Don't Get Sued!

Real estate professionals are getting sued today more than ever. Is there anything you can do to protect yourself? Brokerage loss control expert Leonard Schapker offers answers.

September 1, 1997

Today's market has evolved into a legal battlefield. Buyers and sellers of real estate are filing lawsuits at an accelerating pace. Real estate practitioners increasingly are finding themselves caught in the crossfire.

Today's REALTOR® asked attorney Leonard Schapker, a risk management expert, to give us the latest advice on how to bullet proof a realty practice against this dangerous and growing litigation threat.

Schapker frequently travels around the nation speaking to REALTORS® on this issue. He is assistant vice president and claims counsel for Employers Reinsurance Corp., Overland Park, Kan. ERC and its affiliate, Westport Insurance Corp., are the endorsed errors and omissions (E&O) insurance carrier for the NATIONAL ASSOCIATION OF REALTORS®. Kirke-Van Orsdel Inc. is the program administrator. Their E&O product is known as REALTOR® Guard.

E&O insurance covers liabilities for errors, mistakes, or negligence in the usual listing and selling activities of a real estate brokerage.

Here's what Schapker had to say.

Are lawsuits against real estate professionals still on the increase?

In 1990 about 20 percent of our policy holders were getting sued annually. By 1996 that figure had increased to about 25 percent. We project that the percentage will continue to climb.

What's behind the upward trend?

We have several theories. One is that we're seeing more complex real estate transactions than in the past--such as property trades or transactions involving alternative financing. Whenever you have a complicated transaction, you increase the likelihood that something will go wrong and that the practitioner will end up getting sued.

Second, we've been seeing a lot of mergers and acquisitions recently in the real estate industry. When companies consolidate, they end up with managers trying to oversee more salespeople. Sometimes the oversight isn't done properly, and salespeople neglect to follow correct loss control procedures.

Third, society as a whole is growing more litigious. People are more willing to sue today than ever before. This trend is affecting a broad spectrum of business, not just the real estate industry.

Fourth, federal, state, and local governments are passing more laws that are expanding the duties and obligations of real estate practitioners. An example is the new federal law requiring real estate professionals to disclose information to buyers about lead-based paint hazards. The more duties that salespeople have, the greater the opportunity that they'll make a mistake somewhere along the line.

I can understand why more buyers are suing sellers, but why are the salespeople getting dragged into these cases?

In many circumstances, the buyers determine they may have trouble forcing a seller to pay a claim. The seller may have moved out of state and can't be located. Even if the seller can be found, the claimant might have difficulty enforcing a claim across state lines. Plaintiffs often name real estate professionals in their lawsuits for practical reasons. The brokers aren't going anywhere. They're right down the street.

Real estate professionals are seen as convenient deep pockets. They often appear to have the money to pay a claim, or else they're insured.

What's the most common reason that real estate professionals get sued?

Without question, the major source of litigation involves failure to disclose some claimed property defect. These defects are often ordinary, run-of-the-mill problems such as a roof leak or a foundation crack.

In recent years, a number of states have enacted laws requiring sellers to disclose known property defects. Has that type of legislation helped reduce the number of lawsuits against real estate professionals?

Those laws have helped, but they haven't eliminated the problem. Failure-to-disclose lawsuits against real estate professionals are still common throughout the country.

How does the salesperson get caught in the middle? Let's say a buyer moves into a new house. Two weeks later, there's a rainstorm, and the roof leaks. The buyer goes back to the seller and asks, "What's going on here? You didn't say anything about a roof leak in your property disclosure form."

The seller's reply will often involve some variation on the theme that he didn't say anything about a leak because the salesperson told him not to. Unless the salesperson can document otherwise, it's a matter of the salesperson's word against the word of the seller.

We find that lawyers for buyers and sellers sometimes pursue a strategy of trying to keep the deep pockets, the real estate professionals, in the middle of the litigation.

Are salespeople in urban areas more at risk than those in small towns or rural areas?

The number of lawsuits filed for every 1,000 real estate transactions remains fairly consistent throughout the country, regardless of whether the area is urban or rural. Because urban practitioners have a higher transaction volume, it may seem they get sued more often, but rural practitioners get sued at the same rate.

What's the single most important step that practitioners can take to protect themselves against liability?

I can't emphasize enough the importance of having proper documentation in a transaction file. If the salesperson recommends that the buyer obtain a home inspection, and the buyer declines, the practitioner should have the buyer sign a form documenting that decision.

What could happen if the practitioner doesn't have that documentation?

If after moving into the house, the buyer discovers a problem--termite infestation, for example--the buyer is going to sue the practitioner, claiming that the salesperson never recommended an inspection that would have uncovered the problem.

When the case goes to trial, the buyer is going to get on the witness stand and say that if the salesperson had recommended an inspection, the buyer would have ordered one. After all, a house costing about hundred thousand dollars is at stake. Who would skimp on an inspection costing a couple of hundred dollars? That type of argument is going to have a logical ring to a jury.

I recommend that practitioners have sellers and buyers sign all declinations. In other words, if the salesperson recommends that the buyer get a home inspection or a home warranty, and the buyer declines, the salesperson should have the buyer sign a form to that effect.

Do many practitioners overlook that type of documentation?

I don't have statistics, but my gut feeling is that most practitioners aren't getting signed declinations. A number of brokerages require their salespeople to obtain those forms, but some salespeople neglect to do it. This is one of the greatest failures we see in company risk management programs: The procedures are not consistently followed.

Why is that?

Practitioners are in the business of selling property, not in documenting every transaction detail. A lot of the conversations between the salesperson and the buyer dealing with inspections or home warranties take place in informal settings outside the office--often in a car. The salesperson may not have the proper form at hand and has to remember to get it back at the office.

Whenever you add more steps to a process, you increase the likelihood that something is going to slip through the cracks. Maybe the salesperson actually remembers to mail the form, but the buyer forgets to return it. Maybe the salesperson doesn't have a good diary or tickler system as a reminder to follow up.

What's the most effective way of reminding salespeople to follow through on these procedures?

Practitioners who have been sued before are extremely good at following proper loss control procedures. The problem is that there's a lot of turnover in the industry. You have new salespeople coming in every year. These rookies have never been sued, and it's hard to convince them of the importance of documenting everything.

What's so bad about being sued?

I travel around the country a lot giving loss control seminars. At every seminar, I ask brokers and salespeople to raise their hand if they've ever been sued. I encourage them to tell others in the audience what it was like. I've probably heard hundreds of stories, but I've never had a practitioner stand up and say that getting sued was a pleasant experience.

Getting sued is expensive and time-consuming, and it can hurt you in unexpected ways. You can lose days or even weeks away from selling. And the case can drag on for years. Even if you're insured, a lawsuit can end up costing you. Most policies have a deductible, and in some cases, the deductible is sizable.

Negative publicity about a lawsuit will damage your business and personal reputation--even if you ultimately win. That's particularly true in small towns.

Litigation is a bad experience worth avoiding.

Four Smart Tips to Reduce Risk

Loss control expert Leonard Schapker says you can cut your exposure to liability by taking these simple, basic steps:

  1. Have sellers fill out a property disclosure form. Many states require it. Even if yours doesn't, use one anyway. Check with your state association of REALTORS® to obtain a model property disclosure form customized for your state. The form should be filled out and signed by the seller. It should have a space for the buyer to acknowledge receipt.
  2. Recommend that buyers obtain a home warranty. For a specified period after the transaction, this insurance will cover most property defects that might crop up--thus avoiding need for the buyer to sue the salesperson to recover a claim. The buyer can often negotiate with the seller to have the seller pick up all or part of the cost of a warranty.
  3. Recommend that buyers obtain a home inspection. Give the buyers a list of at least three home inspection companies they can contact if interested. If buyers decline a home inspection, have them sign a form confirming their decision.
  4. Always use a standard sales contract approved by your local or state association of REALTORS®. Although this practice is widely followed, some salespeople still overlook it-- particularly in unusual transactions, such as those involving a friend or relative or some kind of property trade.

Walt Albro is a former senior editor for REALTOR® Magazine.

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