Real estate agents are frequent targets for lawsuits. A common lawsuit scenario involves a buyer of property suing the seller and the seller's agent for failure to disclose defects in the property. In some cases, the buyer also sues his or her own agent to the transaction. The lawsuit alleges not just negligence, but also alleges that the seller and the agent conspired to keep defects hidden to facilitate the sale at a higher price and earn a higher commission.
The buyer may also file a disciplinary grievance against the agent. The grievance threatens not just monetary risk for the agent, but the risk of also losing their professional license. The agent may be forced to defend him or herself in two forums simultaneously.
Most times the lawsuit and grievance are highly defensible. Typically, there was absolutely no collusion or conspiracy with the seller to fail to disclose defects existing on the property. The agent likely had no knowledge of any hidden undisclosed defects. At best, the seller may be at fault.
Nevertheless, a public lawsuit alleging fraud and conspiracy by the agent is unsettling at best for the accused agent. Reputation is extremely important in a referral business like real estate brokerage. In addition, defending lawsuits is expensive and time consuming for the agent. Every day working with defense counsel, reviewing documents and providing testimony is another day lost from practicing as a real estate agent.
Unfortunately, in today's litigious society, lawsuits and grievances against real estate agents are very common. There are no guarantees to completely eliminate the risk of being sued – other than not practicing as a real estate agent. To be frank, lawsuits and grievances are a professional hazard. However, employing a few simple precautions can minimize that hazard. Or, when the suit or grievance cannot be avoided, those same precautions can eliminate or minimize professional liability.
Maintain good communications
Let your clients know they are your top priority by keeping them informed of all significant developments in a bid, contract, or purchase, and responding promptly — within 24 hours — to clients' messages. In this age of email, there simply is no excuse for not keeping a client informed of all significant developments during the representation. After each telephone call, agents should immediately send an email confirming what the call discussed and the agreement and plan going forward.
Of equal importance, keep well organized records, whether copies of letters and emails, or dated notes of telephone calls, of all substantive communications with clients. Keeping all email communications with the client is paramount in order to properly defend a lawsuit.
A client, who knows he or she can get in contact with you, and that you are committed to advocating for his or her interests in purchasing or selling real estate, is less likely to pursue a lawsuit or grievance even in the event a problem with the transaction arises. On the other hand, if a lawsuit or grievance does occur, complete and accurate records of your communications with the complaining client are crucial to any defense.
Avoid giving false expectations
Do not try to protect your clients from bad news. If obstacles, foreseen or unforeseen, arise at any time in the course of a transaction, your client will rely on you to inform him or her promptly, to provide a complete explanation, and to give your honest assessment of the risks and benefits of the clients' options going forward. The client may be unhappy to learn of the obstacle, but not as unhappy as a client who proceeds unaware, only to question, down the road, why you did not inform him or her more promptly.
In addition, do not "oversell" and raise the expectations of your client. If it is unlikely a client will be able to sell a house at given price, the client will be unhappy later when the house doesn't sell at that price. It is better to give a client reasonable and sage advice and to manage their expectations.
Have the client make the hard decisions
Clients rely on their real estate agents to provide a complete and accurate assessment of all risks and benefits of any transaction, but the client must decide how to proceed in light of your assessment. Do not allow a client to say, "It is up to you," because if your decision does not yield the result your client wants or expects, the client may hold you responsible.
Decisions such as whether to get a home inspection or list at a certain price are best made by the client. You can provide them an assessment of the risks and possible choices, but ultimately, the decision is up to the client. A client who is empowered to direct the deal (with your advice) is less likely to cast blame if things do not go as planned.
Document your advice and the client's decisions
Whatever decision a client makes, be certain there is a written record of the advice you provided the client to inform his or her decision. It is easy to follow up nearly every telephone call with a quick email documenting the communication with the client. Should a client take a course you advise against, follow his or her instructions (whenever possible), but state in writing that you would recommend against that approach. If you simply cannot follow the course of action requested from the client (for example, because it would be illegal, unethical or dishonest), advise the client immediately and explain why. If the client insists in that instance, you may need to withdraw as the client's agent.
Avoid filing fee disputes against the client
Pursuing an arbitration or mediation over a commission or filing a fee suit against a client can often lead to a client filing a lawsuit or ethical grievance against you. Even if your client has wronged you, and even if you are, indisputably, entitled to relief, take a moment to evaluate whether that relief would outweigh the cost of defending against the lawsuit or grievance that is likely to ensue. Do not consider only the financial cost, e.g., your deductible and insurance premium, but also the time you would have to invest in your defense and the risk to your reputation, whatever the result. In all but the most egregious circumstances, writing off a loss or walking away from a dispute is often the more cost-effective path.
Avoid the extremely difficult client
Consider carefully whether to retain or stay with clients: who make unreasonable demands; who constantly question your analysis or advice; who refuse to communicate effectively; and/ or who have fired or speak badly of your peers. Remember, a client prone to angry or irrational behavior may, eventually, direct his or her ire at you, regardless how careful you have been to provide the utmost service.
Avoid the unethical, discriminatory and/or fraudulent client
Even worse than the extremely difficult client is the client who asks that you engage in unethical, discriminatory or fraudulent conduct. Deceptive, unethical or inappropriate conduct which benefits a client to a non-client's detriment can expose real estate agents to lawsuits by non-clients. Unethical clients can expose you to more than a civil action or a grievance proceeding. Any fraudulent activity the client performs with your knowledge can expose you to criminal actions as well . If a client insists you take some unethical, discriminatory or dishonest action, even after you counsel against it, terminate that relationship immediately.
Do not favor your interests over your client's Interests, or one client's interests over another client's interests
Always be mindful of, and avoid at all costs, actual or potential conflicts of interest. You have a fiduciary duty to your client. Courts have held that a seller's agent has a fiduciary duty to act with utmost good faith, fidelity, and loyalty in all dealings with the seller. There is no quicker way to embroil yourself in a lawsuit or grievance than acting in your own best interest to the detriment of your client (or in one client's best interest to the detriment of another client's interests).
Sometimes, the appearance of a conflict of interest is enough to instigate an adverse action. Thus, it is necessary to be vigilant about any potential conflicts which may arise and tell your client immediately in the event a conflict of interest arises. If the conflict of interest cannot be waived, withdraw promptly in the manner least detrimental to your client.
Be proactive in addressing client complaints
Even the best of relationships can quickly turn sour if the client perceives that you are not responsive to concerns he or she voices to you. It may not be enough to simply acknowledge a complaint. You most likely need to respond with information pertaining to the client's concerns and a plan to address them. Whether or not you believe you are at fault, take responsibility for remedying the situation, including presenting the client with options and your proposals for how to avoid the issue going forward.
Don't forget liability insurance
Although having an insurance policy will not keep you out of a lawsuit, it can certainly give you comfort and some protection from personal liability. The real estate agent business is a frequent area for disputes. In addition, insurance may be mandatory in some jurisdictions. It is the biggest purchase most clients will ever make and the stakes are high. Be sure to speak to your agent on what type of coverage that you will need to operate as a real estate agent.
These 10 tips cannot guarantee that a lawsuit or grievance will never be filed against a real estate professional; however, they can help manage the risks of practice and mitigate any damage from potential disputes.
i. We would like to thank the contributions from Daniel R. McCune and Kimberly Perdue of Childs McCune LLC in Denver, Colorado in preparing this article.
ii. Note, that there may not be coverage for fraudulent, intentional or criminal activity. Check your policy language and with your agent with any questions on coverage.
The Hanover is the marketing name for the property-casualty and general insurance operations of The Hanover Insurance Group, Inc. All products are underwritten by The Hanover Insurance Company, Citizens Insurance Company of America or one of their insurance company subsidiaries or affiliates. Coverage may not be available in all jurisdictions and is subject to the company underwriting guidelines and the issued policy. This material is provided for informational purposes only and does not provide any coverage. For more information about The Hanover visit our website at www.hanover.com.