If you’re a real estate professional, you know it’s important to manage risk and the threat of potential litigation in your business. No one knows this better than Tom O’Connell, who’s been defending real estate professionals in errors and omissions claims statewide in Texas for more than 25 years. Tom is an approved Texas panel counsel for numerous insurance carriers. He has experience in defending claims of negligence right through to fraud and deceptive trade practice lawsuits.
Top tips for real estate agents to avoid litigation in Texas
- It’s much better to disclose now, rather than face litigation and potentially lose your business in the future.
- Keep a transaction log and always enter the information in chronological order at the time of occurrence.
- Don’t agree to be involved in transactions beyond your expertise or in an unfamiliar geographical area.
- Carry Errors and Omissions insurance. If you attempt to go it alone without legal counsel, you run a much higher risk of having a judgment entered against you.
- If you don’t have E&O and you have a judgment against you, the opposing attorney may collect from the Real Estate Recovery Fund. It’s highly likely that your license will be suspended as a result.
- Always notify your insurer (and your office rep) in a timely manner if an incident (POTENTIAL CLAIM) or claim does occur. Otherwise, you could end up with NO COVERAGE, even if your company has an E&O policy in place.
- If you are subpoenaed to testify in a deposition, you should ALWAYS have the advantage of legal counsel – even if you’re not named in the lawsuit. You run a higher risk of being brought into a lawsuit afterwards.
- You should always provide notice in writing to the buyer as to where the information came from. Say, “5500 square feet per owner” or “Zoned for 2 horses per seller.”
Watch the webinar replay, listen to the podcast, or view the complete transcript below:
*Clips & References
“He just died last night” video clip. Adam Mckay, Jon Brion, Hal Willner & Bruce Fowler, R. G. (2008) STEP BROTHERS. USA.
Laura:
Thank you for joining us today. I’m Laura Prouse with CRES Insurance. CRES has been providing real estate Errors and Omissions insurance and risk management services to real estate professionals, agents, and brokers for over 25 years.
We want every agent and broker to have the right tools to succeed. So, we welcome attorney Tom McConnell, who has been defending real estate professionals since 1986. He has also been working with CRES policy holders offering real estate defense and risk management services for more than 25 years (basically since CRES has been in business.) Tom’s presentation today will give you tips to avoid litigation. (Although Tom is based in Texas, most of these tips will apply nationwide.)
Tom:
Hello everybody. I’m an attorney with Gauntt Koen Binney and Kidd, right outside Houston, Texas in The Woodlands. This is a compilation of tips to hopefully avoid litigation.
Disclosing Defects
It is so important to disclose defects. Based on my experience in handling these real estate errors and omissions cases, probably three out of every four cases involve an allegation that you failed to disclose a material defect.
Be sure to disclose all potential defects that you’re aware of and make sure the buyers or buyers’ agent acknowledge they received it.
One good way to think of that is this: if you’re asking yourself whether the condition is something that should be disclosed, then you should disclose it.
Now agents are thinking you don’t want to scare off potential buyers by disclosing seemingly unimportant problems. But they end up being far more costly in the long run if you’re dragged into a lawsuit by an irate buyer due to an undisclosed defect. (Don’t be the judge of whether a problem is important or unimportant – the fact that you’re considering whether to disclose it or not indicates you should disclose it.)
The other key point is this: if your seller client doesn’t want to have a possible problem disclosed, you should simply walk away from the listing.
Here’s an example. A contract comes in on a listing that an agent has. An inspection is done by a licensed inspector, which reveals potential problems with the foundation. Now that deal falls through when the potential buyer fails to obtain financing.
Another contract comes in, and this time, a structural engineer conducts the inspection of the foundation and gives it a clean bill of health.
Now you as the agent may be confident that the report from the engineer is more accurate than the one from the inspector. So, the agent does not disclose the prior report.
If it turns out there’s a problem with the foundation, and the buyers end up filing suit, the buyers’ attorney in a failure to disclose a foundation defect lawsuit is going to allege your report was a material fact that should have been disclosed. Therefore, the previous report should have been disclosed to avoid potential litigation. (On the TAR form, there is a specific space to note a prior report.)
Document Everything in Your Transaction Log
You should keep a transaction log and document everything in the file. If you should be involved in a lawsuit, it could come down to a “he said, she says” scenario. If I as your lawyer have written documentation evidence as to what happened, that could possibly sway a jury in your favor.
Now you can’t ever enter everything, but it’s always a good idea to list certain items, including:
- The contents of meaningful telephone conversations.
- Important occurrences such as inspection reports.
- Each time an agent provides any report, have them sign off on it.
When you keep a log for each entry, always put down: the date of the events, a discussion of what occurred, and always enter the information in chronological order at the time of occurrence.
Because if you enter the information at a later date — for example, after you’ve received a demand letter — it’s just going to look like you’re recreating a version to support your position.
Here’s an example: As the listing agent, you give your client a seller’s disclosure form to fill out as a part of the listing process. The client contacts you and tell you the form is confusing, and she needs you as the agent to help her fill out the form.
Now here’s what you do: After informing your client that you can assist the client and that the client herself has to fill out the form, here’s what you also need to do immediately afterwards to avoid potential litigation.
You as the agent should immediately enter into your own log in chronological order, the date and the narrative of what occurred. Being able to present the chronological log of your version of what happened could assist a jury in a trial years after the transaction to believe your version of the facts.
I’m in Harris County, that’s Houston, and it can sometimes take three, four, even five years for a trial to actually occur. So that’s why it’s so important to make sure you document everything in the file. And that way it would no longer be a, “he said, she said” contest, but instead you have actual documentation to bolster our position.
Avoid “Unknown Territory” by Expertise and Geographically
Don’t venture into “unknown territory” — because one quick way to embroil yourself in a lawsuit is to be involved in transactions far beyond your expertise or in unfamiliar geographical areas.
Certain types of transactions require special expertise — such as commercial transactions. And certain geographical areas may have requirements or characteristics that you may be unfamiliar with.
Here’s just one example: if you’ve never heard of an estoppel letter, you shouldn’t be handling commercial transactions.
Here’s the example: An agent with experience handling only residential transactions is contacted by a potential buyer to have the agent assist her in purchasing a small commercial office building.
Now there are other agents in the office that have expertise in representing such buyers. However, the agent sees the opportunity for a large commission, and decides not to enlist the help of other qualified agents so he doesn’t have to split the commission. The client ultimately closes on this office building.
Shortly after the closing, numerous problems with the office building pop up and a subsequent lawsuit is filed against the agent. It’s determined there are numerous steps the agent did not take that would’ve been the custom and practice of commercial real estate agents.
This is why you need to either decline the listing or enlist the aid of a qualified agent in the office to assist in the transaction. Doing the right thing early on can be smarter and less costly in the long run.
Real Estate Errors and Omissions insurance
You should always carry real estate E&O insurance. I’ve actually had real estate brokers or agents tell me they don’t carry E&O insurance, not only because of the cost, but also because they feel that carrying insurance makes them a target for litigation.
In addition, some agents and brokers feel that even if a judgment is entered against them that is not satisfied because they don’t have any insurance, they’re going to keep selling real estate. But that may not be true . . .
A listing real estate agent is sued by a buyer alleging that the agent failed to disclose a defect. This agent doesn’t have any E&O insurance and decides he can’t afford an attorney after every attorney he contacts wants a minimum $10,000 retainer.
The agent files his own answer to the lawsuit. The buyer’s attorney then takes the agent’s deposition. In addition to the fact that the agent makes numerous admissions against his interests that he may not have made otherwise if he had the benefit of counsel, this attorney discovers for the first time the agent doesn’t carry E&O insurance.
However, this attorney is familiar with something called the Real Estate Recovery Fund, which provides that if they get a judgment against that agent for activities incurred in connection with those services, then they can collect up to $50,000 per incident from the fund.
Since you as the agent don’t have representation, the buyer’s attorney can easily obtain a judgment against you and thereafter collect the amount of the judgment up to $50,000 from the fund.
In this case, your license will likely be suspended until you pay the Fund back. And in fact, your conduct may be so egregious that they’re not even going to reinstate your license.
The idea that you aren’t going to get sued because you don’t have any E&O insurance is simply not true. In a typical real estate E&O lawsuit, it won’t be until well into the discovery process sometime after the suit is filed, that the attorney determines there’s no E&O coverage applicable. But you’re already in the lawsuit.
And whether you have E&O insurance has no bearing on whether you get sued. Even more importantly, without E&O insurance, you run a much higher risk of having a judgment entered against you, because you’re more likely to not have adequate representation because of the cost.
Never put yourself in harm’s way by rolling the dice or by not having E&O insurance.
Notify Your E&O Carrier Whenever You Have a Claim
Always notify your E&O insurance carrier and your office rep of any potential claims in a timely manner.
Otherwise, you could end up with no coverage even though your company has an E&O policy in place.
This applies not only to obvious claims — such as demands for money or lawsuits — but also other less obvious potential claims as well, such as subpoena to produce documents or to testify.
The definition of a claim in an E&O policy is usually when you have knowledge of any incident which may give rise to request for damages.
You can’t assume that something as innocuous as a simple subpoena isn’t a claim.
Here’s another example of a lawsuit I handled. After a real estate agent assisted a buyer in purchasing a house, the client sends a demand letter to the agent. The demand letter threatens to sue the agent because of an undisclosed defect and demands $5,000 to get the problem fixed.
The agent calls the buyer, and the buyer tells him that he has since calmed down and knows the agent didn’t know anything was wrong. So, he should disregard the notice. So that’s exactly what the agent did, he threw away the letter without informing his manager or the E&O carrier about it.
Here’s the problem. When the E&O policy comes up for renewal shortly afterwards, your broker’s going to fill out the application without disclosing the potential claim since he was unaware of it, because you didn’t tell him about it. And afterwards, the agency obtains a new policy with a new carrier.
Six months later, the buyer sees a lawyer, and the lawyer files a lawsuit against the agent and everyone else involved in it. The agent then gives the lawsuit to the broker, and the broker submits it to the carrier.
The carrier is going to deny coverage because the claim was not disclosed on the application as required. So now, the agent doesn’t have E&O insurance even though he paid for it.
The answer to this is once you receive a demand letter or anything that could be construed as a claim, you should notify your E&O carrier and your real estate agency rep for two reasons:
- You don’t want to put yourself in a position of having no coverage at all since you didn’t disclose the claim in a timely manner to the carrier.
- Secondly, if you submit the claim in a timely manner with no exclusions, the carrier will usually assign a knowledgeable attorney to represent your interests. It’s never a good idea to go through any kind of legal proceeding without the advantage of legal counsel.
That even applies for your subpoena to testify in a deposition. Now, you may think there’s no risk since you’re not presently named in the lawsuit. But without adequate representation, you are at a higher risk of being brought into a lawsuit afterward, since you didn’t have the opportunity in advance to confer with counsel.
Limit Your Liability with Information from Other Sources
How do you as a real estate agent limit your liability when you put information in your marketing materials that you obtain from other sources?
The problem is that if you utilize information from other sources about the condition of the property, and if that’s not accurate, you may be liable for damages.
If you’re wrong on this, you may be liable for damages regardless of whether or not you knew it was wrong.
In Texas, we have the Texas Deceptive Trade Practices Act, or DTPA, that does provide for a possible out to liability.
As an example, let’s say you’re the listing agent, and your seller client tells you the square feet. Now without knowing if it’s correct, you advertise the property on the flyer as having 5,500 square feet. The potential purchaser sees this and relies on the information to purchase it. He discovers later that it’s only 4,500 square feet.
Since even innocent misrepresentations are actionable under the DTPA, you could be held responsible.
There is a defense with the DTPA — if you provide notice in writing to the buyer that the information was obtained from another source, and you did not know and could not have reasonably known the information was false.
In other words, tell them where you got the information in writing, it’s as simple as that. In the scenario above, if the flyer stated, “5,500 square feet per owner,” and you did not know and could not have reasonably known it was false, then you have a defense to a DTPA claim. It’s a simple way to protect yourself, but sadly, many agents don’t bother doing this.
If you’re going to provide specific acreage about the property from a third source, always disclose in writing the source of the information.
Here are some other examples. A property was advertised as “horses allowed.” After the buyer completed the purchase, they discovered horses weren’t okay or they weren’t allowed because it was deed restricted. In this case, the agent simply put on the MLS or on the flyer what they got from the seller, which was horses were okay.
What should the agent have done? Just indicate “Horses, okay, per seller.”
Here’s another example. The MLS says, “new roof.” The agent says he actually saw workers putting the “new” roof down. The problem was they were adding something called an overlay. It wasn’t really a new roof.
One other point, even if you’re going to list the source of information, don’t ever say this, “The property is in mint condition” or “excellent condition.” You really don’t know what condition the property is in unless you’re the actual seller of the property.
And you have to disclose everything that you know. I had a lawsuit where the agent referenced in his listing the square footage of “3,200 square foot per builder,” which is the way you’re supposed to do it. The problem was the agent actually had a prior appraisal report that indicated it was 2,800 square feet.
So, it’s not enough to just disclose the source of the information, you need to disclose everything.
And when you’re getting the information from somebody like your seller, always make sure that they sign off on it.
Because your good friend and client is going to turn on you in a minute when it comes to money or getting sued. His attorney is going to take your client’s deposition and point to this disclosure and where it says, “per owner.” And they’re going to ask the client, “Did you give that information?”
And the client is going to say, “Absolutely not. I don’t know where they got that from.”
So, it’s always a good idea to have your client initial the flyer or whatever and keep that in your records.
Agent-Owned Property Sales
Laura Prouse:
What do you see as some of the high-risk transactions that real estate agents get involved in?
Tom:
The biggest problem is when the agent is selling his or her own house.
In “failure to disclose” cases, the question always is, “did the agent have actual knowledge of the defect?” And I can almost always rely on the fact that the agent didn’t know about the defect.
That’s not usually going to be the case if you’re selling your own house.
Disclaimers
Laura:
I have another question from an agent: “If I put a disclaimer in my information, will that keep me from getting sued?”
Tom:
My advice is it’s always a good idea to put a disclaimer in there, because it does provide some protection. (For example, saying “You shouldn’t rely on this information.”)
But there is a problem with that. In a DTPA claim in Texas, you can’t disclaim liability.
What if you have actual knowledge of a defect? In that case, a disclaimer saying, “you can’t rely on the information I provide” isn’t going to work because you have actual knowledge of the problem.
So, the moral of the story is disclaimers are a good idea. I think you should always use them. But they’re not necessarily going to get you off the hook.
Laura:
Thank you to Tom for covering those great examples of how to avoid litigation. I want to thank you all for attending. Tom’s 25+ years of knowledge goes a long way in claims prevention.
