Most Common Errors That Lead to Lawsuits (2024)

By Harry J. Lew

COVID-19 (the novel coronavirus) has not only upended the U.S. economy, it has made working with customers riskier than normal. To protect yourself, avoid these five important E&O risks.

Real estate brokerage is an inherently risky business. In fact, most agents are likely only one mistake away from getting sued. Thankfully, they know what they’re doing and are careful to avoid mistakes.

In times of economic stress, however, your odds of dropping the ball and of your customers responding with a lawsuit increase markedly. The loss of jobs, shrinkage of personal assets and mounting stress means lawsuits may become more common, just as they did during the Great Recession of 2008.

In the aftermath of the COVID-19 pandemic, economies around the globe have literally frozen in place. As a result, employee layoffs have soared and economic output has tanked. In the United States, the lockdown of major cities such as New York and San Francisco have delivered a body blow to consumer finances. Those still doing well enough to purchase a home will likely enter transactions with fewer assets and more concern about negotiating favorable deals. If something goes wrong, they may be more inclined to sue than in normal times.

In this environment, are you doing business as usual or are you preparing yourself for the increased risks of getting sued? One obvious measure is to make sure your E&O insurance coverage limits are sufficient to handle the extra liability exposure. Also, check to see that you’re not overpaying for your . Now is a good time to compare your existing policies with others to make sure you’re getting the right protection at a good value.

Also consider revisiting your risk-management program to help you avoid making mistakes that lead to consumer litigation.

What sparks E&O claims

One of the best things you can do is revisit the major causes of E&O claims in real estate brokerage. A full discussion of these risks is beyond the scope of this article. But here are five of the most common mistakes that lead to lawsuits against real estate professionals. Be sure to avoid these especially in today’s economically stressed environment.

• Failing to disclose all material information about a property to prospective buyers. For instance, an agent might present a home as being in excellent shape, but after the closing, the new owner discovers a mold issue. What happens next is predictable. The seller asks the prior owner to pay for remediation. But the person refuses. Guess whom the buyer will go after next? Failing to disclose is a vexing risk because the number of things you should disclose is almost without limit. The property you’re selling might have termite problems, leaky roofs, structural concerns and even title questions. Complicating matters is the fact that sellers sometimes withhold information from their agents, setting you up for litigation through no fault of your own. If you’re in California, you’re required to do a visual inspection of the property and to disclose any problems that might alter a buyer’s decision to go forward with the transaction. When it comes to preventing lawsuits from failure to disclose defects, it’s crucial to maintain healthy skepticism about what your clients tell you about their property, keep your eyes open for problems, consider recommending a pre-listing home inspection, and provide a written disclosure of all defects to the prospective buyer. Finally, think about how economically stressed people might react to learning about a problem with their home they should have known about earlier. They won’t be happy.
• Acting in a negligent manner toward a party in the transaction. Negligence occurs when you have a duty toward a client, but did (or failed to do) something that breached that duty, producing a tangible harm to the person. You don’t have to intend to cause harm in order to be held liable. As with failing to disclose, acts of negligence span a broad gamut of actions. For example, you might have forgotten to inform the listing agent that your client was opting out of the deal because of the inspection contingency. Or you might have failed to inform the buyer that the property was listed as having three bedrooms, but that the house’s septic tank was approved only for two bedrooms. Or again, you might have failed to disclose damage to the structure, even though you knew about it. Finally, you might have sold a certain type of property to a buyer looking to operate a business at home. After the closing, the buyer discovers that his condo association prohibits this type of business activity. In these and many other cases, negligence damages the core of the agent/customer relationship, leaving you open to legal action.
• Misrepresenting a property feature to a prospective buyer. If failing to disclose is an act of omission, misrepresenting is an act of commission. Here, you might say something about a property that is false, which then influences the buyer to buy the property. In most cases, misrepresentation deals with property features such as boundaries, easem*nts or improvements made without building permits. However, you can get into hot water by misstating any material fact about a property. As you might expect, there are various levels of misrepresentation from a legal perspective. The least serious is known as “innocent misrepresentation,” which occurs when you give the wrong information to a client with no intent to mislead. “Negligent representation” happens when you fail to provide material information when you should have, resulting in the buyer proceeding with the deal without a key piece of information. “Fraudulent misrepresentation” is the most serious form. It occurs when you deliberately hide a material fact because you know it will prevent you from closing a sale. Examples of misrepresenting a property are misstating the value of a property or assuring a buyer that their children will attend a certain school when, in fact, the home is in another school district.
• Breaching a contract. When you enter into a contract with a customer and fail to perform, you are at risk of getting sued for breach of contract. Normally, a problem with the real estate agreement won’t result in legal action against the agent because you typically aren’t party to that contract. More commonly, you might get sued if you failed to uphold your legal duties under the buying or listing agreement. In addition, breach of contract often is alleged in the context of other causes of litigation, including breach of duty and negligence.
• Breaching your fiduciary duty. Like attorneys and investment advisors, real estate agents and brokers must uphold a fiduciary standard in their dealings with clients. This means they must act to further their customers’ best interests at all times. If they don’t, they may open themselves to lawsuits alleging breach of fiduciary duty. A fiduciary responsibility imposes a special level of expertise, honesty, and transparency upon real estate agents. At no time can you place your own needs and interests ahead of your clients. And if you do, you will be tempting fate legally. As with the other E&O risks just discussed, breaching fiduciary duty manifests itself in many different ways. For example, you might show a customer a lot, but then mistakenly execute the transaction on a different one. Or you might forget to mention that the road in front of a for-sale property tends to flood at certain times of the year. Or you might neglect to mention the seller’s legal fight with a neighbor over a property boundary line. Regardless of the cause, litigation alleging breach of fiduciary duty is a serious matter with potentially devastating consequences for your business.

Risk management practices

Watching for the above risks is essential in these challenging economic times. So is maintaining a robust risk-management program that lowers the odds of you making mistakes in both bad and good times. This includes adhering to best practices such as the following:

• Document every stage in your transactions. This involves confirming in writing when key steps are achieved, documenting client decisions and archiving all client communications.
• Don’t stray outside of your expertise area. If you specialize in single-family homes, don’t try to sell an apartment building. Know your expertise limits, and get help when you’re out of your element.
• Be careful when recommending home inspectors. Ideally, provide several names and make sure each has sufficient E&O insurance. Also, do basic due diligence on their records to make sure they have a history of integrity and fair dealing.
• Try to avoid multiple contracts on the same property. By the same token, handle sales with multiple offers, complex financing, or contingencies with great care.
• Be careful with sale-by-owner homes. Probe for the owner’s real motivations and avoid becoming the person’s agent.
• Avoid giving legal advice at all times. For example, don’t advise buyers or sellers to initial (or not initial) the arbitration clause and don’t advise them on the legal implications of any aspect of the transaction.
• Tread carefully with dual agency. Although this practice is allowed in some states, it creates confusion and can result in litigation when improperly handled.

In short, run your business by the book and let your ethical values guide you at every stage in the transaction. In times like these, when customers are on edge, you need to be at the top of your game to avoid legal disputes. Knowing what’s correct, fair and right will always be your best defense against client lawsuits.

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