encourage our clients to report possible issues before they have a claim. Note that this client got a response based on California civil code. You may need to take different action, but CRES Legal Advisory Services can advise you based on where you practice.

On-call Legal Advisory Services for Risk Management is an essential part of your CRES real estate E&O + ClaimPrevent®. We want to know when you have questions or potential issues, so that we can help avoid serious issues and real estate lawsuits.

That means if you know your legal obligations, but you’re confused as to how to meet them, you should give us a call. The CRES Risk Management Legal Hotline is available to CRES E&O policyholders. The best part…there is no retention (out-of-pocket claims expense) and it is not reported to the insurance company. So no rate increase.

Don’t wait until you have a claim. Unlike other E&O policies that don’t help you until you actually have a claim, CRES E&O works for you DAILY — any time you have a potential claim or issue.

What questions do you have about the obligation to disclose?

This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.

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