The following topics have been accumulated based on calls to the WRA Legal Hotline where the agents, brokers or firms did not have a plan in place when things went awry. While planning for and attempting to mitigate for unknown or potential risks may not rise to the top of the to-do list, taking time to perform a review of your business plan, determining your risk and asking if you are ready for the unexpected is prudent practice. Whether it is a natural disaster, agents moving firms, cybercrime or data breach, or the death or disability of a broker, do you have a plan in place?

Errors and omissions coverage

What does errors and omissions (E&O) coverage really cover? 

When reviewing the E&O policy, it’s important to determine if the coverage and appropriate riders reflect the services offered. Both brokers and agents should work with the insurance carrier to understand exactly what the policy does and does not cover. Generally speaking, 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 other 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. 

In addition to standard insurance protection, E&O insurance may provide coverage for other risks and practices in providing brokerage services. This other coverage may include cybercrime and data breaches; 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 will often be obtained through additional riders if they are available. 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.

Especially important is the scenario in which an agent transfers from one company to another and making the determination of what E&O coverage applies to work at the former company. It would be wise to determine if tail coverage is available and at what price. 

Does E&O cover cybercrime? Wire fraud? Data breaches?

Working transactions online, communicating via email and using the internet can put your firm, clients, customers and other third parties at risk. With good protocols in place, and following them, firms can attempt to minimize risk. Yet as the headlines tell, fraudsters are patient, savvy and successful. Not all E&O polices cover cybercrime, data breaches or wire fraud. This is where consultation with your carrier is crucial. It’s important to ask for definitions and coverage and determine if riders are available. Some policies include coverage for post-breach fees, investigation and monitoring, and some policies may cover the costs for notification to consumers of the breach. For more information about E&O insurance, see the April 2015 Wisconsin Real Estate Magazine at www.wra.org/WREM/April2015.

Floods and record retention 

The broker’s basement was recently flooded. By the time the broker was able to access all the records stored in the basement, the broker was concerned not only about the destruction of documents but about possible mold. What are the required holding times for records, and what can be done to avoid such a situation?

The firm should consider both the health and safety of staff as well as the REEB rules and regulations regarding document retention. Wis. Adm. Code § REEB 15.04 regulates record retention. The code provisions require retention of exact and complete copies of documents. Electronic methods of retention are now permitted by Wis. Stat. § 452.42. Given the REEB record retention rules now include a two-year time frame for transaction documents, the first question may be whether some of the water- and mold-damaged records need to be retained for purposes of the REEB. Granted for tax audit and possible litigation purposes, a longer holding period of at least six years is advisable.

As the broker works through the cleanup of the basement, she may wish to keep health and safety in the forefront. The firm may consider working with a professional remediation company to avoid taking any unnecessary health risks when working with water damage and mold that may occur as a result of the flooding. The broker may also determine, upon advice of a water remediation company or other professionals, what can be done to salvage water-damaged documents. Alternately, if documents cannot be physically saved, they can be copied or photographed in a manner that would allow review if necessary in the future. 

Now that electronic document retention is an option, the literal “basement full of files” can be a thing of the past. Once documents are converted or saved electronically off-site, backups of your transactions and business records is a must. Do you back up regularly? Do you use cloud computing for backing up computer data and records in case the office or your computer suffers a catastrophe? 

Exit strategy

What is your exit strategy? Agents frequently call the hotline with questions regarding an agent moving from one firm to another. Two questions usually come up during the conversation: what paperwork should there be between the broker and agent, and what will the agent be paid after leaving the firm? 

The conversation starts with the recommendation the agent review his or her independent contractor agreement (ICA), commission schedule, and office policies and procedures about termination from the firm. Sadly, in many cases the agents state there are no written documents. If the agent is an independent contractor, by law, the broker and agent must enter into a written ICA stating the licensee shall not be treated as an employee for federal and state income tax purposes. In addition, 75 percent or more of compensation paid by the firm to the licensee during a calendar year is directly related to the brokerage services performed by the licensee on behalf of the firm.

Presuming the broker and agent negotiated commission at the beginning of the relationship, the agreement — itself or in an accompanying commission schedule — includes terms and conditions of compensation after termination. If there is no written agreement, the question of compensation could be determined by verbal agreement if it could be proven, or by past conduct. The moral of the story for both brokers and agents is to review and update ICAs and commission schedules. 

Broker death

What happens to the real estate firm in the event of the broker’s death? 

The answer depends, in part, on how the broker structured the firm. One of the decisions when starting out in business is whether the broker creates an entity or is a sole proprietor. If the firm is a licensed real estate business entity, the entity continues after the death of the broker. For the licensed real estate business entity to continue to provide brokerage services, a new broker or business representative would need to be appointed. The DSPS would be notified of a new broker of record. A proactive broker will have a plan in place so activity of the firm is not interrupted. For example, the broker could have an additional signatory on the trust account. The broker with an estate plan could have a plan for who will step in in the absence of the broker. The broker’s estate plan may assist in the implementation of the plan. It is wise to work with an estate planner and/or attorney to be sure your intentions are known and followed in your absence. 

Code of Ethics 

Are there any changes to the REALTOR^® Code of Ethics for 2018?

In addition to taking stock of office policies, procedures and internal paperwork, January is a good time to review the REALTOR^® Code of Ethics and the REALTOR^® Pathways to Professionalism. Taking a moment to understand the Code can help you to provide the highest level of service in this ever-changing and competitive industry. For 2018, Standard of Practice 12-10 has been modified to clarify that providing a clear picture in advertising and representations includes photos and images used by REALTORS^®. See the new SOP 12-10 below; strikeouts indicate deletions and underscoring indicates additions. 

To view the Code, visit www.wra.org/CodeOfEthics. Also see NAR’s Pathways to Professionalism at www.nar.realtor/Coeeduc.nsf/pages/Pathways_to_Professionalism?OpenDocument as well as the video at www.nar.realtor/about-nar/governing-documents/code-of-ethics/pathways-to-professionalism-respect-for-property?random=404539956.

Standard of Practice 12-10 

REALTORS^®’ obligation to present a true picture in their advertising and representations to the public includes Internet content posted, images, and the URLs and domain names they use, and prohibits REALTORS^® from: 1) engaging in deceptive or unauthorized framing of real estate brokerage websites; 2) manipulating (e.g., presenting content developed by others) listing and other content in any way that produces a deceptive or misleading result; 3) deceptively using metatags, keywords or other devices/methods to direct, drive, or divert Internet traffic; or 4) presenting content developed by others without either attribution or without permission, or 5) to otherwise mislead consumers. otherwise misleading consumers, including use of misleading images.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.