REAL ESTATE ERRORS & OMISSIONS PROBLEMS

Transcription

1 REAL ESTATE ERRORS & OMISSIONS PROBLEMS

2 Claims Made Policies Most real estate E & O policies are claims made rather than occurrence based. Coverage typically applies only to claims made against an insured and reported to the carrier during the policy period and any late or extended repor<ng period for any wrongful acts commi?ed on or a@er the retroac<ve date.

3 Late repor<ng period - provides coverage of claims made during the policy period for wrongful acts commi?ed between the retroac<ve date and the end of the policy period and first made within the policy period but not reported un<l a@er the policy period, usually within thirty (30) to sixty (60) days a@er the end of the policy period.

4 Typically u<lized when suit is filed against the insured at or near the end of the policy period but service of cita<on is not obtained un<l the policy period.

5 Extended repor<ng period - provides coverage for claims first made a@er the end of the policy period for wrongful acts commi?ed on or a@er the retroac<ve date and before the expira<on of the policy period. Absent an extended repor<ng period there can be a coverage gap if brokers merge, sell their business or re<re.

6 Example Broker A sells his business to Broker B. Broker A and the agents he sponsored join Broker B s brokerage and operate under Broker B s name. Broker A s policy had no extended repor<ng period and suit is filed against Broker A and one of his former agents a@er the expira<on of Broker A s policy for acts commi?ed while the agent was sponsored by Broker A.

7 Retroac<ve date- typically dates to the incep<on of coverage and covers claims arising from wrongful acts occurring between the retroac<ve date and the end of the policy period, provided no insured knew prior to the effec<ve date of the policy of a circumstance which could reasonably be expected to lead to a claim.

8 What if before the beginning of the coverage period but within the retroac<ve date a plain<ff verbally threatened to sue the insured real estate broker or had wri?en the broker complaining about one of the broker s salespersons and merely hinted at taking legal ac<on?

9 A discovery provision in a claims made policy allows the insured to report circumstances that could poten<ally give rise to a future claim. If a claim develops it is deemed to be made on the date reported under the discovery provision. This mechanism preserves the coverage for future development but is rarely u<lized by insureds. Why?

10 What happens if the insured is sued within the policy period but is not served with cita<on un<l the expira<on of the coverage period?

11 If, in the course of defending an insured, counsel becomes aware of the poten<al for another claim to be made against the client, what should counsel advise about exercising the discovery provision?

12 Most jurisdic<ons have a discovery rule that can defer the accrual of limita<ons and allow claims to be delayed for several years a@er the real estate transac<on upon which the claim is based. Absent a retroac<ve date and/ or an extended repor<ng period numerous circumstances can arise which would result in no coverage.

13 Agents some<mes withhold demand le?ers from the broker and try and handle the ma?er themselves or just hope it goes away.

14 Brokers frequently hire private counsel to respond to a demand rather than turning in the claim to avoid the claims experience.

15 There is typically no coverage for an undisclosed prior claim.

16 What should you do when an agent or broker doesn t want to turn in a claim and wants counsel to make it go away?

17 How can an uncovered claim be avoided? Counsel who writes the claimant to deny an unreported claim on behalf of a real estate broker should write the broker and remind her to report the claim prior to the renewal of the policy.

18 Deduc;bles Deduc<bles have go?en much larger due to the number and costs of claims.

19 Many brokers have seen their deduc<bles increase from $2,500 to $25,000 per claim in the past 10 years.

20 The brokers who do the most business, have the most agents, and sell the most expensive proper<es complain about having the highest premiums and deduc<bles.

21 Many carriers require counsel to collect the deduc<ble and do not pay any legal or claims expense un<l the deduc<ble is paid in full.

22 What happens if there is a significant exposure but the insured cannot pay the deduc<ble or is in arrears?

23 Slow real estate markets and high claims expense costs increase deduc<bles and make it more difficult for brokers to pay them.

24 May counsel require the insured to place the en<re deduc<ble in the law firm s trust account? Should he?

25 Should counsel have a fee agreement with the insured addressing the deduc<ble?

26 Will the carrier pay counsel and collect the deduc<ble from a defaul<ng insured? Is that implied when the carrier sends the file to counsel?

27 The insuring agreement typically calls for the insured broker to pay the deduc<ble, but the broker will try to get counsel to collect it from the involved insured agent.

28 Most brokers have agreements with their agents calling on the agent to pay the deduc<ble according to the agent s commission split. Can the broker shi@ responsibility for paying the deduc<ble to the agent?

29 Many franchise owners have a flat fee or desk fee they charge their agents, rather than a commission split. The broker will absorb the full cost of the annual policy premium. In the event of a claim on a par<cular agent s transac<on, the broker will require the agent to pay the deduc<ble, with the end result being that if there is an indemnity paid on that claim under the policy, the agent s desk fee or flat fee will be increased.

30 Large deduc<bles can make it difficult for brokers to recruit agents. An agent knows if she gets sued it costs her more if her broker s deduc<ble is higher.

31 Consent policies Most real estate E & O policies are consent policies that require the insured s consent to se?le.

32 Typically the broker must consent, even if only the agent is sued.

33 Wrongfully accused insureds want personal vindica<on victory at trial. The carrier wants to cut its losses and achieve certainty.

34 What is the incen<ve for an insured to consent to se?le where the insured has paid its deduc<ble and feels wrongly accused?

35 How can the refusal to consent affect the insured s claims experience and future premiums?

36 Typical consent clauses penalize the insured who is reluctant to se?le by making the insured liable for any verdict in excess of the se?lement amount.

37 The broker who se?les because of such a consent clause feels that counsel and his carrier have sold him out how do you deal with it?

38 What if there is a reasonable se?lement offer the carrier is willing to pay but the broker insists on a confiden<ality agreement as part of the se?lement?

39 What if the broker will consent only if the plain<ff will withdraw an administra<ve complaint arising out of the same event? Are there ethical issues involved?

40 Conflicts of interest and s;cky situa;ons one lawyer or two? Typically, the broker is vicariously liable for acts of the agent performed under the broker s license. Most policies cover principals, partners, agents, brokers and their assistants whether directly employed or independent contractors. Under most circumstances the carrier can engage one a?orney to represent both the broker and agent since their interests are aligned.

41 Some<mes more than one lawyer may be needed, for example: When the broker claims the agent was ac<ng outside the authority conferred by the broker or is ac<ng without the broker s knowledge; When the broker claims the agent was ac<ng on her own account and not under the broker s license;

42 When two of the broker s agents were involved in the transac<on and one blames the other for the loss; When the claim involves a terminated, disgruntled, former agent of the broker; When an agent owned, listed and sold the property the subject of the suit and is alleged to have violated both seller s and agent s du<es, and When an agent is accused of criminal or fraudulent ac<vity and the broker is sued for negligent supervision.

43 Coverage issues Most real estate E & O claims arise out of residen<al transac<ons. Many involve misrepresenta<ons or failures to disclose latent defec<ve condi<ons. In such cases plain<ffs typically allege negligence, negligent misrepresenta<on, viola<ons of consumer protec<on statutes and fraud.

44 Fraud claims generate reserva<on of rights le?ers which give rise to the right to non- panel counsel of the insured s choice. How do you handle that, assuming fraud is alleged in almost every lawsuit?

45 Fraud claims and consumer protec<on viola<ons allow recovery for ma?ers that are typically excluded from coverage under most E & O policies such as a?orney s fees, mental anguish, fee disgorgement and exemplary damages. How do you handle this in nego<a<ons with plain<ff s counsel? What about a plain<ff s counsel who increases his demand as he incurs a?orney s fees?

46 How do counsel and claims adjusters, underwriters and brokers address non- covered damage claims such as disgorgement/ res<tu<on of real estate fees and commissions, mental anguish, a?orney s fees and exemplary damages? Can the insured be asked to contribute to a se?lement when a demand includes such non- covered claims? Clearly structured policy exclusions help address these issues.

47 What if discovery reveals facts to counsel that indicate there is no coverage under the E&O policy providing the defense? What is the ethical duty of counsel to the insured versus the requirement to report the facts to the carrier?

48 Many lawsuits involve both covered and non- covered claims. How do you instruct counsel when she tells you the covered claim is subject to dismissal via a summary judgment on a legal point, but the non- covered claim will be a jury ques<on?

49 Cost containment Most residen<al buyers who become plain<ffs are very angry at all par<es involved. The biggest investment they have ever made is falling apart and they feel as if they have been cheated by your insured. Their emo<ons can drive the lawsuit. This can make them hard to deal with and make trying to reach a reasonable se?lement very difficult.

50 How do you handle an angry and unreasonable plain<ff and try to contain defense costs?

51 Pre- suit considera;ons Plain<ffs have sued all par<es involved in the transac<on, except your insured, who was the plain<ffs real estate agent. Plain<ffs counsel and the defense counsel give no<ce of their intent to depose your insured. Do you want to know about it? If so, what do you do about it, if anything?

52 Weigh the cost of engaging counsel absent a claim against the poten<al exposure of having your insured tes<fy without counsel. A typical plain<ff tac<c is to depose the agent without counsel, get her to say something incrimina<ng and then sue the agent and her broker

53 Disciplinary Ac;ons Many policies have a sub- limit for the defense of disciplinary ma?ers providing defense costs up to a certain amount for each disciplinary ma?er, for example - $5,000 each. How do you handle that if you have already engaged counsel to defend the underlying civil suit?