Realtors Learn How to Avoid Litigation
As the 13-year-old told his mother when asked about the progress he was making on his school biology paper: “Fine . . . but I think I’ve learned more about penguins than I ever wanted to know.”
Today’s home shopper can sympathize with him. Once the potential buyer gets really serious about making an offer on a house, what happens?
Like a dam bursting, the realtor is suddenly pointing out hairline cracks in the patio, how serious plumbing problems developed two years before and that it may, or may not, be resolved, and that five years before, two members of the family then occupying the house had been murdered in their beds. A full-fledged confessional.
Litigation Explosion
Is all of this gushing-forth of information--ranging from pertinent to frivolous, to interesting-but-so-what--really necessary?
“You’d better believe it,” according to Frederick J. Fisher, president of Torrance-based Fisher Associates.
“It’s not enough any more to fully disclose everything about a property--to document it and spell out what may or may not be wrong with it, and what may or may not have to be repaired. It’s one thing for a realtor to say that he’s discharged his duties in this respect. It’s quite another to prove that he has, from an evidentiary point of view.”
The “why” of it, of course, is the much-reported, much-lamented explosion of litigation aimed at the industry--so-called “errors and omissions” liability suits. Litigation that, to the real estate industry, is what malpractice is to the health field.
“Like practically everyone else writing professional liability coverage,” said Adrian Chapman, senior claims analyst for Fremont Indemnity, a branch of Fremont Insurance Co., “we’ve simply stopped writing errors and omission insurance and are sitting back and reviewing it. The claims are ridiculous and the settlements have been ridiculous.”
To the point where the number of insurers in the state writing such coverage has dropped from about a half dozen a year ago to--at last count--no more than two today, and where both premiums and deductibles have skyrocketed.
“The standard deductible on an E & O policy,” Fisher adds, “used to be $1,000 to $2,500. Now, commonly, it’s $25,000 and, for a large company, the premium can run easily into six figures a year.” The alternative for many realtors? To operate “naked”--the uninsured, crossed-fingers approach to the problem.
It is largely at this target that lawyer-turned-claims-investigator Fisher has zeroed in on in putting together his newly created Claim Prevention Support Program.
Training Program Offered
“All of this has grown out of my 11 years of experience in handling claims investigations for insurance companies,” he said. “I know what categories the claims are going to fall into and where the principal mistakes are being made.”
And much of this came out of work done by Fisher in conjunction with the Barr-Leden insurance brokerage in Van Nuys two years ago, when a model errors and omissions program was put together for local realty boards and in the course of which more than 1,600 E & O claims were researched.
Fisher Associates’ approach: “We come into a realtor’s office and provide in-house training and supervision--not just training the people, but reviewing the office’s entire administrative procedure,” Fisher added.
“For instance, the only other group that keeps files as badly as real estate people are insurance agents. Most of them simply use an 8 1/2x11-inch envelope--slit horizontally at the top and with pertinent data printed on the side--nothing but a transaction file. At the very least, they need two such files, one for the property itself, where it can be noted every time the property is shown to someone, and another one for the transaction itself.”
While the E & O course can be a one-shot, three-hour training session (at $75 an hour), “It’s really more effective,” Fisher says, “if there are at least two or three follow-up visits.”
But when claims are filed, Fisher Associates moves in, investigates them objectively, lets the realtor know where he stands, legally, and how the litigation can be best resolved.
This means working with the realtor’s own lawyer and insurance company (if he has one), or with the realtor, directly. This aspect of the service, Fisher adds, “is at standard investigative rates, $51 an hour. And, for those without a lawyer on retainer, Fisher maintains a state-wide referral file of attorneys with broad, hands-on E & O experience.
At the same time, the Torrance investigative firm also has created a monthly newsletter ($120 a year) providing subscribers with the latest trends in E & O claims, “which include the mistakes that are popping up most frequently, the safeguards that are proving most effective and, of course, all legislation and appellate decisions affecting liability,” he said.
Subscribers also are automatically enrolled in Fisher’s E & O hot line, entitling them to one phone call a month to discuss specific transactions where there may be misgivings about the realtors’ liability.
This, Fisher adds, is based loosely on the legal hot line that the California Assn. of Realtors has provided its members since 1980, and which fields about 20,000 calls a year on all real estate legal matters--not, exclusively, E & O cases.
Costly Legal Defense
“Even if a broker does have errors and omissions coverage,” Fisher says, “he can’t afford to be complaisant because if he doesn’t keep his losses down, he’ll not have it for very long. And even in situations where there isn’t any liability--where the realtor didn’t do anything wrong--you can’t defend a professional in this day and age for under $10,000, and that’s just up to the mandatory settlement conference. He hasn’t even gone to trial yet.”
While Fisher maintains that about 40% to 50% of all errors and omissions cases filed boil down to alleged misrepresentations about the physical condition of the property (“no one ever told me that the roof has a six-foot rip in it”), Fremont Indemnity’s Chapman remains convinced that--regardless of the supposed physical misrepresentations--the vast majority of E & O cases have the same roots: financial troubles coming out of the heyday of “creative financing” in the early ‘80s.
“So many of the deals put together then,” she says, “depended on balloon notes and the need to refinance in two or three years. Interest rates shot up, and they couldn’t do it. And so, all of a sudden, they discover that the plumbing isn’t up to code, that the roof leaks and that they’ve got termites. We wouldn’t have heard a peep out of them if that hadn’t happened--they would have made a killing.”
But certainly adding fuel to “physical misrepresentation” was the Easton case in 1984, when the California Court of Appeal found in favor of Leticia Easton in her suit against the realtor who handled the purchase of her home in the San Francisco Bay area--a house that had a history of soil problems about which no one bothered to inform her. When soil slippage cracked the walls, carried away portions of the driveway and relocated the foundation--all to the tune of $213,000--she sued and won damages of $197,000.
Lean Over Backward
And the flood of similar suits based on land subsidence--and every other ill known to houses--had begun.
If today’s realtor has to bend over backward to inform would-be buyers about everything from leaking faucets to slipping soil, Fisher adds, he has to show the same caution in putting together financial deals for his clients.
“We’ve got one that’s still kicking around the courts two or three years after it happened,” he said. “There was this fairly commonplace deal involving an extremely expensive home here, where the buyer’s offer was contingent on selling his house. A buyer was found for his place, but that buyer’s offer was contingent on his selling his house. This daisy chain went on until six properties were involved.
“So, the broker put together swing loans for all of them, everybody moved and suddenly the guy at the bottom of the totem pole--who had to sell two properties to put the whole thing in place--fell out of escrow. Suddenly, you had six people trying to carry three notes apiece--on their old house, on their new one and on the swing loan--and practically all of them started defaulting. Tremendous equities were going down the tube.”
State-Federal Dispute
Guess who got sued for putting the complex deal together?
Fogging the errors and omissions problem at the moment, according to Ray Cowan of Cardiff General Agency in Sherman Oaks, is an apparent deadlock between the California Department of Insurance and the federal government over the implementation of the Federal Risk Retention Act of 1981 (amended in ‘83)--a move aimed at easing the whole product liability crisis, of which E & O coverage is a part.
Until about two months ago, Cowan adds, his agency was writing E & O coverage for Dynastan Purchasing Group, an insurance underwriter providing E & O protection at reasonable rates under the federal legislation which, essentially, permits underwriters to pool the risks inherent in all product liability situations and provide coverage (in E & O cases) for realtors unable to obtain coverage at livable premiums through conventional sources.
“We voluntarily stopped writing E & O coverage about two months ago,” Cowan adds, “which is a real shame. But, until the air clears and we can get some cooperation from the state, there’s nothing else we can do.”
Bypasses State Code
The state’s opposition to the federal legislation, Fisher adds, is because it permits insurance underwriters to bypass state insurance codes, sell insurance without being licensed in the individual states or to conform to state standards.
And so, “until the air clears,” and E & O coverage for the state’s realtors again becomes available--or, in the unlikely event that the fervor for litigation subsides--the name of the game in the real estate industry is eternal vigilance.
“You tell all, explain all in writing and get the buyer’s signature on everything. And then you do it all over again,” Fisher added. “You use a buyer’s checklist, a seller’s checklist, and you train everybody who comes into contact with clients about what can happen and what the consequences can be.
“You just can’t take anything for granted any longer.”
