Standard of Care Specifics-BMC #3 – Supervision

Failing to Meet the Standard of Care:

A Failure to meet the standard of care could be the basis for negligence which is regarded as the opposite of diligence, the failure to use reasonable care and a failure to be careful.  It is also regarded as doing something which a reasonably prudent person would not do or fail to do something which a reasonably prudent person would do.

This failure could also be the basis for a civil action which is the basis for actionable negligence (a legal cause of action).  This is because it is:

• Based on an act or acts performed without due diligence

• Based on an act or acts were done without proper caution or care – without being careful

• Based on performance of a rash act – negligence often equates with rashness

• Based on the fact that the standard of care exhibited was below par.

This failure to exercise the reasonable standard of care could result in either breach or nonperformance of duties owed to clients or to the public.  This could also result in damages or injuries to clients or to the public.

Standard of Care Specifics:

The specific conduct, disclosures, advice, and counsel provided will vary depending on:

(1) Situation and circumstances of a transaction;

(2) The facts relevant to the situation and circumstances;

(3) The knowledge and experience of the party or parties;

(4) The questions asked by the party or parties;

(5) The requirements stated by the party or parties;

(6) The nature of the property being transferred and

(7) The terms of the sale.

A violation of the standard of care could be determined by:

(1) judge or hearing officer;

(2) Jury;

(3) Arizona Department of Real Estate (ADRE)

(4) AAR Professional Standards Hearing Panel.

Legal and Investigative Processes:

Civil

The civil process most often begins with a dissatisfied party threatening to file a lawsuit with a letter or other communication.  These threats, while many are frivolous, should always be taken seriously.  The situation should immediately be reported to the Errors & Omissions (E & O) Insurance provider.  Many have found the easiest course of action is to offer some kind of informal dispute resolution to the party.  This is what usually occurs.  However, if the dissatisfied party is not satisfied with the offer, the lawsuit is then filed by his or her attorney.  The next step is to notify the E & O carrier and provide the documentation related to the situation.  This is why it is so important for a broker to systematize procedures that ensure a paper trail on the part of the licensee’s activities (AAC R4-28-1103B) in a transaction.

A defense counsel will then be usually appointed by the E & O carrier and another attempt at an informal dispute resolution may be offered to the dissatisfied party.  Expert witnesses will probably be retained and they will be asked to provide written statements to the court.  After these statements are remitted, an informal dispute resolution may be offered again.  If this offer is rejected, there will then be depositions of the parties and expert witnesses conducted.  Depending on the revelations of the facts of these depositions, mediation may be offered.  If the situation is successfully mediated, the lawsuit will be dismissed.  However, if mediation is not successful, the trial will be held.  The case could also be dismissed without successful mediation by the court, but there is the right to appeal this dismissal.

When the trial is adjudicated, either party would have the right to appeal the decision of the court.  This can be a very expensive and protracted process and a broker should have a policy which addresses the earliest, easiest and most cost-effective resolution of these matters in conjunction with the E & O carrier.

The complaint process for ADRE:

The complaint is reviewed and the person filing the complaint is notified as to which investigator is assigned to investigate the complaint.  The investigator sends each licensee involved a copy of the complaint and a request for a written response.  The investigator contacts any other witnesses and may contact the complaining person or the respondent for additional information.

After the assigned investigator reviews the information gathered, the Department determines if there is sufficient evidence to support disciplinary action against the licensee.  Administrative sanctions are not pursued unless warranted by a preponderance of the evidence.  Based on the investigative findings, one of the following decisions is made:

• Close the file without action.

• Close the case with a nondisciplinary letter of concern.

Refer the case to the Department’s Enforcement and Compliance Division for possible disciplinary action.

What are the possible disciplinary actions that may occur?

If the Real Estate Auditing and Investigation Division forwards the case to the Enforcement and Compliance Division for review, Enforcement and Compliance reviews the case to determine if there is sufficient evidence to pursue disciplinary action.

• If not, the case may be closed without action.

• If there is an indication of a violation, but it is minor or technical in nature, the Department may issue a non-disciplinary Letter of Concern.  Although non-disciplinary, a Letter of Concern remains in the file and may be considered when determining the appropriate outcome in any future similar complaint.

• When Enforcement and Compliance find the evidence is sufficient to support discipline, it attempts to negotiate a settlement via a Consent Order (mutually agreeable to both parties) with the licensee.  If an agreement is reached, the Department and the licensee sign the Consent Order and it becomes effective immediately.  There is no appeal of a Consent Order since the respondent licensee agrees to it.

• If a Consent Order cannot be negotiated, or the violation is so severe that the Department will only accept suspension or revocation of the license, it refers the case to the Attorney General’s Office.

The Attorney General’s Office:

1.       Prepares a Notice of Hearing and Complaint, which is sent to the licensee.  The document identifies the statutes or rules the licensee has allegedly violated and sets a date and time for a hearing.

2.       An administrative law judge hears the matter in accordance with the Administrative Procedures Act.  After the hearing, the administrative law judge prepares and sends to the Commissioner a recommended Order.

3.       The Commissioner may adopt, modify or reject the order and issued a Commissioner’s Final Order.  That order may be appealed to the Superior Court.

Possible Penalties:  The licensee needs to be aware that the failure to meet the ADRE mandated standards of care with the consumer could result in any one or more of the following consequences:

Loss of business: It may be easy to overlook this very costly consequence when a licensee is put on the defensive with an action or complaint. However, it should be noted that even if the licensee were successful at defending the complaint, there would likely and inevitably be a cost to their business by the simple interruption of it with them having to devote resources to their defense. Prudent Preventative Risk Management is the best solution to this dilemma. Solve a problem before it becomes a problem.

Damage to reputation: The reality is that even if the licensee is, again, successful in defending himself or herself against the complaint, there may still be damage to their business because of a possible tainted reputation that may now pervade the marketplace. While it’s not impossible to repair reputations, it is often a costly and lengthy process to do this.

Criminal prosecution: While this is a measure for more serious violations, there still have been many licensees who have had to unjustly defend themselves against criminal complaints because they didn’t keep complete and accurate records. Again, the paper trail is very critical here.

Civil Suit: Even if the matter is not regarded as a criminal matter, civil suits have taken their toll against agents and brokers as often an unfavorable verdict can render a licensee or broker insolvent and unable to continue doing business.

Action by the DRE including a potential loss of license: This is also a very direct cost to a licensee as their ability to do business may become permanently impaired.

Action by the AAR including possible loss of membership: While a licensee may survive a civil suit and possible DRE action, a loss of membership in an organization that provides credibility to the licensee with the public is most often more than the licensee can handle. In addition to the “stigma” of being expelled from a professional association, the licensee will no longer have access to very important resources for their business.

ADRE fines up to $1,000 per violation.

Court Costs and Attorney Fees: The agent may be liable for court costs and the prevailing party’s attorney fees if they are adjudicated against.

Compensatory Damages: If the party prevails against the licensee, the licensee will have to remit judgment on compensatory damages.

Punitive Damages (If Willful): If it is demonstrated that the licensee acted with willful negligence or intent, there may be punitive damages assessed against the licensee. These are often much greater than the compensatory damages. Remember the definition of punitive is punishment.

Statutes of Limitations:  These time periods begin either from the time of occurrence or from the time of discovery through the exercise of reasonable diligence, whichever occurs later:

Tort Claim, civil/legal wrong, breach of duty or action for bad faith and damages: 2 years.

General Contract Claims 6 years.

Consumer Fraud and other State Statutory Claims: 1 year.

Common Law Fraud: 3 year.

Arizona Department of Real Estate: 5 years.

Arizona Association of REALTORS®: 180 days.