Hands Off the Seller's Disclosure Notice
No one likes completing paperwork. And there’s a lot of it in a real estate transaction. But resist the urge to help your client with this task. Real estate professionals may place themselves at risk if help becomes more like do. It is critical to remain impartial and guard against situations that could be interpreted as prior knowledge, or even concealment, of information.
The following is a real-world situation that placed a real estate professional at risk and led to the defense of a claim due to the appearance of wrongdoing.
After a seemingly successful real estate closing, a buyer finds a defect or malfunction in their new home that the home inspector failed to identify and was not included in the seller’s disclosure notice. In this instance, most buyers look towards the seller for redress. However, most sellers use the proceeds of a sale to purchase their next home. Therefore, sellers usually do not have liquid assets and are potentially judgment proof. In addition, sellers do not have any insurance to cover what may well be an intentional concealment of a defect, such as prior water damage, a roof leak, malfunctioning systems, a prior termite infestation, or anything else that may be included in a seller’s disclosure notice based on state regulations.
Due to the apparent inability to recover from the seller, the buyer retained legal counsel to file a civil suit against the applicable home inspector, as well as the seller’s broker/agent. The suit alleged a negligent inspection by the applicable inspector and misrepresentation of the seller’s disclosure notice by the seller’s broker/agent. The buyer and their attorney claimed the seller’s broker/agent knew, or should have known, about the defect(s). The claim alleged the seller’s broker/agent had a non-existent duty of inspection and/or they schemed or colluded with the seller to conceal the defect or malfunction in order to make the sale and earn a commission. The seller’s broker/agent had to defend a civil lawsuit, as well as a potential regulatory complaint, and incur the accompanying costs of time and money.
Too often a seller’s broker/agent will participate in the completion of the seller’s disclosure notice, or actually complete the form for the seller. Reviewing the disclosure notice item by item with the seller goes beyond simply helping. The seller’s disclosure notice is just that: the seller’s disclosure notice. All information shared on the notice form should come exclusively from the seller and be completed by the seller only
If a seller’s broker/agent has knowledge of a defect or malfunction that the seller conceals or fails to reveal, there is an increase in risk exposure. If the knowledge and decision to conceal comes from, or in concert with, the seller’s broker/agent, the agent can be a target who is civilly liable for damages claimed by a buyer. Even if the agent has insurance coverage, it may or may not cover the entirety of the claim, depending on how the buyers and the plaintiffs’ attorney pleads the case. The result may be a nominal monetary settlement, but the value of the agent’s time in defending the lawsuit cannot be recovered.
Maintaining a hands-off approach with your clients is a critical and achievable risk management tool. There are ways to provide quality professional service with clear guidelines and instruction to clients without placing you or your business in jeopardy.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.