CRES Risk Management Webinar: Understanding Obligations and E&O Issues for Real Estate Brokers

rectangular table in office space with empty chair surrounding it

In this webinar, Mark Carlson, Attorney from Carlson Law Group and Dave Miller, Regional Vice-President with Fidelity National Home Warranty, discuss real estate broker obligations. They provide valuable insight into what brokers can do to help manage your business risk while supporting your team, especially your new agents. And they also cover the ramifications of E&O claims versus settling issues on your own. 

This comprehensive and informative webinar covers:

  • What brokers are obliged to do under the regulations
  • How brokers should support your real estate agents, especially new agents 
  • Why it’s important to keep your agents up-to-date with the latest industry  information and forms 
  • E&O coverage and exclusions and the importance of communicating these to your real estate agents
  • Fraud vs negligent misrepresentation
  • Dealing with complaints and claims effectively
  • Reasons why insurance premium prices may differ 
  • How handling issues on your own as a broker can cause major problems in the future

Watch the full webinar or read the transcript below…

Laura Prouse: Thank you for joining us today for webinar number five, How to Be a Better Broker Owner and Support Your Team More Effectively.

I’m Laura Prouse from CRES Insurance Services. Today, we welcome Attorney Mark Carlson from the Carlson Law Group. Mark has been defending real estate professionals since 1993, and he has worked with CRES for over 20 years as a founding member of our legal panel. Along with Mark, we have Dave Miller, Regional Vice-President with Fidelity National Home Warranty. (When a CRES E&O client purchases a Fidelity Home Warranty for a seller, the seller also gets $25,000 in Seller’s E&O insurance protection.)

Dave Miller: Today we’re going to focus on real estate brokers. We’ll talk about some things that brokers can do to ensure they’re running their businesses and managing their agents properly. And when lawsuits come up, maybe some brokers aren’t as active as they should be. Mark, what’s the overall responsibility of a broker who has real estate agents working under his or her license?

Broker Obligations in a Real Estate Office

Mark Carlson: The Department of Real Estate regulations sort of simply say that real estate brokers have the obligation to set up systems and policies to oversee not only the acts of their agents, but also of the information that’s supposed to get to the principals within the transaction.

I’ve been to many presentations by DRE where they talked about the broker as being the “uber-broker.” In the office, there may be other broker associates. There may be other managers that are assisting. But there’s one broker that’s responsible for everything that goes on in the office, from agents’ websites to advertising.

So these “uber-brokers” really need to keep on top of everything that their sales agents or broker associates are doing. That includes:

  • Providing training, so that people are doing things in the right way.
  • A lot of times, there are local requirements within a community or within a county that the broker needs to keep on top of.
  • And making sure that all the documents in a transaction are actually getting to the principals.

Dave Miller: So why should a broker care what the agents are selling?

Mark Carlson: I’ll start with maybe the most common sense situation.  If you have an agent who has never done a probate sale and wants to take the listing, he or she may have no idea how to handle it. In that particular case, the broker would obviously want to either assist that agent or have someone else help and mentor the agent to make sure that things get done properly.

It would be the same with an agent’s first commercial deal or first raw land deal. So it’s important for brokers and managers to know when their agents are doing something that’s outside their wheelhouse.

Training and Helping New Agents

Dave Miller: Even though right now it seems like we have more agents than we have properties to sell, there are still a few thousand new real estate licensees coming into the marketplace each month. Why is new agent training so important for a real estate broker?

Mark Carlson: There are two things:

  • I think most brokers want to create their own culture, and that’s what they assume attracted the agent to their company in the first place. So, it’s important to be able to develop the culture of how things are done within a company.
  • Another is the nuts and bolts of the practice of real estate, especially being alert when new forms are released. A lot of times new agents won’t think to go look, or they won’t even look to see what’s been added to the latest version of a form. But agents right now need to be using all of the appropriate forms, especially with this COVID.

We’ve gone over some of the latest California real estate forms in a prior webinar.

When you don’t use the proper form, or don’t use a mandated form, like the new Home Hardness Disclosure (now a mandatory form), then you’re not complying with the standard of care just because an agent isn’t familiar with what forms to use.

A lot of times, brokers will go to meetings at a local association or go to the CAR meetings and become aware of new issues. But agents, especially when they’re new, aren’t thinking about going to those meetings. They’re just pounding the pavement trying to get listings or buyers. So, it’s helpful to pass on new industry information to agents, so they can be compliant, more informed, and more professional.

Keep Agents Aware of What Your E&O Covers – and What it Doesn’t

Another thing that brokers don’t often think about is that when a real estate office is purchasing errors and omissions insurance, either the owner or an admin person is typically handling it. So the admin or broker knows what the E&O policy covers and what it doesn’t cover, but sometimes that isn’t communicated to the agents.

  • If there’s an exclusion for property management, which is getting more and more common, your agents need to know about that exclusion. (Depending on the policy, property management coverage may be $XX extra, but you may decide not to spend the money for it.)  One of your agents has a client that says, “I bought this investment property, and I’d like for you to manage my rental.” And your agent does it, not knowing that the brokerage doesn’t have property management coverage.
  • Another common exclusion could be for mortgage brokering.

As the broker, you need to make sure that the agents know what you’ve negotiating for in your E&O policy. You don’t want to wait until you’re involved in a lawsuit for an incidental property management and there’s no coverage.

  • This is especially important if your agents pay for their share of the E&O. If they’ve paid for it, they’re going to wonder why they don’t have the coverage they thought they paid for.  

E&O Insurance and Fraud

Dave Miller:   We know that errors and omissions insurance can’t ensure you against fraud. There’s still a lot of confusion in the marketplace on what exactly fraud is, if it’s unintentional misrepresentation, or is it purposeful fraud.

Mark Carlson: I think a lot of licensees don’t understand they won’t be insured for fraud.

The Insurance Code actually has a provision that says, an insurance company cannot insure somebody for their own intentional acts. And that is true across all types of insurance policies. So, if I’m driving in my car, and I see my arch nemesis walking on the sidewalk, and I purposefully take my car and run into them to get them off the planet, that would be an intentional act that wouldn’t be covered under my auto policy.

On the real estate side, an intentional fraud claim is a positive assertion of fact, meaning you say something affirmative about a property that is not true, and you know the information isn’t true. The statement is made with the intent to induce reliance, in other words, to get somebody to do something, and then the reliance results in damage to that person. That’s intentional fraud and wouldn’t be covered under any policy, because it’s not allowable under the Insurance Code.

There are other types of representations that are more difficult to define:

  • With negligent misrepresentation, you assert something for which you don’t have a reasonable basis for believing it to be true. For example, if I’m an agent on a showing, and the buyer says, “Is the fence on the property line?” And I look outside the window and it looks like it is, and I say, “Yes.” Well now, I’ve just made a positive assertion of fact.
  • What if that turns out not to be true, and the agent is sued. Then the discussion in front of the jury might be, “Did you know that it wasn’t true? In other words, did you see a prelim? Did you realize before you said it that the property line was actually much closer to the house, so the house really didn’t have the big side yard it appeared to have?

If you knew it wasn’t true, but you said it anyway, that’s fraud, and you don’t have coverage.

Or was the agent just lazy, didn’t look at the prelim, and just assumed the fence was on the property line — with no basis for assuming. The plaintiff is going to try to prove the statement was made intentionally. Then, the agent has to hope the jury believes that he or she just made an innocent mistake by saying something that shouldn’t have been said.

When Do You Have an Actual E&O Claim?

Dave Miller: Real estate E&O claims can be very time consuming and frustrating for all parties involved. With all the different means of communication now, including text and email, how does a broker or agent know if they have a claim?

Mark Carlson: Most E&O policies define a claim as a demand for money that arises out of the provision or providing of real estate services.

  • That’s why it’s important for agents to communicate directly with managers or their broker when they have a complaint from a client.

We’ve had circumstance where there’s a demand for money, but it’s just made to the seller or the letter appears to be made out to the seller, but the agent is copied on the letter. Or maybe the letter is addressed to both the seller and the agents, and the buyers are only including the listing agent because they don’t know how to reach the seller directly.

If that’s a demand, it’s reasonably likely to result in a claim against the broker. That letter, although not directly demanding money from the agent, might be determined by the insurance carrier to be a demand for money and constitute a claim.

If there are any complaints of any sort, they need to be communicated to a manager or the broker for another reason. When an agent is doing their level best to handle a transaction, and somebody says they didn’t do what they should’ve done. There’s an emotional component to that. The agent tries to be as helpful as possible in the transaction, and now somebody is criticizing him. And sometimes, that emotional element clouds an agent’s judgment. When an agent gets a broker or manager involved, it eliminates that, because the manager and broker likely won’t have the same emotional investment.

Another situation that happens frequently: an agent gets a threatening letter or even a demand letter, and then just doesn’t do anything with it. The buyers might not pursue anything past the letter. But then the next rain comes, or the problem manifests itself again, or the buyers realize that the problem is bigger than they expected. And now, they file a lawsuit.

  • If the E&O policy was renewed between the time of the demand letter and the complaint, the insurance company could deny coverage based on having no prior knowledge of a claim.

When an insurance company underwrites, their underwriting is based on what they think the current risk is. If there’s a pending or a brewing problem, they may underwrite and charge different premiums if they knew about it versus if they didn’t.

Agents need to communicate and give any threatening letters to their brokers.  

  • Brokers should keep a file next to their insurance renewals and put every threatening letter they get throughout the year in that file.
  • At renewal, brokers should disclose to the E&O company the threatening letters that came in throughout the year.

And then you know you’re not going to have a coverage problem based on a prior notice issue.

Dave Miller:  When the broker has a claim, what does a broker do next? How does he hand it to the carrier? And what are some steps the broker and agent should take to support their documentation?

Mark Carlson: The whole customer file needs to be preserved. The agent needs to print out all the text messages and emails involved. All the proof of communications during the course of the transaction, and all the transaction documents should all be in the file.

The agent involved needs to look everywhere and make sure he/she has everything. If there are phone calls that were made that potentially are important, grab the telephone bill before it gets destroyed. Every bit of information that might be needed should be in one place.

Dave Miller:  Now we know we have a claim, and they probably settled on a claim for the office. How do claims affect the cost of E&O Insurance for a broker in the future?

Mark Carlson: Insurance premiums are based on what that particular insured cost the insurance company the prior year. It works the same way as your homeowners insurance. If I’ve got no claims, I’m going to get one pricing. If I’ve got a bunch of break-ins, the insurance company has had to pay for things, I’m going to get a different price. Or with car insurance: if I have a bunch of car accidents, my insurance rates are going to go up.

So, the focus is to keep the total cost of a claim down, because that will be more friendly for your premium. (It doesn’t matter whether there are defense costs involved with a claim, or whether there are damages or a monetary settlement paid. The insurance company is looking at the total cost of claims.)

Here’s an example:

Two brokers are on opposite sides of the street from one another. One has five lawsuits in a year.  For each of those lawsuits, the insurance company and the broker agree, let’s just pay $5,000 and get out of each of these.

The other broker on the other side of the street has one claim. That broker decided, “We didn’t do anything wrong. I’m not paying any money whatsoever.” And they take that case to trial, and they get a verdict for the defense that costs them $100,000.

The broker with five claims is likely going to get a lower premium quote the next year than will the broker that had the one claim.

As attorneys, we’re focused on trying to get the best result for the client, and sometimes the best result is the one that doesn’t taste very good. What if a lawsuit came in and you knew it was going to cost you $50,000 to defend the case all the way through trial.

The plaintiff says, “I’ll go away for $5,000.” Even though you didn’t do anything wrong, you know that $5,000 is a better business decision than fighting all the way and spending $50,000. It feels horrible, but that’s an easy business decision.

Where it gets tricky is, “Now it’s not $5,000, it’s $25,000 or $35,000.” Along that continuum, it may get close to where it’s going to be a problem for you in any event. Then you have to decide whether to go all the way through trial, or where is it that you say, “Enough is enough. Let’s just get rid of this claim and try to make a good business decision.”

Dave Miller:  So the brokers have a say in “No, we’re going to fight this,” or does a carrier kind of override that based on the information from the claims adjuster and the attorney?

Mark Carlson: It depends on the policy. There’s what’s called a “consent clause.” Some policies are written so the broker has the last say or the veto power over a settlement (“consent.”) In other policies, the broker doesn’t have the ability to consent.

In my experience of doing this for a really long time, I can count on maybe two hands the number of times when the insurance company wanted one thing and the broker wanted another.

I think everybody wants the same result — to have the claim be as cheap as possible.

Sometimes, the situation is, “Well, I really don’t like this.” And there’s a dispute over what the best road is to the lowest cost.

But I haven’t ever had a case where the broker and the insurance company were on polar opposite sides of the decision to settle, where the broker nixed the settlement deal and had to go forward and deal with the consequences. I think most people realize it’s a business decision that they have to make together.

Dave Miller:   E&O rates have been a little bit higher in the past few years, and a lot of real estate brokers have increased their deductibles, so the E&O cost for agents remains reasonable.  

If an office does have a $2,500 or a $5,000 deductible, they may be getting rid of some issues before they even turn to the carrier. What are some steps a broker should take so these issues don’t blow up down the road if they don’t turn in claims?

Mark Carlson: If you don’t turn in a claim and you renew your E&O policy, then we have a prior notice issue. If you don’t turn in the claim but settle it yourself, and then something happens, there is a “notice in cooperation” clause.

The concept is that if an insured does something that jeopardizes the insurance company’s ability to defend the case, then there can be a problem with coverage. When a broker decides not to turn in a claim and just handle it, the broker should have a conversation with an attorney to evaluate that particular issue based on the facts in that particular case.

Dave Miller:   Is there any kind of form or release that brokers could use to have the other party sign that they’re not bringing this up again? Like, “I paid you the $300 for this issue.”

Mark Carlson: If a company wants to resolve a claim within the deductible, they absolutely want to get a release for that. You don’t want to pay money and have the person come back to you once they realize, “That was an easy target. Let me make up something else.” And then all of a sudden, you’re having multiple claims from the same person.

  • I would say the same thing holds true if there’s a dispute during closing, and the agents say, “I’ll contribute a portion of my commission to fix that particular issue.” You want to get a release in exchange for that concession on your commission also.

You would want to have your attorney prepare a release form for you. That’s something we do under the CRES ClaimPrevent® risk management program. (All CRES E&O clients can contact our expert attorneys pre-claim 7 days a week, for advice or to prepare a document.)

  • So if you’re ever going to give a commission concession, or if you resolve something outside of your E&O policy without making a claim, be sure to call CRES risk management. The legal help is included in your policy.

Laura Prouse:  Thank you, Mark. Thank you, Dave. Always very informative. And for all of you, thank you for watching. We look forward to seeing you next time.

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.

Originally Published March 19, 2021

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