It is imperative to immediately report a lawsuit or claim to comply with your insurance carrier. Any delay could jeopardize coverage and defense for your company.
Situation
Following the closure of escrow on a residential property, a real estate broker and his agent were both sued by the buyers. The buyers sued the broker and agent for allegedly failing to provide the required Seller's Property Disclosure Statement.
Both the broker and agent were adamant that they were incompliance and would have been able to provide documentary evidence that the statement was provided to the buyers' agent. The evidence included a facsimile transmission of a cover letter addressing the "attached" property disclosure along with email exchanges with the buyers' agent discussing the condition of the property.
Problem
Believing that the lawsuit was frivolous, the broker and agent decided to simply disregard it altogether. They also ignored the ensuing Motion for Default brought by the buyers' attorney for failing to file an answer to the complaint.
Mistake
By dismissing both the lawsuit and default motion, the court entered a five-figure judgment against the real estate brokerage. And, to make matters worse, the Default Judgment was not tendered to the real estate errors & omissions (E&O) insurance carrier until one month later.
Result
Despite an all-out effort on the part of the defense attorney assigned by the E&O insurance carrier, the Default Judgment could not be overturned due to delayed responses on the part of the brokerage. Furthermore, the insurance carrier was under no obligation to pay the judgment since the brokerage failed to comply with the terms and conditions of its E&O policy by not providing timely notice of the claim.
Prevention
Many jurisdictions have very strict deadlines for filing court documents. In this case, it's clear that the brokerage could have easily avoided this problem if the lawsuit had been reported to the E&O insurance carrier immediately. And, given the favorable evidence in the transaction file, the claim may have been voluntarily dismissed once the buyers' attorney was presented with the irrefutable evidence.
In order to preserve this evidence, it's extremely important to not destroy your file following a closing so an effective defense can be asserted on your behalf. The transaction file should include the date and time of all meetings or phone conversations and a list of all participants emails. Keep a record of all verified information, contracts, agency disclosures, sellers' disclosures, and closing documents with the appropriate signatures.
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.