E&O Insurance Frequent Claim Scenarios: Case #7

E&O Claim Scenario: Buyer Sues Agent & Broker for Misrepresentation of Expertise in Commercial Transactions

The Problem: A residential real estate agent was approached by a potential buyer who was looking for property where he could live with his family, as well as operate a business. The agent advertised himself as being an expert in residential and commercial real estate, even though the agent had no actual commercial experience.

The Mistake: The agent located a piece of property that was listed by another “in-house” agent. Believing that it would be suitable for his buyer’s residential and business needs, he incorrectly assumed that the property’s zoning would allow his client to operate his business, and thus encouraged him to purchase it.

The Result: About one year after the buyer closed on the property, he received a notice from the city advising him that the operation of a pest control business did not conform to applicable zoning regulations. After the city denied his request for rezoning, a lawsuit was brought against the agent and his broker seeking compensatory damages, lost revenue, and attorney’s fees. The buyer alleged that he relied on the expertise of the agent.

In the end, the claim was resolved after it became apparent that the agent and broker would likely be found liable if the case were ever tried.

Prevention: In this case, the agent and broker could have avoided a costly claim if they had recognized the agent’s lack of knowledge in the nuances of commercial real estate, and had instead had the agent partner with a knowledgeable commercial resource, or had simply referred the buyer to a commercial agent.