Are All Your I’S Dotted and T’S Crossed?
No matter how many times we hear the old adage “Get it in writing”, we still seem to forget the importance of this simplest preventative measure. The conversation in our head usually goes something like this, “Oh, that’s common sense” or “Why would you not do…”. Making assumptions may be easier in the short term, but they can mean confusion, misunderstandings, and possible claims in the long term.Here’s a real-world scenario where important responsibilities were not spelled-out in writing, execution was not verified, and the transaction ultimately led to a claim that could have been prevented.
A real estate agent listed a twenty-acre plat of land on behalf of its owner with the understanding it would primarily be marketed to a homebuilder or investment entity that could develop and sell it as five individual building lots. The seller indicated to the agent that each of the lots had been perked* for a four-bedroom home and the Deeds of Conveyance would be recorded for each of the lots before closing escrow with a buyer. The agent marketed the property as requested and located an interested party, who entered into a purchase agreement with the seller.
The subdivision plat for the property dividing the twenty acres into five residential building lots was not recorded prior to the closing.
In marketing the property, the agent represented to the public that the subdivision would be approved and the lots could be developed immediately for re-sale. As proof, he provided to the would-be buyers copies of the perk tests and a “five-lot” appraisal obtained by the seller.
Not long after the closing, the buyer learned that the plat was not recorded as individual lots and that there was a municipal “steep slope ordinance” in place prohibiting the development of residential building lots with a pitch in excess of 40 degrees. The buyer then sued the seller and the agent, alleging they negligently or fraudulently withheld information and induced him into purchasing the property. To the surprise of the agent, the seller then filed a cross-claim against the agent for failure to exercise reasonable care and diligence, despite the understanding that it was the seller’s responsibility to record the deeds.
The agent may have avoided litigation if the seller’s responsibilities had been put in writing. Marketing the property for over a year as an “approved subdivision” added a level of difficulty in getting the court to agree that the claims against him should be dismissed. The matter was resolved after the seller agreed to rescind the sale and a financial amount was paid by the defendants for the buyer’s expenses and lost investment opportunity. It became apparent that a jury would likely award the buyer damages if the case was ever tried.
An important piece of professional liability coverage is the risk management practices that can be put in place to prevent claims in the first place. If you look at it this way, you don’t set sail and hope someone will save you if you fall overboard. You make sure you know how to swim before you leave the harbor. Institute smart business practices now to help decrease your risk of a claim, and also to ensure you are better prepared to defend a claim if one is filed.*A Perk Test is more formally known as a Percolation Test where the soil is evaluated to test the rate at which water drains. The results of this test provide crucial information needed to design and install a septic system.For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.This article was produced in conjunction with AXA XL and is not to be taken as legal advice.