March 28, 2019

E&O Insurance Frequent Claim Scenarios: Case #1

E&O Insurance Frequent Claim Scenarios: Case #1

With detailed transactions, competing client interests, and significant financial stakes all part of our daily business, it’s easy to understand why real estate agents and brokers are particularly vulnerable to lawsuits.

In the interest of increasing awareness of – and ultimately avoiding – frequent claim scenarios, we’ll review several actual cases in The Daily Bean over the next few weeks which E&O insurers advise are most representative of all claims.

Case #1: Failure to Confirm Can Result in Fraudulent Claims

In the rush of completing paperwork and procuring signatures to close a transaction, it’s easy to brush aside the need for one more phone call or email to double-check some small detail. Unfortunately, a trivial detail to you may be significant to a buyer or seller. If you’re not confirming all details with the appropriate authorities, you may be leaving yourself and your firm open to a claim.

Here’s an actual scenario that could easily happen to anyone.

The Situation: A buyer purchased a large single-family home on a one-acre lot. The home site was near a main highway but a large tract of woods located at the rear of the property served as a buffer between the home and the highway. During the home search, the buyer made it clear to the agent that privacy and easy access to the main highway were key considerations in their final decision. The agent believed the property met all the buyer’s needs.

The Problem: Prior to the sale, the agent informed the buyer that the adjacent woods were a designated greenbelt, protected from development. Based on that information, the buyer agreed to purchase the property. One month after the sale, a large retail chain announced plans to build a large “box store” 100 feet behind the property.

The Mistake: The agent described the woods as a protected greenbelt based on second-hand information and failed to confirm with the appropriate entities. The representation made by the agent was not accurate and was based only on assumption.

The Result: The buyer sued the agent for negligent misrepresentation and fraud, demanding rescission of the contract as well as other unspecified damages. Due to the allegation of fraud and negligence, the insurance carrier for the agent provided a defense, but reserved the right to deny coverage for any damages that arose from fraud. Ultimately, the case settled with the parties agreeing to pay for the construction of a large privacy wall and additional compensation to the buyer.

Prevention: The agent should have confirmed the information with the appropriate authorities before making the statement. Complete accuracy of all representations is critical to avoiding claims. Misrepresentation of material facts is the most common cause of claims.

Your duty is to provide buyers with accurate information based on facts that will help them make the right home-buying choice. Successfully fulfilling this responsibility helps minimize the risk of a claim.