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Real estate errors and omissions risks increase as agents expand services

Realtors venture into unfamiliar territory in search of more revenue

Real estate errors and omissions risks increase as agents expand services

After the implosion of the U.S. housing market in 2007-09, experts say the resulting flurry of catastrophic professional liability lawsuits targeting real estate brokers and agents has finally begun to dwindle.

However, new realities in the realtor marketplace — coupled with sustained improvement in housing prices and sales volume — likely will continue to drive errors and omissions claims against real estate professionals, experts said.

“The profile of the real estate E&O space has changed quite a bit, in that a lot of agents and brokers that we would typically cover only for that service have had to evolve their traditional services in order to stay competitive,” said David Egosi, a New York-based vice president and national underwriting leader for miscellaneous professional liability at Hiscox Ltd. “There's a been a change or shift in the overall scope of services that a lot of brokers and agents will offer, which opens up the nature of the claims we're seeing come in.”

Specifically, experts said many real estate brokerage firms are expanding the range of services they offer their clients to include project and construction management for newly built developments, as well as property management services for existing condominium, co-operatives and apartment complexes.

“There's been a lot of merger activity and consolidation in the marketplace as a result of the economic conditions,” said John Stathis, a senior vice president in National Financial Partners Corp.'s property/casualty practice in Scottsdale, Ariz. “Various firms are combining, changing or otherwise trying to get a leg up on their competition, or just trying to get more revenue in the door. It's been tough, and there's been a lot of transition in the market in personnel from point A to point B and, with that, a lot of transition in terms of what some companies have had to do in order to stay alive.”


Lacking experience in drafting and executing contracts for services beyond their normal scope of business could expose real estate professionals to additional sources of E&O liability for negligence, breach of contract, breach of fiduciary duty and misrepresentation — typically the most common causes of professional liability claims against real estate brokerage firms and individual agents, experts said.

In addition, it is unclear how — or even if — a real estate brokerage's E&O insurance would respond to claims stemming from services performed outside traditional operations. Experts said companies should carefully review their existing E&O cover prior to advertising or providing services with which they are not familiar.

“They may or may not be adequately covered by the policy form that they purchased, especially the ones that are more price-driven, so it's important that insurance carriers are evolving with the broker-clients,” Mr. Egosi said.

Even if home prices continue to increase, experts said real estate agents should expect to see a rise in the frequency of E&O claims as the volume of residential sales increases.

In particular, residential brokers and agents, which experts said traditionally generate a higher annual volume of professional liability claims than their counterparts in other market segments, are likely to encounter more allegations of misrepresentation, failure to disclose property conditions and other breaches of fiduciary duty to home buyers.

According to the National Association of Realtors' “2013 Legal Scan,” the volume of U.S. lawsuits accusing real estate professionals of breaching their fiduciary duty to their client increased 29% since 2011 (see related chart).


Though individual agents ultimately were found not liable in 38% of the cases identified in the NAR's report, 80% of real estate professional polled said breach of their fiduciary duty is likely to be among their top three legal exposures in the near future.

“Some buyers certainly have bought houses on the expectation that they were buying on the downturn, and that they would see a very quick and immediate appreciation in property value,” said Gregg Kahn, a Florham Park, N.J.-based partner at Wilson Elser Moskowitz Edelman & Dicker L.L.P. “When that doesn't occur ... the buyer may very well become dissatisfied with their real estate professional for possibly pulling them into an overpriced transaction that didn't turn out as well as they would have liked.”

Mr. Kahn said the potential for increased professional liability lawsuits against brokerages and/or their agents — not to mention E&O insurance disputes that may arise thereafter — should compel real estate professionals to put more care into their documentation of agreements and representations made to their clients.

“If I were going to give any practical advice to real estate professionals, it would be to document all of your conversations with your clients,” he said. “When you see the demand letters, and you see the time and expense that brokers and agents have to go through in defending a claim, it makes it much easier to defend in front of a judge or a jury when the agent has documented their communications.”

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