The Importance of Seller Disclosures and Reputable Inspector Recommendations
When you think of the Seller's Disclosure Statement, you likely think about ensuring your seller clients provide details into any current issues or defects of their property. But your seller's disclosures shouldn't stop there. To avoid liability, it's also important to disclose problems that have previously been fixed. What's more, if you plan to provide inspector recommendations to your buyer or seller clients, it's vital to ensure the inspector is reputable. Failure to do so could lead to a costly claim. Read the following real-world example to see how.
A real estate agent is the listing agent for a two-story single-family home on a barrier island. She is familiar with the property, having previously listed it for three consecutive owners. She provided a recommendation for a pest inspector when her sellers reported the presence of wood-destroying organisms shortly after they closed on the property two years earlier. The listing agent advises her sellers to disclose the problem on the Seller's Disclosure Statement, but they decline to do so since the problem, to their knowledge, had been completely remediated.
The cooperating agent, who has no previous involvement with the home and who is associated with a separate brokerage, advises the prospective buyers to obtain a wood-destroying organisms (WDO) inspection and report during the inspection period before closing. The buyers use the pest inspector recommended by the cooperating agent.
A WDO inspection is performed… by an unlicensed inspection company. So, while the cooperating agent appropriately recommended to his buyers that they obtain a WDO inspection, the inspector he recommended was unlicensed. The WDO report revealed no evidence of WDO and the buyers proceeded to closing. Nevertheless, shortly after the sale closed, the buyers discovered active WDO and evidence of a previous WDO issue.
There are at least two mistakes. First, the Seller's Disclosure Statement, which asked if there ever had been a WDO issue, may not have been completed correctly (depends on the wording) and the listing agent should have advised her buyers accordingly. Second, the cooperating agent provided the name of only one pest inspector and that inspector was unlicensed.
After the closing, the buyers discovered the existing WDO infestation. The damage required repairing the impacted portion of the home. The buyers sued both agents, their brokers, the sellers, and the pest inspector, alleging various theories of liability, including failure to disclose and negligent recommendation.
The lawsuit was settled after the expenditure of certain costs of defense. Had the listing agent counseled her sellers differently, or had the cooperating agent provided more than one pest inspector and made sure that inspector was licensed (or at least claimed to be licensed), perhaps a lawsuit could have been avoided.
For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.The purpose of this article is to inform and insulate real estate professionals from potential monetary claims and professional grievances. The fact patterns are from actual claims against real estate agents. While the author is an experienced claims representative, the opinions expressed herein are general in nature, not fact nor state specific; and therefore, should not be taken as a substitute for legal advice from an attorney licensed in your state. This article was produced in conjunction with AXA XL and is not to be taken as legal advice.