Brokers, think you’re covered?

Mistakes happen. So you buy errors and omissions (E&O) insurance to cap your exposure. Paying your deductible is far easier to swallow than the tens of thousands that you might otherwise pay for attorney and expert fees, and, heaven forbid, a judgment.

E & O policies do not cover all claims.  Intentional misdeeds are not covered. Understandable. Another exclusion to E & O coverage, however, takes many brokers and salespersons by surprise. Most policies exclude coverage for claims arising out of the private transactions of the broker and salespersons. These claims arise with surprising frequency and can destroy the financial well-being of the broker and salesperson alike.

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

But claims do arise from these transactions (what-a consumer would dare think you did wrong!). After reporting the claim to the E & O carrier, you can expect a denial of coverage.  Translated:  You are on your own!  And 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 probably includes 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 and you’ll easily win. If that is your assessment, good for you – it probably means that you have not been sued. But, if the complaint states facts, that if true (a big assumption) make you liable, then you are in it for the long haul. Even if the claimed facts are 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 an expense.  Spending tens of thousands of dollars to defend a marginal claim arising from a private transaction is hard to swallow. Who pays? There may be a provision in your broker/salesperson independent contractor agreement, possibly not.

These cases tend to pit broker against salesperson and include derivative lawsuits for indemnity and contribution. Sounds complicated and expensive?

Yes, there is a fix!  This “fix” comes to me by way of a salesperson’s call to the Hotline. She mentioned that her broker’s policy requires her salespeople to list their private sales with the office, through another salesperson. The broker 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 an 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.