The Errors & Omissions (E&O) Workgroup created under AAR’s Risk Management Committee is investigating claims trends in our state with an eye to raising awareness among REALTORS® and developing risk management resources that can reduce claims in the future. The workgroup recently completed a broker survey on the topic and also contacted E&O companies for information on claim trends. Here are highlights from its findings:

Broker Survey

• Most of the claims reported were made by buyers of residential property against listing brokers.
• A third of the claims were filed more than 12 months after close of escrow.
• Most of the claims were settled. Although the settlement amounts varied, interestingly about a quarter of the settlements did not involve the exchange of money.
• In the cases that went to trial, the broker prevailed 67.6% of the time.
• The top three claims categories were:
• permits/zoning
• property construction defects
• plumbing leaks/mold
• Transactions with clients, subdivisions, easements and termites also resulted in a significant number of claims.
• Not surprisingly, the vast majority of brokers identified short sales and REOs as claims trends in the near future. Property management claims was another oft-cited concern.
• Education was overwhelmingly cited as the best risk management tool that AAR can provide to the membership.

Trends According to E&O Companies
Exact numbers of claims and payments are proprietary and therefore unavailable. However, several companies were willing to share general statistics and claims trends.

• Consistent with the AAR survey, the E&O insurers report that buyers bring the majority of claims, with the majority of those claims being against the listing broker, and involving residential property.
• The insurers also cited vacant land transactions as a significant source of claims, both in number and severity.
• Misrepresentation/failure to disclose continues to be the major claim theory alleged against brokers by a wide margin, followed by negligence and breach of fiduciary duty (including self-dealing).
• Although claims involving dual agency are infrequent, these claims appear to result in increased defense costs for obvious reasons. One insurer reported that its average total defense cost is $18,000 and the highest total incurred was $167,001.
• Like the AAR survey results, the top claims categories reported by the insurers included:
• code violations (permits)
• water infiltration/mold
• Other common claims were specific performance and contract errors. The types of claims trends the insurers reported were:
• raw/undeveloped/partially developed land
• property management
• lease purchase/lease option agreements

The E&O Workgroup members are: James “J.T.” Tsighis (Chair), Martha Appel, Betty Arthur, Bill Ashker, Rick Mack, Ron Moore, Lisa Robinson, Yvonne Coelet and AAR staff Michelle Lind, Christina Smalls and Jan Steward.