Lending a Hand Without Placing Your Business at Risk
We all tend to go out of our way to help clients. However, lending a hand can often be a tricky proposition (especially in the age of social distancing) and might just place your business at risk. So thinking twice before acting once is a good check to ensure your assistance to clients is fair and equitable across the board.
Here is a real-world scenario involving a real estate agent’s professional recommendation. The advice seemed straight-forward enough, but in retrospect, it should have been presented differently in order to assist the client and protect the agent.
SITUATION
A buyer exercised their right to obtain a home inspection but had either never made a home purchase before or was not from the area. The buyer asked their agent for a recommendation due to being unfamiliar with local home inspectors. The agent worked with an excellent home inspector who had always been dependable but had never identified a defect significant enough to cause a potential purchase to fall through. The buyer accepted the referral and, without any significant defects contained in the inspector’s report, the sale closed. The home inspector was paid and the agent earned their commission and felt they had provided helpful service to their buyer.
PROBLEM
Subsequent to the closing, the buyer determined there was a significant, visible defect the seller didn’t disclose. The home inspector failed to discover the defect, and hence nothing was included in the inspection report. The seller either rolled the sales proceeds into a new home and/or was judgment-proof. The home inspector’s contract with the buyer had a liquidated damages clause, limiting his liability to the cost of the inspection, which in some jurisdictions is enforceable. The buyer found no recourse with either the seller or the home inspector. Because the buyer’s agent offered only one inspector recommendation, the buyer claimed the agent either: (1) recommended an inspector who glossed over defects in order to ensure the sale occurred, thereby protecting both the agent’s commission and continued referrals; and/or (2) referred the buyer to an inspector who the agent knew, or should have known, was incompetent. The buyer ultimately sued his own agent.
MISTAKE
If an agent is asked for a home inspector recommendation, the best practice is to provide multiple options for the buyer. At least three choices should be provided to avoid the appearance of an agent and home inspector having an improper, unspoken agreement which might place their own interests ahead of the buyer’s.
RESULT
In addition to suing the seller, settling with the home inspector for the liquidated damages set forth in the contract, and the $300 fee for the home inspection, the buyer sued the seller’s agent alleging they knew of the misrepresentations in the seller’s disclosure notice. The buyer also sued his own agent for the conduct of the home inspector the agent recommended. In this scenario, the real estate professionals with insurance coverage became the target defendants.
PREVENTION
While it is clearly acceptable to have a prior relationship with home inspectors or knowledge of their quality of work to provide helpful recommendations, agents must maintain an arms-length relationship in order to ensure their fiduciary duty to the buyer is satisfied. If asked for referrals, the buyer’s agent should provide multiple recommendations for home inspectors and any other requested professionals. Agents should always put the interest of the buyer ahead of his or her own, even if it prevents a sale from closing. However, there are other properties the agent can locate for the buyer, or the buyer can choose to negotiate concessions from the seller in order to close the deal.
Providing assistance to your clients is good business, but it’s important to ensure there is no appearance of impropriety and all your clients are offered the same high level of customer service.
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.