E&O Frequent Claim Scenarios

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've reviewed several actual cases which E&O insurers advise are most representative of all claims. While these cases, fortunately, don't involve Bean Group, our E&O carrier advises these are representative of the most frequent 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.

Case #2: Agent Sued for Failure to Disclose Offer and Provide Access to Property

The Situation: An agent agreed to list and sell a residential property. The agent had an interested buyer, and an offer was presented and accepted on the property. Subsequently, a neighbor was denied access to view the property despite stating that he would offer $85,000 more than the original offer. The seller ultimately claimed the agent was negligent in not making the property accessible to the neighbor and demanded the difference in the selling price.

The Problem: The relationship the agent had with the buyer would later create an issue because the agent failed to give access to the neighbor and failed to inform the seller of the higher competing offer.

The Mistake: The agent should have disclosed his relationship with the buyer to the seller. The agent should have given the neighbor access to the property and conveyed the higher offer from the neighbor to the seller.

The Result: Several months after closing, the seller found out from the neighbor about the offer of $85,000 over the asking price. Following document production and depositions, the evidence revealed the agent had favored the buyer - a violation of agency law. Experts lined up to testify, and the agent eventually settled with the seller for $40,000 plus attorney fees.

Prevention: Breach of agency or fiduciary duty allegations typically arise following a problem with a transaction, and many of the disputes involve claims of undisclosed dual agency. You should always keep abreast of agency laws in your state to minimize potential claims alleging breach of fiduciary duty and disclosure issues. It’s important to exercise fair and equal treatment to both sides of the transaction. Avoid dual agency if possible, but if you must agree to disclosed dual agency, fully disclose the status to the purchaser and seller in writing with a reminder that no confidences can be maintained. Always provide a full disclosure of information.

Case #3: Buyer Sues Seller and Agent: A Real-Life Situation Illustrating the Importance of Examining Readily Available Information

Situation: A real estate agent listed a residential apartment in a mid-rise brick building in a large city. The seller of the unit served on the condo association BOD for many years. When completing the seller's property condition disclosure, he answered "no" to questions relating to knowledge of any defective physical conditions, and to the knowledge of proposed increases in fees or assessments. Shortly thereafter, the property was sold in a dual agent transaction to a young couple and proceeded to close as scheduled.

Problem: The exterior walls of the building were failing as a result of water intrusion, freezing, and expansion.

Mistake: It was widely known among the residents that there were significant problems with the walls, as the board of directors held numerous meetings to discuss hiring a structural engineer and contractor. The agent, a non-occupant owner of one of the units, never attended these sessions, but was on the distribution list for the meeting minutes.

Result: Several months after the property closed, the buyers received a “Notice of Special Emergency Assessment” from the BOD in the amount of $64,000, to be paid over a three-year period. They immediately filed a lawsuit against the seller and the agent, alleging intentional and negligent misrepresentation the condition of the property. During the discovery phase of the litigation, copies of meeting minutes and distribution lists were produced. In her defense, the agent claimed that she never read the minutes and would have made further inquiries if she knew about the failing walls. The claim was resolved with the seller contributing a majority of the settlement.

Prevention: Providing the seller’s property condition disclosure statements and condo association documents to buyers are important steps in the disclosure process. These steps alone, however, may not properly satisfy all legal requirements. Ignoring readily available information about the property in this transaction and failing to act to protect her clients was a costly error on the part of the agent.

Case #4: Sellers Fail to Provide Buyer with Structural Engineering Report Revealing Structural Damage to Foundation

The Problem: The property went under contract to prospective buyers who hired a home inspector. The inspector didn’t discover any additional structural issues, and the transaction took place. The seller failed to give the buyers a structural engineering report that indicated additional issues the home inspection didn’t reveal.

The Mistake: The agent assumed the structural engineering report did not reveal any additional problems. While the real estate agent claimed he verbally advised the buyer of the content of the report, the disclosure statement should have been amended to include the structural engineering report.

The Result: Following the close of escrow, the buyer soon discovered additional cracks and water penetration. He then sued the sellers and the agent, alleging that they failed to fully disclose the defects by not providing the prior structural engineering report and not amending the seller’s property disclosure statement. It was further alleged that the real estate agent recommended to the buyer to waive the inspection contingency in the purchase agreement, which created additional exposure to the agent. The case ultimately settled for $35,000.

Prevention: Litigation would likely have been prevented with an amended seller’s property disclosure statement and disclosure of the prior structural engineering report. The bottom line: disclose what you know, and don’t rely on your client’s word if there is an actual report to disclose.

Case #5: Failure to Obtain Written Approval Results in Lawsuit

Maintaining a written record of your work is an integral way to protect yourself from litigation. If a claim is ever filed against you, proper documentation can help clear you of any wrongdoing.

Unfortunately, not all real estate agents are in the habit of creating a thorough paper trail.

Here’s a real-world scenario where failure to obtain written approval resulted in a lawsuit:

The Situation: A real estate agent entered into an exclusive listing agreement with a builder of custom homes to market a thirty-lot subdivision. As part of his responsibilities, the agent created a brochure with photographs and descriptions of properties the builder had previously constructed. This brochure was designed for potential buyers to gain an understanding of the builder’s quality and craftsmanship.

The Problem: The builder invited the agent to tour one of his completed houses, which was already occupied. The agent used the opportunity to take pictures of the home’s interior and exterior. The agent published the photographs in the brochure and in the local newspaper real estate section without gaining written permission from the homeowners.

The Result: When the homeowners learned of the unauthorized photographs, they immediately filed a motion for declaratory judgment asking the court to declare the newspaper publication had violated their rights to privacy. They also sought a cease and desist order.

The owners were concerned that others would copy their home’s design and that their personal property was now a target for burglars. Upon receiving the court documents, the builder instructed the agent to pull the newspaper advertisement and discontinue the brochure. Shortly thereafter, the builder terminated the agent’s exclusive listing agreement and demanded the agent’s broker compensate his clients for the invasion of privacy.

Prevention: In this situation, commission revenue was lost for thirty potential transactions – all because the agent didn’t obtain written consent to publish photographs.

One of the main objectives of a risk management program is to help avoid litigation and the potential loss of clients. Getting relevant written approvals to use specific images should be a fundamental requirement when creating marketing materials and advertising copy.

Case #6: Agent and Broker Sued for Failure to Take Reasonable Measures to Protect Against Criminal Cyber Activity

This risk manager article from our E&O provider was originally published several years ago. With the runaway increase in cybersecurity claims in the real estate industry, this classic scenario is worth revisiting:

The Situation: A real estate agent was contacted by an out-of-state couple who were searching for a waterfront condominium to enjoy as a vacation getaway. With the agent’s help, the clients were able to find a condominium that met their needs. They entered into a purchase and sale agreement, which included a condition that $35,000 would be wired to an account at a local bank. During the escrow period, numerous emails were exchanged between the agent and her clients, including details relating to the date and time of the closing.

The Problem: Three days before the closing, the buyers received a communication from the agent’s email account instructing them to transfer the $35,000 to a different bank. The email was a scam – the agent’s email account had been hacked, and a third party had actually sent the fraudulent message with directions to make the deposit to an account under their control.

The Mistake: The buyers transferred the money as instructed in the fraudulent message.

The Result: During the closing, it was discovered that the original transfer had not been processed, and the sale could not be completed that day. Sometime thereafter, the agent had to inform her clients that due to an account breach, they would not be able to purchase the property. The buyers responded with a lawsuit against the agent and broker-owner, alleging they failed in their duty to keep personal information confidential and failed to use reasonably practicable measures to protect against criminal activity.

Prevention: Emphasis should be placed on avoiding the email breach which allows unauthorized email access. Mandating minimum password standards and requiring two-factor authentication across all email accounts makes a real estate brokerage significantly more resistant to these scams.

Numerous other preventative steps could have been taken, but at a minimum, brokers and agents should consider alerting buyers to call their sales agent and/or closing attorney before acting on corrected wire instructions, which may appear to come from a real estate agent, closing attorney, or lender. Consider including a written alert with a contact number when you email wire instructions stating any change should be verified by phone.

Case #7: 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.