How to manage 4 key areas of risk when a client’s home is destroyed by CA wildfires
If you’re a California real estate professional, chances are you may have represented a buyer who purchased a home that ended up being destroyed by wildfires. If you haven’t already, you may in the future.
Or, perhaps you need to deal with a client who owns a home in a wildfire affected area, which was spared and now they wish to lease their property to those who have been displaced.
Experienced real estate defense attorney Jennifer L. Supman, of Manning & Kass, Ellrod, Ramirez, Trester LLP, covers the important steps you can take to reduce the risk of a lawsuit for you and your clients.
When dealing with properties affected by the wildfires or in fire-prone areas, you need to have a handle on:
- When you should include severity zone and wildfire area disclosures, and how you should do this
- How to review Natural Hazard Disclosure Statements with your clients
- When it’s appropriate to engage a third-party consultant and what your level of liability is if you do
- How to assess the risk as an agent acting as a property manager when leasing to displaced natural disaster victims, whether you’re representing landlords or renters
So what are the best practices for claims prevention due to the California Wildfires?
View the webinar, listen to the podcast, or see the transcript below. And be sure you have real estate Errors and Omissions insurance.
Thank you for joining us. I’m Laura Prouse with CRES Insurance. CRES has been providing real estate E&O insurance and risk management services to real estate licensees and companies throughout the United States for over 25 years.
We want every real estate agent and broker to have the right tools to succeed while minimizing your risks. So, we hope you find today’s webinar valuable.
Today we’re joined by Jennifer Supman of Manning & Kass, Ellrod, Ramirez, Trester in San Francisco. Jennifer is the acting general counsel for Premier Real Estate Brokerage in San Francisco, and she also leads the real estate agent and broker liability practice area at Manning & Kass.
Jennifer will be talking about the impact of wildfires on real estate and property management in California, and how to avoid claims.
Thank you, Laura. Today, we’re going to talk about new developments in California in 2018 and 2019 arising out of the recent California wildfires and the impact of these new developments on you as a real estate agent doing business here in California.
As we all undoubtedly remember, the 2018 wildfire season was the deadliest and most destructive season on record. There were more than 8,500 fires that burned, more than 1.8 million acres were burned and destroyed, and the fires caused more than $3.5 billion in damages, including roughly 1.8 billion in fire suppression costs.
As a result of the natural disasters here in California on August 4th, 2018, a national disaster was declared in Northern California in connection with these wildfires. Unfortunately, after the declaration of emergency in November, 2018, some pretty strong winds aggravated the fire conditions in the state and another round of large, even more destructive wildfires occurred across California.
Those who were lucky enough to have their lives spared and who can afford to rebuild their homes, face not only labor shortages, but very steep labor costs, insurance challenges, and building delays.
This all has an impact on real estate agents and brokers doing business in the state. As a California real estate licensee, it’s more than likely that you either:
- Have or will represent a buyer that purchased a home destroyed by the California wildfires
- Represented a seller and the sale of such a property
- Have a client who owns a home in or near the affected area whose residence was spared by the fire and is interested in, or thinking about, or has discussed with you renting his or her property to those displaced.
Wildfire Disclosures to Buyers and Sellers
First, we’re going to talk about what to expect if you represented a buyer or seller of a home that was destroyed by the recent wildfires.
If a property listed or purchased is in a designated very high fire hazard severity zone or in a wild land area, which is in essence one that contains substantial forest fire risks:
- Both the seller and you as the listing agent and broker have to disclose this fact to the buyer, if either you or your seller has actual knowledge that the property is in a designated fire zone, or if the city or county where the property is located has prepared a map of all properties in the fire zone and that map identifies the seller’s property as being in the fire zone, and the city and/or county has posted a notice that identifies the location of this map somewhere within the county, whether it be at the county recorder’s office, the assessor’s office, or with the county planning department.
Most importantly, if when looking at the map, a reasonable person cannot tell with certainty whether the property that’s being listed and sold is in the fire hazard zone, both the seller and you as the listing agent have to disclose that it is in a fire hazard zone, unless you have an expert report that’s attached to the disclosure that states the property is not in such a zone.
- If you opt to prepare the Natural Hazard Disclosure Statement (NHDS) yourself and you’re looking at a map and you can’t determine whether the property is in this fire hazard zone, you have to disclose that it is.
You may also use a local option real estate transfer disclosure statement if your client’s jurisdiction mandates the use of the local option disclosure.
A seller and listing agent can elect to use the services of a third-party consultant to complete the NHDS in lieu of completing the form themselves. And indeed, many brokers are now mandating the use of a third-party consultant to minimize your liability as the listing agent and your potential liability and exposure in the event of an inaccurate reporting or determination.
Because agents are required to verify this disclosure in addition to the seller, the best practice is to use a third-party consultant or expert to complete the disclosure and make the determination for you.
However, it’s worth noting that if you do use a third-party consultant to complete the NHDS, it does not relieve you and the seller from the obligation to deliver that form to the buyer. You as the listing agent, even if you use a third-party consultant, still have the obligation to deliver the NHDS form to the buyer in connection with the transaction.
Wildfire Claims and NHDS Options
What are some potential claims that we’re seeing arise from the California wildfires? We’re seeing buyers initiate litigation and pre-litigation claims against sellers, listing agents and brokers, and the buyer’s own agent and broker — for failing to disclose that the property was in a fire hazard zone or misrepresenting that it was not in such a zone.
Buyers are alleging that the seller knew or should have known the property for sale was in such a zone and failed to disclose or misrepresented that material fact in connection with the transaction. Buyers are alleging that they were relying on their own agent and broker to advise them whether the property was in such a zone, to investigate this material fact on their behalf, and to counsel them on the risks of purchasing a property in a fire hazard zone, one of which being an inability to obtain homeowners insurance (or if they can obtain it, it’s very expensive.)
We’re seeing sellers in these claims and civil actions alleging that:
- Their agent and broker should have advised them that their property was either in a fire hazard zone or the need to disclose that material fact to buyers.
- Alternatively, the agent and broker failed to recommend that they retain an expert consultant to prepare this disclosure report and make the determination for them, so to minimize their potential liability and exposure in the event of an inaccurate reporting.
Oftentimes, I see that a lot of real estate agents, brokers and their principals don’t spend much time on these forms. The NHDS seems to be pretty much an afterthought, and this form addresses not only fire hazard zones, but also earthquake fault zones and flood zones.
These threats are very real in California, and we should all brush up on what our obligations are under these forms, our different options for filling out these forms, and best practices in addressing these disclosures.
That’s especially true because agents have to sign these forms and attest to the truthfulness of the information, in addition to the seller.
That is unique and different from most sellers’ disclosures, which are contained in the TDS (Transfer Disclosure Statement), which very clearly state on the forms themselves (and California law confirms this) that any representation made by a seller on a TDS is the representation of the seller alone.
This Natural Hazard Disclosure Statement is the opposite, where the listing agent has to attest to the information in addition to the seller.
The best practice here is to offer a professional report in lieu of making the determination yourself, don’t do work that you don’t need to do, and don’t put yourself in a situation that’s going to open you up to potential liability and exposure if you make the wrong determination.
Rentals in Wildfire Areas
After a wildfire, you may be approached by a client of yours who owns a home. That client indicates that they’ve been offered $20,000 a month (or something significantly above market rent for their property) for a lease by tenants who have been displaced by the recent wildfires.
I’m seeing this a lot with my clients. With homes that would typically lease for something like $5,000 a month, displaced tenants and their insurance companies are approaching homeowners and offering something like $20,000 or $25,000 a month for 12 months upfront payment.
A lot of these homeowners think to themselves, “Gosh, I could live somewhere for a year and make somewhere close to six figures by renting out my house to someone who’s been displaced, and I’ll get cash up front.”
So, we’re going to talk about considerations to keep in mind if you have a homeowner client turned landlord. That client may come to you and describe such an opportunity, and ask for your advice and council. Or they may ask you to serve as the property manager.
It’s especially acute in the San Francisco Bay area, given its very tight housing market and already very dire housing crisis and shortage. So, it comes as no surprise that individuals who have been displaced by the recent fires and their insurers are bidding very aggressively to lease these homes in adjacent areas, while the tenants determine whether they’re going to rebuild their homes that were destroyed, relocate, or potentially sell.
In response to the rental price gouging that’s been happening both by homeowners when these tenants approach them, and the exorbitant fees that insurance companies are offering to pay on behalf of their displaced tenants, and the impact that that’s having on the market and perhaps displaced individuals who don’t have insurance, the state of California has enacted a rental price gouging statute.
The governor declared a state of emergency in multiple counties across California over the past two years. And, under the rental price gouging statute, rent for any housing cannot be increased annually by more than 10% as determined by the actual rent paid by the tenant at the time the state of emergency was declared. Now the state of California has interpreted this law to apply statewide.
So, what are the rules for determining rental value of a single-family home or condominium if you’re approached by a client homeowner asking you about this?
There are three primary rules:
- If a unit becomes vacant during the state of emergency, the prior rental amount paid remains in effect as a limitation, unless the unit is furnished, in which case the landlord or homeowner can add an additional 5% to the monthly rental value.
- If a unit was rented within one year prior to the state of emergency declaration, then the last rent paid is the set rental price for that unit.
- If the rental was not rented for one year prior to the declaration of the state of emergency, the rent limitation is 160% of the fair market rent established by HUD.
Now, this third rule is probably going to be the one that applies to your homeowner client who has never rented their home before (and never thought about renting their home before).
So, what’s important when determining what the rent limitation is under this third rule is determining what the fair market rent for the property is as established by HUD.
Now, how do you make that determination? If you go to HUD’s website:
You can actually see the “fair market rent” established by HUD. And it’s established by the county in which the property resides, in addition to the number of bedrooms.
Now, once you determine the county of the property and the number of bedrooms, the HUD chart is going to tell you what its established fair market rent is for that property.
And under this rule, when setting the rental value for such a property, you use the HUD rental value times 160% and that is the highest that your homeowner can set the rent for that specific property.
As an example: If HUD establishes a fair market rent for your client’s property at $5,000 per month, your client cannot rent the property for more than $8,000 a month, which is 160% of the fair market rent established by HUD.
It’s important to note that it is not a defense to increase rent in excess of 10% annually because of the length of the rental term, an increase in goods or services provided by the landlord or homeowner (except in the case of a furnished unit which will warrant an additional 5% increase in the rent), or because the rent is paid by an insurance company on behalf of the tenant.
Now, the state of California has established some fairly significant penalties for violating the rental price gouging statute. A violation of the statute can result in fines of up to $10,000 per violation. So, if you have a client who is renting five different units out of compliance with the rental price gouging statute, the monetary fines can be up to $50,000 total. In addition, the violation of the rental price gouging statute can result in one year in jail, and it’s a per se violation of business and professions code 17200, which is California’s unlawful business practice statute. It’s designed to protect consumers and people acting against the benefit of the consumer.
A violation of the rental price gouging statute will subject your homeowner turned landlord client to punitive damages (three times the amount of the actual damages which are designed to punish the violator), and also attorney’s fees, which can easily be six figures in California.
So, violation of this rental price gouging statute is a serious offense. The state of California is seriously looking at and prosecuting these crimes. It’s not just a civil violation, and it’s not just a civil lawsuit that will result. It’s a criminal lawsuit that will result as well.
Your homeowner turned landlord client shouldn’t think, “Oh well, I can do this and this is going to go under the radar.” It definitely will not. One exception exists to the rental price gouging statute: a greater price increase in rent is lawful if the owner or landlord can prove that the increase is directly attributable to additional costs for repairs or additions beyond normal maintenance that were amortized over the rental term that caused the rent to be increased by something greater than 10%.
However, I want to warn all of you not to give your client legal advice or assist in setting the rental price for a client’s property.
This is because in order to do that, an analysis of the rental price gouging statute needs to be conducted. And, the statute needs to be applied to the specific facts that your client presents you with. And that’s really a job for an attorney.
What about eviction considerations under this state of emergency in California? Your clients need to keep in mind that a landlord cannot rent a unit for a rental price greater than the evicted tenant could be charged.
Let’s say you have a property owner who is leasing a single-family home to a tenant. After the wildfires, she decides to evict that tenant, because she wants to get this sweetheart deal of five times the market rent by an insurance company, all paid unfront, as opposed to the market rent they were getting by the tenant who was evicted.
The state of California says, “You can’t do that.” And they’re actively looking into this issue as well. And recently, a Nevada real estate agent was criminally prosecuted for evicting a tenant, and then raising the rent on her home by 80% from $5,000 a month to $9,000 a month after the fires. This law came into effect on January 1, 2019, and already we’re seeing criminal prosecutions flowing from it, and it’s only been 30 days.
So, don’t think that these are going unnoticed by the state of California. Tenants are becoming knowledgeable about this, especially those who have been displaced, and they’re reporting what they deem to be improper behavior to the state of California Attorney General’s Office.
Your clients also need to keep in mind that evictions can only occur for grounds established by California law, and you can find those grounds at California Court of Civil Procedure 1161. And those grounds include:
- Failure to pay rent
- Breach of a covenant in the lease
- Lease termination by its terms
- Improper subletting by a tenant
- Waste by a tenant
- Nuisance by a tenant
- Some other illegal use that the tenant is putting the property to
The other thing that I’m seeing a lot of: property owners who are leasing their homes to individuals displaced by the fires are finding themselves as defendants to lawsuits that landlords typically find themselves as defendants to.
Causes of action that we’re seeing alleged by tenants who are in a reasonably and emotionally frail state, and perhaps their sensitivities are heightened, and what they’re looking for, and the expectations of a landlord are heightened. These tenants are initiating claims against property owners turned landlords for habitability violations for breach of quiet enjoyment warranties, invasions of privacy, personal injuries, emotional distress damages, all arising out of these tenancies.
This is something that homeowners need to keep in mind. Not only might they get a good payday now under the rental price gouging statute, it’s not going to be as good as it was prior to the enactment of that statute, but they also need to weigh the risks of becoming a landlord.
The owner/landlord has to ensure that the unit is habitable. There are certain implied and express warranties that come along with being a landlord and if those are breached, the damages that a tenant is entitled to include personal injury damage and emotional distress damage — damages that are not covered under a homeowner’s insurance policy.
Your homeowner turned landlord client might say, “Well, I have a homeowner’s insurance policy, so I’m willing to bear the risk, because if something goes sideways with this tenancy, I have insurance to back me.” Well, oftentimes, homeowner’s insurance policies do not cover the damages that a landlord is entitled to, which include fines, penalties, emotional distress, personal injuries, et cetera. So that’s a risk that your clients need to keep in mind as well.
If you have a current or former client who’s considering a lease offer for what seems like a very sweet deal, it’s really important that you instruct your client to consult with the appropriate legal professional and/or CPA, so they can evaluate the risks associated with these type of lease agreements.
Another thing you need to keep in mind is if you’re asked to serve as a property manager in connection with this type of lease agreement, make sure to first obtain prior approval from your broker. And assuming you obtain prior approval, memorialize the agreement on a CAR form, such that you have the indemnity protection provided for thereunder which flows from the owner to you in the event that anything goes sideways with the tenant.
Homeowners’ Insurance Issues
There are some insurance considerations and some new laws passed in response to the wildfires that we’ve seen in California over the last few years.
To protect California homeowners from insurance carriers that have delayed paying on property damage claims following the wildfires, seven new laws have been adopted that I just want to make you aware of, in the event that you’re consulted by a client with regard to one of these issues.
Obviously, don’t give legal advice — but this is some background of some protections that are being afforded to homeowners who have lost their homes that you all should be aware of.
SB 824 is a new law which prohibits homeowner policy cancellation for one year from the date of the Governor’s Declaration of Emergency.
SB 894 requires an insurer to grant an extension of coverage for living expenses for up to 12 additional months for a total of 36 months if an insured encounters a delay in the reconstruction process that is the result of circumstances beyond his or her control.
SB 917 requires coverage from a loss resulting from a combination of covered disasters such as landslides, mudslides, or fire.
AB 1772 provides that full replacement benefits must be extended from 24 months to 36 months under a fire policy.
AB 1800 provides that in the event of a total loss of a home or of an asset, the insured is entitled to policy benefits even if he or she decides not to rebuild, or the insured purchases a residence in a new location.
AB 2594 extends the statute of limitations to sue an insurance company for a loss related to a state of emergency from 12 to 24 months.
AB 1875 helps consumers find insurance agents to help ensure that the coverage that is obtained meets the specific needs of that consumer. It is an online service at California Home Insurance Finder https://interactive.web.insurance.ca.gov/apex_extprd/f?p=400:50
Thanks Jennifer. The first question: “Should I be advising my clients about the insurance assembly and Senate bills so they know their insurance rights? Or is that too risky to do?”
That is definitely too risky to do. Just like you shouldn’t engage in legal advice, don’t give insurance advice either because that falls in the realm of insurance agent and broker territory. But the laws are something you should be aware of.
So, you can have a conversation with your client about generally what you know, but any conversation should be prefaced very clearly with the fact that you are not giving them any insurance advice, you’re not giving them any legal advice, and they need to communicate with the appropriate legal and insurance professionals to get additional guidance.
Another question: “How do we find a good insurance lawyer to advise a client?”
In terms of advising the client with regard to the insurance they need, that’s not necessarily an insurance lawyer, that’s really more of an insurance broker.
One of the recent laws that was passed, AB 1875, connects consumers with insurance agents to help ensure coverage is obtained that meets the specific needs of the consumer. Have your client visit the California Home Insurance Finder:
The last question: “I was involved in a transaction as the listing agent. The selling agent stated that it wasn’t necessary for the selling agent to sign the disclosure. Please advise.”
Based on the signature lines on the NHDS, the seller has to sign the NHDS and the listing agent has to sign the NHDS, along with the buyer who receives it. Visit the NHDS page on CRES to view sample reports: https://www.cresinsurance.com/insurance/real-estate-errors-omissions/natural-hazard-disclosure/
Thank you for attending. Jennifer, thank you so much for your time and expertise, and all the valuable information.
To speak with a real estate E&O insurance expert, contact the CRES team at 800.880.2747 (toll free).