Video Description
Real estate brokers face a range of potential claims, from licensing complaints to litigation and ethics grievances. In this webinar, Jim Meseck, a legal expert specializing in defending brokers shared critical insights on risk management, the importance of Real Estate Errors and Omissions insurance, and best practices to minimize liability. (Jim is an attorney in Colorado, but his insights apply to all states.)
Some key takeaways brokers should keep in mind:
- E&O Insurance is Essential – Brokers must have sufficient coverage tailored to their practice, including policies for environmental hazards, regulatory complaints, and tail coverage for retirees.
- Disclosure is Critical – Brokers should ensure sellers fully disclose known issues, document disclosures, and avoid summarizing or interpreting findings.
- Stay in Your Lane – Avoid unnecessary liability by not investigating property conditions, obtaining permits, or drafting legal documents.
- Property Management Risks – Increased litigation in Colorado (and perhaps in your state) makes property management a high-risk venture requiring legal oversight.
- Compliance with Regulations – Brokers must adhere to strict state regulations, avoid creative workarounds, and maintain detailed records.
Watch the full webinar above, listen to the podcast or view the transcript below.
Video Transcript
Jim Meseck:
This is Jim Meseck from White and Steele here in Denver, Colorado. I am an attorney that specializes in defending real estate brokers from all sorts of claims, whether it be pre-litigation, litigation, licensing complaints, or even ethics grievances with local boards of Realtors®. And today I’d like to talk with you about some of the common and recent claims that I’m beginning to see here in Colorado against real estate brokers who I represent. But before we go there, I would just like to point out the benefits of real estate E&O insurance for brokers. And if I can get my slide to work here. Here we are on E&O insurance. So again, I can’t stress enough to my clients how important it is that they be prepared before they get a claim. That means you need to have the risk management tools in place, not only to prevent claims, but a plan of action and what to do when a claim comes in.
So I encourage all real estate brokers to review your errors and omissions insurance policies, make sure you’re in compliance with your state if it requires real estate E&O. (If you have CRES real estate E&O, your policy is in compliance with your state if your state requires E&O.)
You also need to know what kind of limits you should expect or ask for to protect your business. Look at the average cost of the homes sold. Look at the cost of repairs. Are you seeing personal injury types of claims? So you want to make sure you have all types of coverage, because E&O insurance is the number one risk management tool you must have if you are a broker. And make sure if you’re part of a group policy (like the state-sponsored plan) that you know what the group policy provides. If you have an individual policy, make sure you have a sufficient amount of limits that will cover you and the nature of your real estate practice.
Key Real Estate E&O Claim Areas
Every policy is different, so look carefully at what your real estate errors and omissions policy includes . . .
- Are you selling mostly your broker-owned real estate? Do you have specific coverage for that beyond your principal residence? (For example, with CRES Agent-Owned Property on your E&O policy, it covers vacation rentals and other rental property up to a 4-plex.)
- Do you have coverage for certain things like environmental hazards, including mold?
- Is there coverage for a regulatory complaint or an ethics complaint?
- Also, depending on what stage you are in your real estate career, are you looking to retire? Do you need to get a tail policy that will extend your coverage after you leave the brokerage and after you’ve stopped practicing? If you’re driving clients around for showings, make sure you have sufficient auto coverage.
- Make sure you have an umbrella policy, like a Business Owner’s Policy that covers all of your activities.
When Should You Report an E&O Claim — or a Problem
With that, you also need to know what to do when you get a claim for reporting. How do you report a claim?
I really like the CRES risk management program because it encourages people to come forward when there is a problem, and they don’t necessarily have to be worried about, is this going to count against me? Is this going to be a ding on my claims’ history?
Tell your insurer. Work with your insurer. Know what your retention amount is, know what statements that the other side might be trying to get you to make and that you can’t make because of your insurance. Preserve everything. Once you start the claim process, give the adjuster everything. And I can’t stress how important it is to give the adjuster, and if an attorney gets involved, that you give them everything and everything means everything you can imagine related to the property, related to the buyer, related to the seller, related to the home inspector.
Even if you don’t think it has anything to do with anything about the case, make sure you get that to your attorney because we never know where a case is going to go once it gets to us. So be prepared.
The number one claim I see is failure to disclose.
Number two is failure to advise and protect the client.
Have You and the Seller Disclosed Everything?
So what I’d like to do is break this down and talk first about disclosures. We’ve all heard the expression, disclose, disclose, disclose, and I repeat that frequently and often. It is the number one best piece of advice I can give. As a broker, you need to encourage and advise your sellers to disclose everything. A common fact pattern I see is a broker will list a property, it’ll go under contract. That buyer will do their due diligence and inspections and then terminate for reasons related to the inspections.
This creates a host of problems for both the seller and the broker. The first buyer, the terminated buyer, may have found issues that the seller does not agree actually exist or impact the property. You as the broker still need to disclose those because now you have actual knowledge of an adverse material condition. Whether you believe it’s true or not, doesn’t matter. You have documentation that it is an issue for a buyer, and you need to disclose it, and you need to advise your seller to disclose it as well. And this needs to be documented. You may need to advise the seller to update their seller’s property disclosure form that may be required under the terms of the contract. So be wary of the seller minimizing.
I’ve seen a case recently where the seller had the property listed with another broker. That listing period terminated. Then the seller hired my broker a couple of months later, listed the property and didn’t tell the broker all the reasons why the first listing ended up being terminated. Got terminated because the buyer found things during inspection that the seller didn’t agree with and didn’t want to disclose. So know your duty, know your seller’s duty, advise your seller to disclose.
Another common fact pattern is we’ll get something akin to a partial disclosure. So the seller will say, “Well, this is what they found the first time. Can you just send this statement saying it’s not true? Or can you just summarize and say, ‘Well, this is maybe the problem, but here are all these other factors.'” Don’t do that.
Don’t let your seller tell you what to say.
Do not comment on the materials provided by the seller when you provide it to the buyer’s agent or the buyer.
Do not interpret, summarize, explain, look for a silver lining, or translate it.
Just say, “Here’s the information. I’ve disclosed it to you.”
Document What You Disclose and How
And document that you have disclosed something. Because that’s the next issue we often run into. A lot of times buyers will say, “You didn’t disclose this to me.” And the seller’s agent will say, “Yes, we did.” “Well prove it.” Where’s the paper trail showing that the disclosure took place? Where’s the list of documents?
I’ve even had clients take photos, and I had one client videotape everything that was disclosed. They put the documents on the counter and took photos of each document and then the group and then the stack. So this is great.
I had one client create a chain of custody form that listed all the items like engineering reports, water test results, radon test results, and had the buyer’s agent sign for these documents.
If you’re a buyer’s agent and you’re getting documents in, make sure you identify and list them. You want to document what was disclosed to you and that you provided this information to your client, the buyer. So we’ve got a paper trail, don’t rely on, “Oh, well, this is all saved in the cloud.” This is another case I have where I have a commercial broker who is representing the seller, and the seller gave him a lot of information about the property and all the problems with the property. They saved it in the cloud and then gave access to buyer’s agents.
However, there was an expiration date on what was saved in the cloud, and now we’re having a problem showing that what the seller’s agent thought was disclosed, actually got disclosed. So be careful when relying on technology.
The Seller’s Property Disclosure Form
Also, here in Colorado, we have a Seller’s Property Disclosure (SPD) form. This form is very problematic and creates problems for both sellers, seller’s agents, and the buyers themselves. You need to advise the seller to update the SPD and provide the documents that the information in the SPD is based on. If new information comes in, you need to advise the seller to prepare a new SPD. Also, this is a six-page document, and a lot of times sellers will not have lived in the property, it’ll be an investment property, it’ll be a fix and flip, or they’ll have inherited the property, and you’re dealing with a personal representative.
However, you need to advise them that they need to be as thorough as possible, and they need to review and answer all the questions in the SPD. So for example, in section A of the SPD, it asks about structural problems, water, moisture. And then later on in the SPD, more information is requested about those topics. Frequently the seller will stop filling out the form after the first one or two pages. So in section A, they’ll make a comment, maybe about structural problems, but later on in the SPD, in section N, specifically N line seven, it asks about movement, expansive soils, which are often related to structural problems. So they’ll check the box, yes, for structural problems in section A, but then leave the box and section N line seven for movement, expansive soils, blank.So then the argument I get from the buyer’s attorney is, “Well, the seller and the seller’s agent were minimizing this.” You as the seller’s agent had a duty to advise the seller to complete the entire SPD, not just part of it, but the entire thing and provide all the relevant information. And just checking one box here does not let you say it was disclosed.
Other examples: in section A, it talks about moisture, water. What is the moisture and water problem? Is that a roof leak? So that’s in section B1. Is that flooding? Is that a drainage problem? Is that a grading problem? Is that in the floodplain? Those are in sections B, J, and N. Also in section A, it asks about hail, wind, fire, and flood. So if you check the box there, then you should be looking to see what did they disclose in later sections.
If you indicate structural problems in section A, then there’s section K which asks about floors, cracks, heaving, settling, exterior walls and windows. If there’s hail damage, then there should be boxes checked in later sections. So again, the Seller’s Property Disclosure form is a trap for the unwary, and you as the broker need to be aware of that.
Is the Work Permitted or Not . . .
Another issue that comes up with more and more frequency now, because home repair costs are so expensive … a lot of times home sellers will not want to pay for the cost of a permit and skip getting a permit. So then we go to whether the lack of permits is an adverse material condition or not, and should you be investigating. You as the broker should not be investigating, you should be advising your clients to investigate.
The reason permits are important and should be disclosed as to whether they were obtained or not, is because of building code violations. So that’s the actual adverse material conditions, the building code violation. And brokers are not building code inspectors. So if there’s a lack of a permit, it should be disclosed, if you know. If you don’t know, then you need to advise your client to disclose whether there are permits or not for any recent remodeling work or renovations done during their ownership. If you’re a buyer’s agent, you should be advising your client, “Hey, the MLS says this is a remodel, rebuild. There’s renovations, there’s new things done.” You should investigate the permit status and look for any building code violations.
However, you need to be careful because here in Colorado, depending on what jurisdiction you are in, there may be one or two building departments that apply. There could be a local municipal building department, there could be a county building department. And then for certain things, there could also be state permits required:
- Depending on the size of the property
- Whether it’s commercial or residential
- For such things as well permits, septic systems, depending on how big they are.
And you need to know where to send your clients to look for the permits, so if it’s a rural property right on the edge of town, it’s not going to help to send your clients to the municipal building department. They would need to go to the county building department.
Never Waive a Home Inspection
Related to this issue are inspections.
So it’s very important that you encourage your clients to get as many inspections done as possible, on anything they’re concerned about. Let the client pick the inspector, the type of inspection, the level of service, how much they want to spend. Never advise a client to waive inspections or for that matter, objections to title. No matter how competitive the market is, even if you’re not going to raise inspection objection items, you need to have your client advised to know as much about the property as possible before they purchase. So never discourage them from doing inspections, always protect their right to inspect, recommend extending deadlines as necessary. Protect the earnest money of your clients as much as possible. So most of my clients, fortunately, are honest, hardworking, real estate brokers.
Stay Within Your Lane and Avoid Getting “Creative”
The majority of cases I see brokers getting into problems is when they try to get too creative, they volunteer to take on more responsibility than is required of them, than their uniform duties under Colorado statute and the commission-approved listing contracts require. They’ll also get in trouble when they try to do a freebie. They’ll just try and help out a client help them save some money, and that’s when things get off track. So in Colorado, by statute and by your uniform duties as laid out in your listing contract, whether you’re a buyer’s agent or a seller’s agent:
- You have no duty to investigate the condition of the property for the benefit of your client.
- You have no duty to verify the representations of the seller or the inspectors.
However, if you volunteer to investigate such as doing a building permit search, then you have assumed that duty and you take on that liability and that responsibility.
So stay within your lane. Also, stay within the four corners of the real estate manual. I can’t tell you how many times I’ve been with a client and they tried to find a creative solution and went outside the four corners of the real estate manual. It didn’t work out. A DORA Professional licensing complaint gets filed, and the broker appears before an investigator in the commission trying to explain, “Hey, we know that the rule says you can’t do this, but we were just trying to solve this problem and help our client and find a workaround.” That may show that you didn’t intend fraud or that you didn’t intend to harm the consumer.
However, that’s still going to be a licensing violation. So anytime you feel like you’re getting outside your lane, you need to advise your client to consult with an attorney or the appropriate professional, such as an engineer. If there’s a structural issue identified by a home inspector, then you should be telling them to consult an engineer. If there’s a contract issue or a lending issue, then they need to speak with an attorney or somebody other than yourself.
Property Management Problems
Another problem I see a lot with brokers is when they get into property management. My basic advice to brokers here in Colorado is don’t do it. There’s too much liability. There’s too many risks, especially in an increasingly litigious jurisdiction such as Colorado.
We are seeing class actions against property managers due to recent changes in landlord-tenant law regarding application fees, security deposits, those sorts of things. If you are a property manager, know the law, and have an attorney advising you about these changes in Colorado legislation. Know when the law’s going into effect, have your practices ready to change when the new laws go into effect.
Know what you can or cannot charge for an application fee, for security deposit, for a pet deposit. Now, follow Colorado’s unique accounting required of property managers where you need to have a ledger, a journal, and three-way reconciliation. A lot of my clients are unaware of this. They will use QuickBooks and then all of a sudden they’ve been audited by DORA, and it turns out they’ve not been in compliance.
So don’t think you can just come into Colorado and start property management the way you did it in other states, because Colorado’s very unique. Also, one unique aspect about Colorado is you need to have an attorney draft property management agreements with the client landlord. You need to have an attorney draft a lease. Neither of those are forms provided or approved by the Colorado Real Estate Commission. So that’s another area my clients find themselves in trouble with is they’ll go online, do a Google search, find a property management agreement, find a lease, everybody likes it, but it’s not a commission approved form, and it was not drafted by a Colorado attorney. So therefore, there are problems.
Also, this is an area where we see civil rights complaints over eviction, wrongful evictions, habitability, discrimination, accommodation requirements. So again, property management is just completely fraught with risk. And if you’re going to do it, you need to have an attorney advising you every step of the way, and you need to make sure you definitely have property management E&O insurance that covers all forms of risk from slip and falls to assaults, to class actions, to accounting issues, and also helping you out with audits and DORA complaints.
Self-Managed Properties and Audits
Self-managed properties are another specific area of property management where I see broker clients encountering problems. Even though it’s your property and you have a license and you’re managing it yourself, you still have to comply with regulations.
You have to basically have a contract with yourself. You have to disclose to yourself, you have to have a trust account. You have to write letters to yourself and submit reports to yourself. So make sure your file is papered and you have all this information in the file in case you get audited.
You are Always a “Full Service” Broker
Another area where I see brokers, where they try to get creative, try to just be helpful, is when they try to or they’re approached by a seller and say, “Hey, I don’t really need you to sell my property. I just need access to the MLS,” or “I need you to get the word out.” This is where brokers get in trouble, because as professionals, it’s our job to solve people’s problems. We want to help people. We want to help our clients achieve their goals. And so you can’t do that though if it requires you taking shortcuts.
You can’t contract away your uniform duties. You have to be there for your client and be with them every step of the way, making sure they’re advised. You can’t say, “Well, just for $250, I will list your property on the MLS, and then it’s up to you.” That is not allowed under Colorado regulation, under Colorado case law. So once you’re somebody’s broker, you’re their broker all the way. So here in Colorado, we have a tremendous amount of forms. We have a lot of regulation, we have a lot of guidance in the form of Commission position statements, but every once in a while we will encounter problems that are not addressed in say, the contract to buy and sell or the listing contract.
For example, this came up in a risk management call recently through CRES, and this was an issue where the broker had a listing contract with the seller, put the property on the market. However, before they started getting offers, the seller died. The seller’s personal representative steps in, takes over, and wants to terminate the listing contract and use somebody else. So we had to go through the analysis. What do the forms say? So the Colorado forms are unique in that they’re very thorough. I think we’re up to 22 pages now and growing in the contract to buy. And so we had to go through the contract to buy with a fine-tooth comb and also look at the listing contract.
So basically, in this instance, if the seller died after the contract to buy was entered into, but before there was any offer, then the personal representative may have the ability to terminate the listing. However, if the property was under contract, then the personal representative needs to perform and sell. So again, I know this is not a very common fact, scenario, thank goodness, but I bring it up as an illustration that there are still a lot of things not addressed or covered in the form contracts and that you need to be aware of that could lead to potential liability.
Post-Closing Repair Agreements
Another thing that leads to potential liability is where buyers and sellers agree to post-closing repairs.
In fact, I also am a mediator, and I’m mediating a case right now where that’s the problem. The buyer and seller agreed to sell the property, but during the inspection process, they identified stucco issues and the closing was coming up. Everybody wanted to close, but they couldn’t get the stucco repaired because the temperature needs to be above a certain degree for three days in a row to make the repairs. So everybody wanted to close, but the temperature, the weather was not cooperating. So they just agreed, “Oh, we’ll do it later. We’ll just put some money in escrow.”
Well, it wasn’t decided who was going to call the repair company, and it wasn’t decided what happens if the repairs are greater or lesser than what was anticipated.
It wasn’t decided, well, how long are we going to leave the money in the escrow account?
So again, if you can, the best practice is to push off the closing. However, if that’s not possible, then do not hold the escrow funds yourself. Do not agree to supervise the repairs. Do not agree to release escrowed funds without written consent or authorization from your clients, and document your advice that you gave that, “Hey, we’re better off doing amend, extend, and trying to push off the closing.” And then it is the client’s choice to go forward despite your recommendation.
Your Duties End at Closing
So another problem I see is, again, brokers want to be helpful. They want to make sure their clients are happy.
They want that five-star rating on Google, Yelp, Zillow, and everywhere. They want a happy client because a happy client’s going to lead to referrals. And so another instance where I’ll see brokers going too far or doing the freebie is after closing. Remember, your duties as a broker end at the closing table when you get up and walk away; you have fulfilled your obligations under the contract. Your representation ends. However, if you volunteer and continue to work with your client, whether it’s investigating, negotiating additional terms … or a lot of times sellers say, “Well, the property wasn’t cleaned enough. Can you go negotiate and get them to agree to clean? Or can you hold the escrow money?”
Remember, you are not obligated to do this, and I would advise you as an attorney to not take on any additional liability. I know that’s hard, but at some point you’ve got to cut the cord, and the buyer and the seller need to be on their own, and it’s their issue to deal with.
Where I see problems with this is post-closing occupancy where things haven’t been thought through entirely about security deposits, rental payments, return of security deposits, accounting for security deposits, if it’s being applied towards cleaning or repairs. What’s normal wear and tear? Was that there before or after the closing? Who gets to do the final walkthrough? How’s that coordinated? How’s that arranged?
And post-closing repairs, again, are huge problems after the closing ends where I see brokers overextending themselves.
My name is Jim Meseck with White and Steele. I’ve been an attorney here in Colorado going on 24 years now. Also in Wyoming for that same amount of time, and recently was admitted to Iowa. I mostly focus on representing real estate brokers, mortgage loan originators, appraisers, some home inspectors, and sometimes attorneys and malpractice claims.
I can’t encourage you enough to know what is in your real estate E&O insurance policy, make sure you have the required coverage, and to work with your insurer to actively manage preventing claims as well as handling those claims when they do arise.
