“Going out on a limb” and “flying without a net” are phrases describing those who are risk-takers. Now, whether those are good or bad risks is usually subjective. As a real estate licensee practicing in Wisconsin, you may unknowingly be choosing to “fly without a net” or you may be “going out on a limb.” Here are some questions that may help guide you: Do you have errors and omission (E&O) insurance? Do you personally purchase or sell real estate? Do you have another agent help you when you sell or purchase a property? And does your E&O insurance cover you when you purchase or sell your own real estate without another agent helping you? Depending on how you answer these questions, you may be taking a bigger risk than you think.
E&O is not required in Wisconsin
While some states may require real estate licensees to carry E&O insurance, the state of Wisconsin does not. The concept of E&O insurance for real estate licensees is the equivalent to malpractice insurance for doctors and lawyers. Basically, if something goes wrong, then the professional who is insured is represented by the insurance company on the matter; it’s akin to car or homeowners insurance for professionals.
While the state may not require Wisconsin real estate licensees to carry E&O insurance, many companies do not take the risk and instead require such coverage as part of an agent’s independent contractor agreement or office policy. Who pays for what is up to the agreement between the real estate firm and the agent.
E&O typically does not cover personal transactions
E&O policies are just like any other insurance policy, meaning there are things that are covered under the policy and things that are not. For instance, E&O policies generally won’t cover an agent for fraud, criminal acts, discrimination or libel.
Obviously an agent’s list of “things to do today” does not include committing criminal acts, fraud, discrimination or libel. But as previously mentioned, there is one area that agents don’t realize they are operating without an E&O net: when acting personally as a party to the transaction, also known as acting as a licensee/principal.
The majority of E&O policies do not cover real estate licensees acting as a principal in the transaction. Therefore, agents who are selling or buying a property for themselves have no idea that they are not covered by their E&O policy.
When considering the idea of selling your own property or purchasing a property for yourself, here are a couple of things to keep in mind. First, does your company policy address this matter, and secondly, does your E&O cover for personal transactions? If your company’s policy says it’s permissible, but there is no coverage of such acts, you need to decide if you’re going to go eyes open into a potentially high-risk situation. The good news: if the company agrees and you want to move forward in this circumstance, E&O rider policies are available that may be purchased to cover licensee/principal transactions.
Two-year statute of limitations applies to brokerage services
Another relevant discussion to personal transactions involves the recent legislative change to the statute of limitations for litigation against a real estate firm and its agents reducing the time frame that a firm and its agents may be sued after a transaction closes. The time frame was reduced from six years to two years. As of March 4, 2016, any contract that closes ,any listing or buyer agency that is entered into, or any transaction that fails to close will have a two-year statute of limitations. This new statute of limitations only applies to transactions after March 4, 2016, and does not apply retroactively to transactions prior to that date.
Wis. Stat. § 452.142 clearly sets forth a two-year statute of limitations. And while the reduction of the statute of limitations from six years to two is an aggressive and positive step in controlling liability, the two-year statute of limitations only applies when the licensee associated with the firm is providing brokerage services.
Licensees selling or purchasing their own property are not providing brokerage services on behalf of their firm. Therefore, arguably the two-year limit does not apply to real estate licensees acting as principals in a transaction. The intent was to say the statute of limitations under Wis. Stat. § 452.142 will be two years relating to brokerage services. Brokerage services is a defined term in Wis. Stat. § 452.01(3e), which means any service that requires a broker’s license provided by a firm or any agent associated with the firm. Per industry reports, an average E&O claim runs about $25,000. When it is a claim that relates to self-dealing, the claim may increase to as much as 10 times that amount.
Therefore, if the two-year statute of limitations does not apply to personal transactions, then the statute of limitations would be six years for those acting as a licensee/party to the transaction. This is another consideration for Wisconsin real estate licensees to factor into their analysis when deciding if they are going to participate in a transaction as a licensee/principal.
Case highlighting the risks associated with selling your own property
Holz v. Lentz (No. 2012AP65, Ct. App. 2013) (www.wicourts.gov/ca/ opinion/DisplayDocument.pdf?content=pdf&seqNo=94665)
In 2008, Kenneth Holz purchased a residence from Sean Lentz. At that time, Lentz was a licensed salesperson associated with First Weber with whom Lentz had listed his personal residence. Lentz served both as the seller and the listing agent in the Holz transaction.
After closing, Holz discovered basement defects that were not disclosed in Lentz’s real estate condition report (RECR). Holz sued Lentz for breach of contract and other various claims of misrepresentation.
Lentz did not respond to the complaint, therefore, by default, Holz took judgment against him. After Lentz did not pay, Holz added First Weber as a defendant. In the amended complaint, Holz deemed First Weber accountable for Lentz’s acts because he was an employee/agent of First Weber and therefore all of his actions were attributable to the company.
First Weber argued in its motion for summary judgment that even if the allegations in the amended complaint were true, First Weber could not be held vicariously liable for the misconduct of Lentz. Basically First Weber argued that the company should not be strictly liable for the acts of its agents regardless of the agents’ behaviors. First Weber’s motion for summary judgment was denied by the circuit court, and the matter proceeded to trial. First Weber was eventually successful in arguing Holz’s claims had no legal basis to hold First Weber vicariously liable for the misconduct of Lentz. The circuit court dismissed First Weber from Holz’s claim.
In its analysis under Wis. Stat. § 452.12(3), the court held that for First Weber to be liable for Lentz’s misrepresentation, the misrepresentation had to be made on behalf of First Weber as part of a “brokerage service” to another person. The court determined that brokerage services were not provided to another person because Lentz acted on his own behalf, not on behalf of First Weber. Additionally, the court determined that Lentz made the misrepresentations in the RECR in the capacity as the seller — not as the salesperson for First Weber. In its conclusion, the court held that First Weber could not be liable for Lentz’s misconduct and granted First Weber’s motion for dismissal.
Holz appealed and argued one significantly relevant point: he argued that the court erred in granting First Weber’s motion for dismissal because he still contended First Weber was liable for the misconduct of Lentz.
In response to Holz’s first argument, the Court of Appeals noted that vicarious liability does not arise automatically from agency, but rather the law must have some affirmative expression to arise. The court held that Wis. Stat. § 452.12(3) superseded any inconsistent common law duties or obligations as noted in Wis. Stat. § 452.139(1) and that the definitions of both broker and brokerage services in Wis. Stat. § 452.01(2) and (3e) clearly state that the brokerage services must be made for “another person.” The court affirmed the circuit court in its determination that Lentz’s misrepresentations made in the RECR were made by Lentz as an individual seller, not on behalf of First Weber in the course of brokerage services provided for another person.
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Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.