The ailment has several symptoms. The National Association of REALTORS® (NAR) reports that there has been a significant (more than 30 percent) increase in the level of litigation involving brokers and agents. The contemporary real estate consumer is entering into the transaction with much higher expectations and is proving to be less than amiable when those expectations are dashed by real or perceived incompetence on the part of their real estate service provider.
The indemnity community within the insurance industry is understandably anxious for a number of reasons, not the least of which stem from losses of almost $8 billion during the past few years. Errors and omissions policy premiums across the industry are experiencing double digit inflation. Deductibles are approaching $25,000 in some states and at each renewal the list of exclusions becomes longer. Many brokerages are finding that despite long relationships with carriers and spotless records, renewals are no longer automatic.
The situation is made worse by the fact that only five carriers remain in the errors and omissions field today out of 13 or more that served the industry in 2001.
Some brokerages for reasons totally unrelated to their own business practices, have found themselves unable to secure insurance. This often occurs because other brokerages within their geographic or economic pool have been unable or unwilling to effect risk management.
Some associations are now beginning to promote the idea of setting up their own E & O insurance programs as a viable professional and economic solution. Hopefully this thought is still in the research stage, where it will discover that other industries and professions have tried this option with limited success.
The solution here probably doesn’t lie with creating new captive business and insider employment opportunities. The solution lies in coming to grips with the simple concept that the time has come to introduce transactional standards and best practices into the real estate service package.
Significant among the many changes that have been introduced into the contemporary real estate industry is the concept that there is a “right” way to do things. Until the industry comes to grips with the fact that it is no longer feasible to have one million practitioners each individually defining and interpreting the various components of the real estate service package, no amount of insurance reform, replacement, reconfiguration or reassignment will solve the problem.
How complicated is this? A group consisting of real estate and insurance industry professionals recently considered the challenge. Consider the relative simplicity of the risk management design outlined by the following 10 recommendations.
Top 10 Recommendations
• Obtain a written sellers and review the form to verify that the information is consistent with what you know about the property, and, yes, share this information with prospective buyers.
• Yes, the new consumer is demanding more and more information, and yes, you should do everything to help them find it. However, become the source to the source but not the source. Do not classify anything and stay away from that short but critical list of things not to say.
• Conduct a careful visual inspection of the property and investigate (not ignore) the “Red Flags.” Failing to spot these claims in the making may lead to a listing, but we now know that they also are going to result in a claim.
• Unlike their predecessors, today’s consumer does not expect you to be an expert on everything. Never act outside the area of your expertise and comfort zone. Recommend the services of another more specialized expert. If the buyer wants to waive an inspection, get it in writing. If they opt for inspections advise them that the inspectors’ contract has more disclaimers than an audit report.
• Your firm should create and strictly adhere to office procedures at every stage of the transaction.
• Religiously disclose all conflicts of interest in writing. Remember the four basics: whom do you represent, disclose all parties, document your decisions in writing and do as you say.
• A significant number of today’s customers, especially first time buyers, are minorities. Boomer generation agents have not, by and large, successfully educated themselves on the nuances of serving customers from cultures different than their own. This has led to a significant increase in claims relating to fair housing violations. Everyone in the firm should attend periodic fair housing and sensitivity training.
• Successful litigation often rests upon the completeness and sufficiency of the transaction file. Strict office procedures should be established and followed with respect to these procedures. Commission checks should not be dispersed until the responsible manager has reviewed the file. The file must be retained after closing.
• Watch out for C.L.U.E. reports. Insist on a report from the seller as soon as possible. The concern is both for insurability and past claims.
• The E & O insurance contract is a very complex document. Among its requirements may be the representation by the firm that an effective risk management program is in effect. Another provision may require that all claims be reported promptly to the carrier. The failure of either of these requirements can be fatal to your coverage.
These 10 suggestions precisely reflect the nature of the claims and suits currently being filed throughout the country. They are responsive, focused and relevant to addressing the current crisis.
Mark Twain often is credited with pointing out that continuing to do the same things and expecting a different outcome is the definition of insanity. Unless these simple matters can be reduced to best practices and transactional standards, no amount of rearrangement at the carrier level will be anything but empire building.
