Ten Claims Trending Up in Today’s Market

Are You Covered? | Dodging the E&O Bullet | Top E&O Claims

At AAR’s Broker/Manager Risk Management Conference in August, attorney Rick Mack of Mack, Drucker & Watson and AAR Legal Counsel Michelle Lind addressed the current trends in E&O claims. Here are the top ten types of claims Mack encounters in his practice:

1. Property Condition Claims

In years past, property condition claims have accounted for over 80% of cases. Currently they’re running about 65-70%. The top three types of property condition claims are soil/structure, water-related (roof and plumbing issues that lead to mold problems) and termites. Many of AAR’s risk management tools, such as the Seller Property Disclosure Statement (SPDS) and Buyer Advisory, help protect against these types of claims.

2. Short Sale Claims

In 2008, Mack’s office had just one short-sale-related case, but the number increased significantly in 2009 and 2010. Short sales are a big part of the market today, so it’s no surprise that they are becoming an important percentage of claims. There are typically nine months between the closing and the lawyer’s office. Lind says that while nationally, these claims have not yet seen a jump, Arizona is likely on the leading front of this trend.

Plaintiffs generally argue that the agent either gave no advice or bad advice about lingering liability on items such as HOA fees, taxes or deficiencies. The best way to prevent these types of claims is to shift the risk by getting these clients to experts. “Tell them, ‘Go and get that figured out with an attorney and CPA. When you’ve got that done, come back and we’ll short sell your house,’” says Mack.

3. Poorly Drafted Documents

In an attempt to get deals done, agents are getting creative and drafting trickier transactions, such as lease options, wraps, lease purchases and so forth. “When agents get away from the garden-variety AAR form transaction, oftentimes they muck it up,” Mack says. Why doesn’t AAR produce a standard lease purchase contract? “These are high-liability transactions,” cautions Lind. “AAR’s Risk Management Committee doesn’t want to lull members into a false sense of security with a ‘standard’ form.”

4. Valuation Issues

“You promised me that I could sell this and make money.” When the market is volatile, valuation claims arise. Agents are no better at reading the future than anyone else. AAR’s Market Conditions Advisory is a simple form that basically says, “What comes up must come down.” Make it a part of your buyer package.

5. Transactions with Clients

Whenever you’re doing business with a client, you’re stepping into a higher-risk transaction and a transaction that can often involve personal liability. “Sometimes agents think disclosure will take care of risk,” Mack says. “Disclosure is important, but it does not remove risk.”

6. REO Transactions

“Two years ago, I was Chicken Little talking about the risks inherent in these REO master listing agreements. And so far, I’ve had zero claims about this,” Mack admits. “Instead, I’m getting these crazy trash-out claims!” See the related article, “REO Trash-Out Claims,” for advice on avoiding these.

7. Subdivision Claims

These claims generally involve illegal lot splitting. If a person or entity owns six or more properties in a subdivision, a public report is required. Many lenders taking back properties were unaware of this requirement. “If you’re doing REO work, send information on this to your asset managers and ask them to forward it on to their legal departments, so you can show that you notified your client,” advises Mack.

8. Investment Advice/Securities

Want to avoid this type of claim? Don’t give investment advice. Ever.

9. Utility Availability

The last thing a new homeowner wants to discover is that they aren’t really on sewer. Verify with each utility (electricity, gas, water, etc.) that the service really is available—and for what price.

10. Survey/Legal Description Errors

Say your buyer client purchases a beautiful wooded lot and begins to build a home there. The land’s true owner arrives and demands that the work stop. It turns out that the buyer actually bought the lot to the west instead. Uh oh. “Frankly, these are tough claims to avoid,” says Mack. “All you can do is be as careful as possible.”