As a real estate professional, you face risks every day in the course of your business. These risks can lead to costly mistakes — with financial implications as well as potential damage to your hard-earned reputation.
So it’s a good idea to be aware of the major reasons for E&O claims against real estate agents, so you can be proactive in protecting yourself and your business to avoid a lawsuit.
The Top 3 reasons for Errors and Omissions claims against real estate agents are:
- Failure to disclose something which should have been disclosed
Let’s explore what each of these issues are, so you can make a plan to avoid them in your real estate business:
Misrepresentation occurs when the agent (or seller) makes a statement about the property which is untrue, which induces the buyer to purchase the property. This generally relates to a feature of the property, for example, boundaries, easements, structural issues, defects, or renovations which haven’t been approved by the relevant regulatory bodies. However, misrepresentation can relate to any material fact about the property, which has been falsely presented by the seller or agent.
There are three types of misrepresentation:
- Innocent misrepresentation – this occurs when an agent or seller simply makes an error, with no intent to mislead the buyer
- Negligent misrepresentation – where the seller or agent fails to disclose material information out of negligence, which in turn influences the buyer to proceed to contract.
- Fraudulent misrepresentation, which occurs when there is intent to mislead the client or to cover up a material defect to close the sale
For a disgruntled buyer to win a misrepresentation lawsuit, the misrepresentation must relate to a material fact which influenced the decision to purchase.
Failure to Disclose Information Which Must Be Disclosed
If you fail to disclose something that is material to the value of the property or the buyer’s decision to purchase, you may find yourself facing a lawsuit.
Failure to disclose is a common reason for lawsuits against real estate professionals, whether it’s regarding title issues, termite issues, structural defects, leaks, or other property defects. E&O claims against the agent or broker can and do occur, even though the responsibility for disclosing important information about the property is shared with the seller.
In California, in addition to disclosures, you must carry out an inspection of the property (a visual inspection is fine, you aren’t required to undertake a building inspection). But you must disclose anything you find in that inspection.
In the course of selling a property, if you become aware of a defect which would affect the buyer’s decision to purchase, or the amount they would pay for the property, you have an obligation under the law to disclose this information.
Negligence claims are very common in real estate. You can be accused of negligence if you haven’t fulfilled your duties as a real estate agent sufficiently. Issues such as failing to act with due care or failing to take appropriate action when required can be deemed as negligence, particularly if these actions end up causing your client harm — financially or in some other way.
It’s important to understand the distinction between negligence and fraud. Negligence is a breach of duty, where there is not intent to cause harm. Fraud is an action with intent.
How You Can Avoid E&O Claims In Your Real Estate Business
To make sure you’re not facing a claim for misrepresentation, failure to disclose or negligence in your real estate business, you can implement some measures to protect yourself:
- Always tell prospective buyers about any material property defects which would affect the value of the property and/or the buyer’s decision to purchase. If the property has had a prior inspection, disclose the results of that inspection to potential buyers.
- Document any visual inspections you undertake of a property
- If you’re passing on information to the buyer, specify the source where the information has come from
- Keep accurate records of all of your communications with your clients
- Ensure your sellers understand their disclosure requirements and ensure they sign all relevant disclosure forms
- Be sure your sellers complete the disclosure forms themselves (you can help them fill out the forms, but you should not complete the forms for them)
- Ensure you comply with all contractual obligations with your clients, to avoid any claims of negligence
- Avoid using exaggerated statements and keep property descriptions fact-based and accurate
- If you are using information in your listing or advertising that has been provided by the sellers but hasn’t been verified, indicate “per seller” (i.e., 3,721 square feet per seller)
You cannot be sued for your opinion, but use caution in communicating any opinions and indeed any form of information to a prospective buyer. Be sure to stay within the scope of your profession because, however well-intentioned you are, this information can be used against you in the future. Check out this blog about “Providing information and data to your clients” on our website for further information.
Protecting Your Business
Sometimes, even when you think you’ve covered all the bases, accidents or errors in judgment can happen. That’s why it’s so important to be adequately insured. CRES has been protecting real estate professionals across the USA for more than two decades. A CRES E&O + ClaimPrevent® policy offers superior coverage, and we can tailor a solution to suit your business. Contact the CRES team at 800-880-2747 to find out more.