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Are You Adequately Insured 2.0?

Often, Legal Hotline articles discuss steps REALTORS® should take to protect their clients. This edition, however, focuses on action you need to take to protect yourself. In 2007, we ran an article under the same title and the article is still applicable. The focus of the 2007 article was on broker liability for bodily injuries sustained by consumers and other brokers during showings. The message of that article is still applicable and will be repeated as the last section of this article. However, in 2019, broker liability, and thus insurance risks, are expanded and now the appropriate inquiry begins with…are you insured for the action you are about to take? Only after you answer that question do you need to consider whether your insurance is adequate.

In today’s world of mobility, with clients located or traveling around the globe, it seems brokers are often asked to fill in for an absentee client at an important event. A broker may be asked to sign documents as a client’s power of attorney or act as a personal representative for a long-time client or substitute for a buyer at the buyer’s inspection or collect rents for a client who will be working overseas for a year or two. Chances are good that brokers are not insured against liability incurred for any of these efforts.

Power of Attorney (“POA”) or Personal Representative (“PR”)

The risks associated with a broker serving as both a PR to an estate that is selling real property or as a POA to a client who is buying or selling real property and as the broker representing the party, are confusing and burdensome. When a real estate broker serves as a power of attorney for a client or a personal representative for the estate of a deceased client, the broker necessarily owes fiduciary duties to the person (power of attorney) or beneficiaries of the estate (personal representative). Fiduciary duties require absolute loyalty and allegiance to the interests of the party as well as unwavering adherence to all lawful instructions of the client. 

Real estate brokers licensed in Washington State do NOT owe fiduciary duties to clients. Washington’s real estate brokers owe statutory duties to clients AND to the party on the other side of the transaction. While the statutory duties owed are robust and protective of consumer interests, the statutory duties allow brokers to engage in dual agency, something that fiduciary duties would not allow. Statutory duties also require brokers on both sides of a transaction to provide duties to the party on the other side of the transaction. For broker to serve as both a PR and as a listing broker for the same property confuses the duties that the two-hat-wearing broker owes to the beneficiaries of the estate as well as to the future buyer of the listed property. Similar issues exist for the broker who serves as a POA for buyer or seller. If broker owes fiduciary duties to one party, because of the broker’s additional service as a POA or a PR, is it even possible for broker to provide the other party with the minimum Agency Law duties that broker is required to deliver to the other party? In many instances there may be no conflict, but in some instances there will certainly be problems.

In addition to the confusion found in deciphering broker’s duties and allegiances, there is the question of insurance. If a firm has an errors and omissions policy, the policy covers only the activities described in the particular policy’s professional services section. It is unlikely that any real estate firm has purchased an E&O policy covering liability arising out of a broker serving as a PR to a seller/estate. Most real estate firm E&O policies cover sales activities, business management and/or property management. Those professional activities do not include service as a fiduciary to a buyer or seller while acting as a POA or a PR. As a result, if a broker and the broker’s firm encounter legal claims arising out of a transaction where broker served as both PR or POA and a broker, the first thing the insurance company will do is determine whether the complaint is with regard to the provision of brokerage services or with respect to service as a fiduciary. If the problems arise as a result of the broker’s service as a PR or a POA, then the firm and the broker will be without E&O coverage in defense of those claims.

If a broker is the personal representative of an estate and the estate is ready to sell property, the estate should list the property with a different broker. The broker may be licensed to the same firm as the PR, so long as the PR is not the designated broker of the firm. If a client needs somebody to stand in as the client’s power of attorney, then broker should advise the client to name a friend or family member. Electronic signatures and document delivery eliminate the need for a signer to be personally present, thus enabling an absentee client to name a POA who is located elsewhere.

Meeting buyer’s inspector on behalf of buyer.

If a buyer is unable to be present at the property when buyer’s inspector inspects the property, that is not the end of the world. However, if buyer’s broker says, in anticipation of that situation, “don’t worry … I’ll meet the inspector, get the report and let you know what the inspector had to say” that could be cataclysmic. In making that statement, broker is offering to provide far more than real estate brokerage services and well beyond what the typical E&O policy insures. Broker is offering, instead, to stand in buyer’s shoes and evaluate the findings of the inspector and determine what is and is not important to the buyer. If broker errs, the broker has not committed an error in the provision of real estate brokerage services. Instead, broker erred in the provision of a voluntary service broker undertook, replacing buyer’s discretionary evaluation of the condition of the property with broker’s. It is unlikely that most E&O policies will cover a claim by buyer against broker or firm arising out of allegations by buyer, that broker failed to properly convey the import of the inspector’s findings.

When a buyer cannot be present at an inspection, the only offer broker should make to buyer in concession of buyer’s absence is that broker will meet the inspector at the property, to provide access. Buyer and inspector will then have to communicate separately, after the inspection, by phone or in some other way, so that buyer can get a full debriefing directly from the inspector and ask questions important to buyer, directly of the inspector. After that happens, buyer can then instruct broker with respect to repair concessions buyer may want to ask of seller.

Collecting rent for an absentee seller.

Client purchased a home from a broker and the broker has done a great job of staying in touch with the client so when the client is transferred to another work location for just a year or two and chooses to rent the home during the client’s absence, it is natural for the client to ask their trusted broker to “just collect rents for me.” As easy as this task sounds, it is wrought with potential liability … uninsured liability in most cases. When a broker “collects rents” the broker is serving as the client’s property manager. Washington law prohibits any broker from serving as a property manager unless the broker’s firm has a written management agreement signed by both a client and a managing broker licensed to the firm. If the firm enters a property management agreement with the client, then there is no problem. The firm’s designated broker will be responsible for this “rent collection” just as the designated broker and firm will be responsible for all property management activities undertaken by the firm. The problem arises when a broker does not recognize the prohibition against merely “collecting rents” and proceeds in the absence of a formal property management agreement. 

While the client and broker may consider “collecting rents” to be an informal and fairly insignificant arrangement, the state does not. Substantial fines are likely to be delivered by the Department of Licensing to the broker and the firm when the Department discovers this relationship. Moreover, if the firm is not insured for property management activities or if broker’s collection of rents is handled outside the firm’s protocols for insured property management activities, then liability arising from broker’s casual property management will not be covered. When a broker is asked to “collect rents” or engage in any other property management activities for an absentee client, broker should consult broker’s managing broker with respect to the firm’s willingness to provide property management to the client. If that is an option, broker should offer property management services to the client at the direction of broker’s firm’s policy. If that is not an option, then broker should graciously decline client’s request.

Brokers providing self-representation in a transaction.

While not a neat fit under the heading of “insurance issues created by absentee clients,” it would be remiss for this article, addressing lack of insurance coverage, to skip the topic of problems arising from situations where real estate licensees act as their own real estate broker. Brokers should know that the typical E&O policy is an insurance policy protecting the firm and its brokers from liability arising from third party transactions. A basic E&O policy is not intended to insure claims that arise from “self-dealing”. In other words, claims that arise in a transaction where one of the brokers is also a party to the transaction will not be covered by a basic E&O policy. It is possible for a firm to purchase a policy that will cover this transaction but even then, the policy may impose certain requirements on the transaction. For example, coverage may be limited to owner occupied property and may require seller’s provision of a home warranty.

Before a broker represents him or herself in a transaction, broker should consult with the firm’s designated broker. If the self-representation is insured, then broker should proceed in conformity with any requirements imposed by the firm’s E&O policy. If the transaction is not insured, broker should ask another broker (in broker’s firm or any other firm) to represent broker in the transaction.

Insurance for bodily injury

Beyond the business liability issues just discussed, brokers need to make sure they are adequately insured against claims for bodily injury to clients and to members of the public (buyers, brokers, appraisers, etc.) invited into seller’s home through broker’s listing. Many will be surprised to find they are not.

Many real estate brokers fail to carry insurance adequately protecting the broker from claims brought by a client or customer injured while viewing property. Imagine this scenario: you are the listing agent and a potential buyer views your listing during an open house. Buyer enters the home, fails to recognize the step down into the sunken living room and falls, sustaining an injury. Buyer sues seller, listing agent and listing firm for negligence and failure to warn of a dangerous condition. Seller is likely to be defended and protected by a homeowner’s policy. The firm is likely to have liability insurance adequately covering this claim. However, it is possible that broker has no coverage or insufficient coverage. Whether there was actually a failure to warn is a question that only a jury could answer and is not the point of this article. The relevant question is: when buyer sues, do you have an insurance company that will defend you and pay your lawyer bills, whether buyer is right or wrong? 

The missing piece in the insurance portfolio of most brokers is business liability or general liability insurance. Broker may have some coverage from broker’s homeowner’s policy, if broker has a homeowner’s policy, but the coverage may be insufficient. It may be possible to supplement the homeowner’s policy or it may be necessary to purchase a separate business liability insurance policy. 

Broker should recognize that broker is probably not covered under the firm’s general liability policy. While brokers are typically covered by the firm’s E&O policy, brokers are not typically covered for bodily injury sustained by clients or members of the public, by the firm’s general liability policy. That is the problem brokers need to remedy. Adding a business liability policy to the average broker’s insurance portfolio is not typically expensive. In fact, in most cases, it is relatively inexpensive. It is probably not necessary to elaborate on the expense broker would face in having to defend a bodily injury claim, even if broker prevailed in the action, if broker does not have insurance coverage. At that point, winning or losing the lawsuit would not be the defining issue. The question would be, how much did broker spend in paying a lawyer to defend the claim – legal fees that are not recoverable in a personal injury defense.

Brokers also need to ensure that their automobile policies include the necessary riders to protect from claims filed by clients injured while riding in the broker’s vehicle. A standard auto policy may not protect broker if broker’s injured passenger is a business client. Typically, auto policies require an additional endorsement to protect drivers from claims filed by a person who was injured while riding with the driver as part of the driver’s business. Again, an endorsement on an auto policy to cover this issue is going to be relatively inexpensive.

Depending on broker’s assets, it may be wise for broker to also carry an umbrella policy. An umbrella policy supplements the other insurance products in an insurance portfolio and increases the coverage afforded by each product. For example, a business liability policy may provide $500,000 coverage. But, if broker owns $2,000,000 worth of assets and the plaintiff sustained a significant injury, then plaintiff is not likely to settle for the limits of the liability policy of $500,000. Rather, plaintiff will take the claim to trial and attempt to obtain a judgment against broker, payable from broker’s personal assets. If broker carried a $2,000,000 umbrella policy, the insurance coverage would total $2,500,000 and the matter would be far more likely to settle without exposure to broker’s personal assets. Again, the average cost of an umbrella policy is not significant considering the corresponding risks and benefits.

It has been said that the five most devastating words any insured person can hear come from their insurance agent when a claim is filed. Those words are “have you read your policy?” In other words, “your policy does not cover the claim you are submitting.” All brokers should make a phone call to their insurance agent. The questions should be two-fold. “Am I insured for _____ and am I adequately insured?” Although everyone is busy and schedules are tight, this a phone call you cannot afford not to make.