Ways to Reduce the Likelihood of a Claim

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

E&O may seem intimidating, but the good news is that there are things you can do at each step of the transaction to minimize the chance of a claim occurring.

1. Trust your gut.

“One thing that agents do have control over—and it’s one of the beauties of real estate—is that they get to pick who they want to work for,” says Trudy Moore, designated broker for HomeSmart in Phoenix. Attorney Rick Mack of Mack, Drucker & Watson concurs. “Nine times out of ten, clients will tell me, ‘I knew this guy was trouble from the beginning, but I thought that I could make it work.’ If you think a client is going to be difficult, don’t do it,” he says.

2. Stick to your area of expertise.

Your job is to facilitate the sale or purchase of property. If questions come up outside the scope of your services—whether they concern a crack in the ceiling or lingering financial liability after a short sale—tell your clients to contact qualified experts. And do it in writing. “Agents need to understand that by not allowing themselves to be pressured into answering those questions, they are better serving their clients,” says AAR General Counsel Michelle Lind.

If you refer your client to a specific expert or provide a list of possible experts to consult, perform some due diligence to ensure that the other party is reputable. (For example, a contractor should be licensed, bonded and insured.)

3. Maintain a paper trail on all transactions.

Make it a part of your practice to take notes throughout the transaction. Send follow-up emails documenting phone or in-person conversations. Your clients will be impressed by your thoroughness—and should you ever need one, a defense attorney will be delighted at your forethought.

If you have any inkling that things are going awry and find yourself without good notes, sit down immediately and write up a detailed chronological account of the transaction to date. Memories fade quickly while lawsuits seem to last forever.

4. Get your broker involved early.

“Agents need to address issues when they come up instead of ignoring them and hoping they’ll go away,” cautions Jim Sexton, designated broker for John Hall & Associates in Phoenix. Moore agrees. “Anytime an agent is having a challenge, or someone is making a demand upon them, I want them to call me, even if it’s just verbal,” she says. Depending on the circumstances, such as the dollar amounts involved, your broker may attempt to resolve the situation or may choose to report the incident to the E&O insurer immediately.

An insurance company considers a claim “a demand for money or service” (verbal or in writing, depending on the policy.) The insurance company requires that these claims be reported as soon as practicable, or the insurer may deny coverage on the claim.

“If you suspect you may have a claim, reach out to your broker,” says Dennis Galvin, an attorney with insurance provider OneBeacon. “You don’t want to jeopardize coverage by guessing wrong.”

Time frames are critical in E&O coverage. If you fail to mention a situation to your broker and then the firm changes carriers, you are unlikely to be covered for that claim because you had “prior knowledge” and failed to disclose it to either carrier.