Evaluations of Standards of Care & Conduct by E & O Carriers:
E & O insurance carriers will often evaluate a brokerage in relation to their compliance to standards for care and conduct. These standards do come from the following in order of their weight in the level of importance:
- Statutory Law
- Common Law
- Public Regulation
- Specific Promises or Representations or information supplied by the parties.
- Particular Actual Experience and Skills of the Professional converged with handicaps and/or inabilities of the client or customer.
- General industry practice
- Standards from private trade associations; for example the National Association of REALTORS®
- Common Sense
- Felt community morals or senses of justice
- Other areas of influence
Liability by Association: One area that a broker must always be aware of is that they can be very vulnerable to having liability without intent. The best example of this is”Vicarious Liability”. The tort doctrine that imposes responsibility upon one person for the failure of another, with whom the person has a special relationship with such as a licencee and a broker. This is liability where one person, himself blameless, is held liable for another person’s conduct. The legal principle of vicarious liability applies to hold one person liable for the actions of another when engaged in some form of joint or collective activity. This type of liability often makes one liable without wrongful intent and even though they did not, in fact, commit the actual, physical act or omission that directly generated the damage. Vicarious liability is generated by law or by relationships. Brokers are vicariously liable for the licensees that are employed under them. Other forms of this liability include master for their servant, principal for an agent, parent for a child, fiduciary for award or beneficiary and liability in contract or common law such as partners in the partnership.
The word TORT is French for wrong, a civil wrong, or wrongful act, whether intentional or accidental, from which injury occurs to another.
Liability by Statistic: An anecdotal profile of the most likely person to be sued in real estate practice is an agent who has been in the real estate business over ten years; a top-producing agent; typically from an office that pays 100% on the commission split; a long-term sales associate or associate broker. In addition, this license typically will take the minimum number of hours required for continuing education license renewal and in many instances, is the organizer and supervisor of the “mini-inner-brokerage” or “team” within the brokerage. The designated broker or managing broker and corporate brokerage entity usually get “co-sued” for a vicarious form of liability. Liability by Image or Process: Some interesting observations on perceptions of the legal process include:
Limited surveys of jurors indicated that a very high percentage of the time, they had their minds made up at the close of the opening statements by the attorneys. In addition, when current events raise awareness of potential violations of the law that can include violations of federal lending laws, false advertising, misuse of funds and even alleged violations of the Racketeering Influenced & Corrupt Organizations Act (RICO) can lead to criminal investigations and indictments. E & O insurance in most cases will often not cover the costs of defending these allegations.
However, the times may create circumstances and situations, regulatory entities can often target brokers when alleged violations of the public trust surface in real estate practice. An example of this has been brokers who were accused of “short sale malpractice” which the NAR identified will be the largest single source of liability claims in 2012 through 2015. In these cases, many real estate agents were actually asked to guarantee compliance by their clients and even non-clients.
Liability for Poor Broker Decisions: Situations have often arisen when there has been a conflict between the broker’s advice to the licensees employed by the broker and the law. The licensee may be concerned about being exposed to malpractice liability. The obvious questions are whose opinion trumps the other and an agent should ask if the E & O policy will cover the broker’s bad advice.
Other Policies with E & O Coverage: Many general office insurance policies (business insurance) provide coverage for such events as defamation and embezzlement. Many E & O policies do not cover personal injury. Most E & O policies do not cover liabilities such as defamation, false advertising, premises slips and falls, vehicle injuries and missing trust fund monies. This is where a comprehensive general office liability and automotive policy can offset these additional risks. Another prudent consideration would be the broker requiring the salesperson to have an endorsement to their own vehicle coverage adding the brokerage. Sales associates do drive prospects from one property to another and the brokerage does have risks for auto mishaps that might occur with such activity. Home warranties are also an effective way to offset these additional risks as home component items are often the first area of problems. Home buyers will often first look to the agent to resolve this problem. Recommending these home warranties and requiring acknowledging waivers by the clients is a very effective risk management tool.