BROKERS, THINK YOU ARE COVERED?

A must-read for brokers and salespersons

Mistakes happen. So, you buy errors and omissions (E & O) insurance just in case. You will have to determine what deductible, but regardless of the amount, your share of the defense costs and/or settlement amount are capped and easy to swallow. Far easier to swallow than the tens of thousands that you would otherwise be paying for attorney costs, expert fees, and, heaven forbid, the judgment.

E & O policies do not cover all claims. Intentional misdeeds are not covered. Claims of intentional misconduct, however, are usually accompanied by alternative theories of liability, including negligence or the unintentional breach of a fiduciary responsibility. With bundled claims like these, your carrier is most likely to provide a defense, but also notify you of its "reservation of rights." The reservation indicates that while you are being provided with a defense, the insurer reserves the right not to pay any loss attributed to intentional conduct. As a practical matter, most claims of intentional conduct are abandoned or dismissed prior to trial, or the case settles on other bases and without any contribution by the broker/salesperson other than payment of the deductible.

Another exclusion to E & O coverage takes many brokers and salespersons by surprise. Many, if not most, policies exclude coverage arising out of the private transactions of the broker and salespersons. These claims arise with surprising frequency and can have devastating impact on the financial wellbeing of the broker and salesperson alike. This situation merits further discussion.

Assume that a salesperson is involved in the acquisition and sales of real estate as moneymaking venture, alone, or in partnership with others. Maybe the salesperson has an ownership stake in a corporation which would seemingly limit the saleperson's liability to his/her equity stake. The salesperson and broker may consider this the saleperson's private venture and thus the broker pays no heed when these properties are sold, purchased or managed.

But claims do arise from these transactions and it is my assessment that the sales of "private" property owned by a salesperson are more likely to attract litigation. Why? Purchasers are generally suspect of sellers when they discover an undisclosed defect. Add to the equation the licensed status of the seller and that kernel of undeserved mistrust that some folks have of licensees, and you have a suit in the making.

When such a claim is reported to the E & O carrier, you can expect a denial of coverage, not just a reservation of rights. Translated: You are on your own! Brokers, you can count on being a named defendant even though your salesperson was involved in his/her private transaction. Why? Email and letterhead used in the transaction include the name of your brokerage, meetings may have taken place at your office, the salesperson had your sign on his car, or for any other reason. The mere fact of your professional relationship is sufficient to assume that the claim will include you, the broker.

No reason to panic, right? The claim was probably bogus to begin with and will be easily defeated. If that is your assessment good for you. It probably means that you have not been party to a lawsuit in recent years. If the claim, however, states facts, that if true (a big assumption) suggest liability, then you are probably in it for the long haul. If the facts are untrue or even lies, it does not mean early termination. Lies and bad facts will get a Plaintiff through the pleading stage into the phase of litigation called discovery when depositions and documents production are used to ferret fact from fiction. But discovery is also expense. Spending even $50,000 in legal fees to defend a marginal claim arising from the private transaction of a salesperson is hard to swallow and the amount can be much more. Who pays? There may be a provision in your broker/salesperson independent contractor agreement, but quite possibly not.

Many times these claims will pit broker against salesperson and include derivative lawsuits for indemnity and contribution. Sounds complicated? And expensive?

I would not be regaling you with horror stories if there were not a fix! This "fix" comes to me by way of a salersperson's call to the Hotline. She mentioned that her broker's policy was to require her salespeople to list their private sales with the office, through another salesperson. The broker substantially discounts the commission and most of what is paid goes to the listing salesperson. The price paid, however, may be well worth it because any claim against the broker, the listing salesperson or the licensed owner involving lapse of fiduciary responsibility, will be covered. Claims against the owner for breach of the Seller Disclosure Law or misrepresentation will likely not be covered, but there is still and advantage that goes to the licensed seller. Because some of the claims are covered, the E & O carrier will hire counsel to assert defenses. The individual expense of the salesperson to cover that additional claim of misrepresentation or breach of the Seller Disclosure Law will be far less than if there had been no coverage at all.

The broker/salesperson independent contractor agreement is a perfect place to spell out the responsibilities of a salesperson who lists and sells his/her own property. Must the property be listed with the office? Will the salesperson indemnify the broker for any claims arising out of the private transaction? If private transactions are permitted, may the salesperson make any reference to his affiliation with the broker? Is the salesperson required to inform the consumer on the other side of the transaction that the matter is being handled privately, and not in relationship to the salesperson's affiliation with the broker and outside of the knowledge of the broker? These questions should be considered and addressed by legal counsel who can update your policies and independent contractor agreement.

Together with late reporting, private transactions represent the greatest number of denied E & O claims. Brokers must take stock of policies or run the risk of paying defense claims for transactions that would not have benefited the broker.

Mr. Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com