VIDEO WEBINAR SUMMARY
In today’s ever-evolving California real estate market, understanding current trends in Errors & Omissions (E&O) claims is critical for real estate agents and brokers looking to stay protected. In this informative webinar, Laura Prouse of CRES Insurance is joined by Mark Carlson from the Carlson Law Group and Dave Miller from Fidelity National Home Warranty to unpack the latest E&O trends affecting California real estate professionals.
From disclosure disputes to water intrusion, unpermitted work, and the legal intricacies around ADUs, this session dives deep into the top E&O claim categories and how real estate agents can reduce their liability risk. The conversation also covers the impact of California’s recent wildfires on property sales and best practices for navigating transactions in fire-impacted areas.
Key Takeaways:
- Disclosure remains king – it continues to be the top reason for E&O claims, especially related to property defects discovered after close of escrow.
- Water intrusion is rising – unprecedented rain events are leading to new and expanding water damage claims.
- Permit-related claims are growing – renovations and unpermitted upgrades are increasingly landing agents in legal trouble.
- ADU law changes are reshaping the landscape – new state laws make it easier to legalize previously non-compliant structures.
- Wildfire zones require extra diligence – sellers and agents must be especially careful with disclosure, insurance coordination, and understanding rebuild programs in fire-impacted areas.
Watch the full webinar above, listen to the podcast or view the transcript below.
VIDEO TRANSCRIPT
Laura Prouse:
Thank you for joining us today for the latest trends in real estate claims. I’m Laura Prouse with CRES Insurance. And today we welcome Mark Carlson from the Carlson Law Group. Mark has been defending real estate professionals since 1993, has worked with CRES for over 25 years, and is a founding member of our legal panel. We also welcome Dave Miller, VP of Sales with Fidelity National Home Warranty. Dave manages the CRES Advantage Home Warranty Plan, which can reduce your out-of-pocket costs should you have a claim with your CRES real estate E&O Insurance. We have a lot to cover, so Dave, I’ll let you take it from here.
Dave Miller:
Well, thanks for having us, Laura. Mark, it’s always great to see you. Laura had mentioned there’s been an uptick in real estate E&O claims so far this year. Obviously, in your law firm you have claims that are coming across from CRES all the time. Are you seeing an uptick in claims? Or are they about the same from last year?
Mark Carlson:
We’re seeing a little bit more year over year in things that are sent to us. Keep in mind that we don’t see all of the claims. We see the litigated matters. And so sometimes claims can get resolved before they come to us. But typically, the ratio is about the same. So I would agree that so far this year, it’s been a bit more active than it was last year.
Seller Disclosure Issues Leading Cause of Real Estate E&O Claims
Dave Miller:
Laura also mentioned that disclosure is always the highest category, of claims. But she mentioned permits and water intrusion are kind of hot topics right now. Can you talk to those?
Mark Carlson:
So, disclosure is always the top, number one by a large margin. Things that were wrong with the property that the buyer didn’t discover during the investigation, But then are discovered after close of escrow. And that’s been the same my entire time defending real estate brokers.
We have had a bit of an increase in water claims, but I think that is more of a product of the last couple of years where we’ve had just the unprecedented rains. And the properties that previously were able to fend off that amount of rain, or just things started to fail. And then once you start fixing one area, you discover other areas that previously had gone unnoticed. And so it isn’t just a matter in a lot of these cases of just fixing a small leak, there’s a lot of other water damage areas that need to be fixed. And that’s what causes people to want to file lawsuits, because the damages get to be more than what they can cover out of their own pockets.
And there have been some permit issues where there’s not a lot of room to build. People have been remodeling, obviously not as much as they did in the 2016-17 area era, when money was a bit cheaper, but we’re still seeing conversions and ADUs and whatnot. So, there have been more claims relative to work being done without permits.
We’ve also had some deposit disputes and that continues to be an item, or a category of lawsuits and disputes that prior to Covid really wasn’t that much of an issue. Now we’re seeing people that are stretching to get into properties, and they find out that their loan when it funds is a quarter point, or an eighth point, whatever, higher than they thought, and that really pushes them over the edge to where they can’t afford the property. So, they want to back out, and then people are fighting over deposit disputes. Just when the loan market gets tough, that’s when buyers are most likely to back out.
Has Everything Been Properly Permitted?
Dave Miller:
Now, on some of those permit issues, are we talking about things like retaining walls that didn’t get permitted, or is it square footage or rooms that they’ve added to the back of the house? Or maybe they replaced an HVAC system and didn’t get it permitted? What kind of categories within permits are you seeing?
Mark Carlson:
It’s typically people doing remodeling work or doing upgrades without getting proper permits. We haven’t seen a whole lot of issues where there are foundational problems that were repaired without permits, although we get a few of those. But they’re not as common as things like moving the bathrooms or bedrooms, or changing the footprint, and then just didn’t get the necessary permits.
Dave Miller:
And talking about permits, what about those flipping houses? Obviously, in this market it’s a little bit harder for flippers to come in and have a successful business, because the costs have gone up so much. Are we seeing fewer claims on houses that have been recently remodeled and flipped? Or what’s your pulse there?
Mark Carlson:
Yeah, those kinds of claims are down significantly, at least from what I’m seeing, from the time period right prior to Covid, or even during Covid, when money was really cheap and the market was on fire, we saw a lot of those claims done.
ADU Laws in California Help Sellers Remedy Illegal Units
Dave Miller:
We had new laws that came out in 2018 and ’19, I think, regarding ADUs. And we’ve seen obviously an increase in the last eight to 10 years with properties having ADUs on them. Why are we seeing in terms of claims after these new laws?
Mark Carlson:
You could say new laws, you could say change in economic conditions. You could say whatever change happens, it takes about 12 to 24 months after those changes before we see an increase, or see claims arising out of those changes. And I think that it’s just the course of what leads to a lawsuit, right? Somebody gets into a property, they’re fined for a few months, or they don’t discover the issue for a few months. Then they spend another handful of months or whatever trying to resolve the issue. And then ultimately, they can’t resolve the issue and then they decide, “Well, I have to do something to either get this paid for or get my money back, or whatever the nature of the lawsuit may be.” And then they file a lawsuit. And for whatever reason, that range has been the same for 20 years. You pick out anything, any change in the market over the last 20 years, and I can demonstrate how on our side we didn’t start seeing those claims till about a year to two years after those changes.
Dave Miller:
And you’re seeing how sellers are using the rules to remedy illegal units in additions prior to selling. Explain to us what that means.
Mark Carlson:
So, let’s sayas an easy example … you have someone on the small lot, let’s call it a 7,000 square foot lot with an 1800 square foot two-bedroom home, and the garage at the back, to where you have to drive down the side on your driveway. We all have that picture of that house in our mind. Somebody has an aunt or an uncle who has owned those kinds of houses. Everybody does. And so people need to add more space, or they want to have a rental unit or whatever, so they convert the garage into a dwelling unit, illegally. And so previously, before there were the ADU laws, you just couldn’t fix that issue. You had to have covered parking. So maybe you tried to put a carport along the way on the driveway. But for the most part, those kinds of problems were just not solvable without major renovations, or razing the house and putting in a duplex.
But now with the ADU laws, I can apply to have that converted garage be an ADU. And now what was previously an illegal structure as a dwelling unit, now becomes a habitable structure. And you could have a lot that’s bigger where somebody took a chicken coop and made it into a dwelling unit. We’ve had those kinds of cases, I’m not making it up. And now you can use the ADU to correct the illegality of that structure being a dwelling unit.
In the city of San Francisco, there’s just been a ton of those also where you have units that previously just couldn’t be legal, and now they’re using these laws to be able to make things legal. So, it’s been a tremendous tool for sellers to say, “All right, now I want to sell my property, and I’m going to make an illegal structure, I’m going to add that square footage. The value of my property goes up.” And it’s been a real trend over the last year or so.
Dave Miller:
When you’re telling me that cities and counties have less ability to stop those folks from putting in ADUs because of the new laws?
Mark Carlson:
Right. That’s the idea behind the state’s programs, or state rules, is that it forces local building departments, planning departments, to accept these ADUs irrespective of what their local ordinances are. Setbacks are smaller. Again, covered parking is essentially eliminated so long as you’re within a certain radius of a bus stop, or other public transportation. And so yeah, they don’t have any discretion. They have to approve these projects.
Dave Miller:
Are there any differences if I’m going to be adding an ADU to my property, if it’s for my or my family’s own use or if I’m going to be renting it out to somebody, is there anything that applies differently to me if it’s one or the other?
Mark Carlson:
Not in the construction. There could of course be some rent stabilization issues depending upon the area. (But we would need another two hours, especially after Covid with all the tenant protections, to cover everything. It seems every city has their own version of tenant protection or rent stabilization ordinances.)
Dave Miller:
Now, we talk about how new administrations, market volatility, interest rates, those can all affect the housing market, and I think we’re seeing that right now. But do those factors really affect the increase or decrease of real estate E&O claims? Do those tie in at all together?
Mark Carlson:
Well, when the market does well and the property prices go up significantly, or even modestly, people tend to not file lawsuits in those environments. They’re still happy, they made money on their property. And so they’re less likely to be upset about being in the property in that kind of economic environment. When the market turns and now somebody is in a house that’s worth less than what they paid for it, that is usually when the frequency of lawsuits goes up, although there are potentially fewer transactions. When you go back in time, you have to look at the number of deals that are happening, because those go up and down. We’ve had many years here without a lot of inventory, but then we saw in the Covid timeframe, which wasn’t that long ago, where you still had low inventory, but there were just a lot of transactions happening.
And rates of course influence people’s desire to get into properties, although maybe not the best economic decision. The CAR Chief Economist has a funny saying, which I like to steal, he said that, “The number one best time to purchase real property was 20 years ago. The number two best time to purchase real property is today, because the market is always going to go up.” And so no matter what the circumstances are, you see all these things on social media about how it’s better to rent than to buy. And the economists typically do not agree with that concept. If you need a house, it’s always better to buy today, instead of trying to gauge the market.
Wildfire Disclosures
Dave Miller:
Of course, we’re in California, we have a lot of fires in Northern California all the way down here to San Diego. Regarding selling the lots and fire impacted areas, you have disclosure requirements, insurance challenges, building and zoning restrictions, environmental and safety concerns; infrastructure and utility issues, buyer financing and property value volatility, community and local government regulations and mortgage assistance. Eight really good topics. Mark Carlson:
Well, since we started with disclosure being the number one area of lawsuits, obviously being attentive to your disclosures on a house that either has been destroyed, damaged, or is in a fire-prone area. In California, you have to provide the Natural Hazard Disclosure (NHD) reports and the California Home Fire ardening Disclosure and Advisory. . You have the wildfire advisory that was drafted after the Paradise Fires, but has obviously been more important in light of what happened in the Pacific Palisades and Altadena. So, just really focusing on disclosure and being very diligent is super important in these fire-impacted areas. It doesn’t necessarily need to be properties that have been destroyed or partially damaged. If you got the one house that was in the middle of the carnage that survived, you’re still going to want to make those disclosures.
And obviously, homeowners insurance was a problem before, it is going to be a bigger problem afterwards. There have been a lot of things happening to try to change that. So, that really is something that real estate agents are just going to have to keep on top of.But CAR did make a change to the RPA, the Residential Purchase Agreement, that may allow the ability to get homeowners insurance be a contingency, which before it hadn’t been. So just make sure that you as an agent, that you advise your client, start looking for homeowners insurance early, so that you’re not in a situation where you can’t close because you can’t get insurance on a particular property.
Dave Miller:
Obviously, real estate agents are great at what they do, but some of them try to cross the line and become too “helpful” to clients. With regards to the eight topics we mentioned earlier — disclosure requirements, homeowners insurance challenges, building and zoning restrictions, environmental and safety concerns, infrastructure and utility issues, buyer financing and property value volatility, community and local government regulations and mortgage assistance — how involved should real estate agents get with clients?Mark Carlson:
There are so many changes right now in temporary orders from the governor’s office, from local building departments. There’s a bunch of new programs that allow a streamlined application process. And all that, again, all that is changing daily or weekly. And you’ve got the environmental concerns. The federal government has actually been cleaning up most of the hazardous materials on these fire-impacted sites. And so it’s a long-winded answer to your question, which is you can’t be on top of every issue as a real estate licensee.
- So you have to make sure that you’re directing your clients to experts in those particular areas. If you need somebody to figure out if there’s environmental clean-up that needs to be done on top of what the government has already done, you need to get an expert in that field to advise your clients.
Building code changes in programs. There are so many programs out there right now:
- If you’re rebuilding exactly what was there, there are a certain set of rules
- ; If you’re rebuilding up to 10% more than what previously existed, there are different rules
- If you’re rebuilding up to 20% more than what was there previously, there are different rules.
And so for buyers looking at lots or homes partially destroyed, they really need to get with somebody that knows those programs so that they can make the best decision for their particular situation.
5 Best Practices for Selling in Fire-Impacted Zones
Dave Miller:
You have five bullet points for best practices for selling in fire-impacted zones The first one: “Work with fire mitigation experts to help buyers assess risks and necessary precautions.”
Mark Carlson:
The home hardening concept is a few years old now. And so really, for buyers that are looking at properties in areas where you know wildfires have been before, and potentially are going to have fires in the future, get somebody in there that specializes in fire mitigation issues. Have a survey of the house, “Is there a reason why this house survived and the others didn’t?” And really just to try to get an understanding, because it’s going to potentially impact insurance, or the ability to get insurance going forward. So I think it really is a best practice for an agent to:
- Make a recommendation to a potential buyer to have the property surveyed by somebody who knows what they’re looking at with respect to fire mitigation issues.
Dave Miller:
Best practice number two: “Encourage early engagement with insurance providers to prevent any last minute surprises.” Mark Carlson:
So, if you are trying to buy a property where the house is partially destroyed or fully destroyed, talk to potential homeowners insurance providers early in the process. You want to have at least those consultations as quickly as you can, so that you have some understanding of what kind of issues you’re going to be up against.
Dave Miller:
Your best practice number three is:, “To contact the local planning departments to understand permitting programs and rebuilding requirements.” Mark Carlson:
Real estate agents should never try to figure out what particular permitting or rebuilding programs are available for their particular clients. You always want as a licensee to tell your buyer:
“Hey, there are these programs available. You need to go figure those out.”
In the county of LA and Altadena city, I was on a Zoom with a bunch of state people put on by Southland Regional Association of Realtors® and CAR about a month ago, and it was a wealth of information. I was taking notes as fast as I could. But there are just so many programs that are available that you just have your clients go to the city, go to the county, at least get some idea of what’s on the menu, because there’s an awful lot.
Also, we’ve got a number of executive orders from the governor’s office, and some were just changed earlier this week. And so having your clients keep up with what those orders are is also really important.
Dave Miller:
You mentioned under best practice number four to highlight those fire resistant property features if you are representing the seller. That could mean things like, “brush has been cut back,” “fire-retardant roof,” etc.
Mark Carlson:
If you’re selling a house that was in an area that was impacted by fires, but the house came through unscathed, those are going to be some of the things. Well, firstly, on the home hardening, you’re going to have to make those disclosures typically in any event. But those are all features of a property that could help you market that property to buyers.
Now, of course, you don’t want to oversell. “Hey, this house is never going to burn because of these features.” We’ve all seen, I’m sure, the news pieces of one house in the middle of the Palisades that survived where all of them burnt down because they had a pump system to pump water out of the pool, and to water down the house, which is what saved it. So, those kinds of things obviously are going to be important to a new buyer. And also, for the buyer’s ability to get insurance going forward.
Dave Miller:
And your last comment on best practices was: Be thorough, obviously in all disclosures, and usethat CAR Wildfire Disaster Advisory, when appropriate.
Mark Carlson:
If you are in a very high fire zone and you have to do the home hardening disclosure, and disclose that it comes out on the NHD that you’re in a very high fire zone area, I would use that form. There’s a lot of good information on that advisory form that CAR put out after the Paradise Fires. So, it just gives your buyers a lot of good information where they can go do their homework. And again, it isn’t a matter of, “Okay, I’m going to stick it at the bottom of all these other disclosures.” The Wildfire Disaster Advisory, you’re going to want to sit down and read it to your buyer clients, or go over it line by line, so that they understand and are motivated to follow up on those areas.
Dave Miller:
Is it a mandatory form or not?
Mark Carlson:
The Wildfire Disaster Advisory is not mandatory. The home hardening is one of the new, or is the newest required disclosure.
Mark Carlson:
Like the TDS (California Real Estate Transfer Disclosure Statement). If you’re doing a TDS, you’re going to have to do a home hardening disclosure as well.
Dave Miller:
You can also readMark’s risk management piece on selling in fire -impacted areas..
Mark, thank you. Laura, thanks for having us this morning, so that we can help educate all of your insureds.
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