Failure to Supervise Agents Can be a Critical Omission
Allowing an agent to conduct business under your license comes with the responsibility of oversight and supervision. Being aware of an agent’s activities and making inquiries when appropriate are necessary tasks to help ensure good management. Keep in mind that you can be held accountable for the actions of your agents. Signing an agreement outlining the specific parameters of the agent/broker relationship may offer the most thorough protection against possible claims.
Here’s a real-world scenario where general oversight was waived with troubling consequences.
A real estate agent, representing multiple investors, handled numerous real estate investment transactions with power of attorney*. The agent submitted some, but not all, transactions through a broker.
The agent acted with fraud and malice in misappropriating the buyer/investors’ funds and destroying the value of their real estate investments.
The existence of so many power of attorney transactions as well as the large number of investors should have prompted the broker to investigate further. The broker failed to scrutinize the agent’s frequent investment activities with multiple clients. The broker was held accountable even though most of the transactions did not funnel through the broker’s office.
Following the failed real estate investments, the clients sued the agent and broker alleging fraud, malice, misappropriation of funds, and lost value of more than $500,000 in their real estate portfolios. The broker was sued for allegedly causing the damages for failing to supervise his agent. The lawsuit was settled prior to going to trial. Testimony revealed that the broker had knowledge of some of the transactions, but neglected to do anything. The lawsuit contended that the broker had an obligation to safeguard the clients’ interests, failed to do so, and was hence liable for damages.
A broker should always be aware of what their agents are doing, especially if transactions are going through the broker’s office and appear to be suspicious. Transactions involving numerous investors should raise a red flag. In this case, there were numerous power of attorney transactions the agent was signing off on and this should have caused the broker to investigate further. Based on the information obtained by the broker, the agent should have been reported for unauthorized activity. It is the responsibility of the broker to supervise his/her license/sales staff.
Pre-established office procedures for reviewing transactional documents, as well as clear oversight and management of agents operating under your license should be in place. A thorough system of checks and balances may help detect unauthorized activity and prevent future lawsuits.
For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.*The use of a power of attorney is not considered a real estate service under the Real Estate ProtectionPlus E&O policy.This article was produced in conjunction with AXA XL and is not to be taken as legal advice.