Broker liability generally arises in one of three ways: (1) misrepresentation — including concealment and the failure to disclose where this is required, (2) failure to meet a licensing standard that has become a standard of performance —an example being Wis. Admin. Code § REEB 24.07, investigation and disclosure, and (3) undertaking the performance of a specific duty and failing to do it properly.
Risk reduction begins with good training, office policies, broker supervision, attention to detail, and good insurance coverage. Even with good planning, sometimes issues arise, creating the need to work with your insurer to defend against legitimate or spurious claims. The coverage afforded by your errors and omissions (E&O) insurance coverage may be your greatest investment in risk reduction.
What are the benefits of E&O insurance?
E&O insurance is designed to provide comprehensive professional liability insurance coverage for real estate salespersons and brokers. In essence, it’s malpractice insurance for the real estate professional. E&O insurance provides coverage for errors and omissions of real estate brokers and agents in providing information or services to their customers or clients. The insurance is intended to protect brokers and agents against liability claims or lawsuits for damages caused by errors — something they did, or omissions — something they failed to do.
What services can be covered in an E&O policy?
In addition to standard insurance protection for errors and omissions in providing brokerage services, E&O insurance may provide coverage for other risks and practices. These may include: appraisal and property management, lockbox property damage, fair housing discrimination, regulatory complaints, innocent partner fraud protection, mortgage broker coverage, and failure to advise for commercial and residential environmental pollutants including asbestos, radon and lead. While some policies will include a portion of these risks in the standard policy, extra coverage may be available by obtaining a rider at extra cost. Each E&O insurance carrier will offer different insurance protections, so it is important to make sure the E&O policy covers all the services offered by the brokerage firm.
What is not covered by E&O?
Although coverage options vary among carriers, E&O policies generally don’t cover: fraudulent and criminal acts, insolvency, failure to collect escrow or tax money, employment contracts, bodily injury claims, libel, slander or defamation, pollution and toxic waste, violations of securities law, conversion, misappropriation or commingling of funds, failure to maintain adequate levels of insurance, and liability assumed under various indemnity agreements. A broker must be sure to understand what is covered and what is not covered before purchasing E&O insurance. When interviewing potential insurance carriers, be sure they identify what is and isn’t covered.
What about personal transactions?
This is an area of great potential broker liability, and personal transactions may or may not be covered. It is important to review your coverage. See pages 9 and 10 for more information.
Are brokers or agents required to carry E&O insurance in Wisconsin?
Although some states require all licensees to have coverage, in Wisconsin the choice to carry E&O insurance is a risk reduction and company policy decision. Agents should refer to company policies and procedures to determine what, if any, coverage is required by the broker.
When an agent changes brokers, what are the legal guidelines to follow regarding payment of E&O insurance?
Before making a change, the agent should review the independent contractor agreement, office policy, and the errors and omissions policy with the current broker. The terms and conditions of these agreements hopefully will indicate the agent’s responsibility for insurance coverage and costs. There generally are two forms of E&O coverage for real estate agents: “claims made” and “tail coverage.” Although most E&O insurance typically is on a “claims made” basis, the broker may require “tail coverage,” which would protect from a lawsuit concerning transactions prior to the agent’s departure, but the claim is made later.
If the agent plans on leaving a firm and there is a known potential conflict with a transaction, the agent and broker should communicate about the potential liability and potential E&O coverage. The agent may explain the situation to the broker and may claim the agent has done nothing wrong. The agent may refer to the E&O policy to determine when and if a claim should be filed regarding the alleged issues arising out of the transaction. Given the agent's pending departure, the timing of filing a claim should be carefully considered to assure coverage in the event the parties pursue legal action.
Additionally, the agent may refer to the errors and omissions policy to determine what coverage is in place, what coverage is available and the costs thereof.
E&O insurance possible claims
There is a potential conflict with a transaction. The agent explained to her broker that she did nothing wrong, and the agent has E&O insurance.
The agent may refer to the errors and omissions policy to determine when and if a claim should be filed regarding the transaction issues.
A buyer purchased a home that was a foreclosure and was sold "as-is". After closing, the buyers occupied the home and found that the basement leaks. They immediately contacted their home insurance agent who told the buyers that even though they bought the home "as-is," the seller and the broker may be responsible to fix the crack. What should the agent do if the buyer threatens the seller or the broker with possible litigation about the basement?
The agent may notify the broker of the buyer's potential claims. Because of the buyer's potential claim against the broker or firm, it would be prudent to review the company's (or firm's) errors and omissions insurance policy to determine when and if a claim should be made to assure coverage for the agent and firm.
For the potential dispute between the buyer and seller, once a transaction has closed, the agent has no responsibility to assist the parties with this situation or to give the parties legal advice. Doing so will only expose the agent to potential liability. The buyer should be advised that the issue would need to be resolved by the parties themselves or with the assistance of legal counsel. The broker may also recommend or suggest the parties consider mediation as a possible dispute resolution method.
After a closing, the buyer's attorney copied the agent on an email to the sellers. The email suggested the sellers deliberately failed to disclose information about a crawl space that was full of mold. The letter included a comment about the agent’s inspection of the property. The buyer is saying they are going after the seller and not the agent. What should the agent do?
When an agent is included in written or verbal correspondence that threatens possible litigation or claims against the agent or firm, the E&O policy should be brought out. A careful review of the policy with the broker will let the agent know whether (a) the email should be reported to the insurance carrier, and (b) what sort of coverage might be provided if the agent later becomes the target of the buyers or the attorney. Each policy has what are considered triggering terms to initiate a file for possible coverage. If a claim is not timely opened, the agent may lose coverage. The agent should consult with the insurance carrier and broker regarding when to notify the carrier.
A broker is contemplating changing his E&O insurance carrier. What is the time frame for a buyer or seller to bring legal action against the broker after a transaction?
The time a party or consumer has to file legal action will depend on the nature of the claim and the applicable statute of limitations. Statute of limitations for contract or misrepresentation claims is six years; certain other claims have shorter statutes of limitation. A broker may refer to legal counsel regarding any specific questions to determine what claims former parties may make as well as the broker’s potential risk or liability. Once that is determined, the broker may work with the insurance agent to review the insurance policy and determine how or whether to consider more coverage.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.