The Two Times I Worried About Being Pulled Into a Lawsuit

Realtors, like all professionals, are constantly on guard trying to stay out of lawsuits. The sad reality is anyone can be sued by anyone for anything. They might not win the case, but defending a lawsuit is both costly and a time eater even if it's a baseless claim.

Only twice in my long career in both residential and commercial real estate have I been concerned about being brought into a lawsuit. Both times it was the result of a seller not disclosing something they knew about their home.

A Defective Septic System

Many years ago I listed an older home with the old style, drain field septic system. Right after the buyer moved in they started having problems. There was a terrible smell both inside and outside of the home after a rain.

It was immediatly obvious to me this wasn't something that had just happened. The seller had been dealing with this for a long time.

The buyer, who did not have an agent representing them, called me and were very upset. Who wouldn't be? I told him I would talk to the seller. Of course, the seller said he didn't know what they were talking about, but I let him know there's a good chance they were going to be sued for non-disclosure of a material defect. And in my opinion, they would lose.

I then called the septic inspector and asked him how the septic system could have possibly passed when it was so obvious it wasn't working correctly. He didn't have a good answer but knew he had a problem too.

Bottom line, the seller, septic inspector, and I all agreed to pay 1/3 of the cost of a new septic system. I didn't have to make that concession but I also didn't want it to go to litigation. The buyer was happy and nothing more came of it.

The Bad Roof

Roofs are usually inspected during the option period. During the option period (usually 7-10 days), the earnest money is held by the title company. If the buyer and seller can't come to an agreement on how to resolve things like a bad roof, the buyer can terminate the contract and get their earnest money back.

That's how it's supposed to work, but in this case, the seller kept delaying the buyer from inspecting the roof until after the option period had expired. He insisted he had a good roof and kept coming up with one excuse after another to keep the buyer's inspector off the roof.

The option period expired without the roof inspection. When they finally got on the roof, they found out it needed to be replaced. They asked the title company to get their earnest money back and were told the seller wouldn't release it. Now the buyer is extremely upset, and again, who can blame them?

The buyer agent decided to run a CLUE report (Comprehensive Loss Underwriting Exchange) on the home. Any time a claim is filed, or a conversation takes place between the insurance company and a homeowner, it's recorded and public information.

The buyer agent found out the seller had actually filed a claim on the roof but instead of replacing the roof, had put the money into his pocket. That's insurance fraud . If we'd know about that we would never have been working with the seller in the first place. This was definitely going to end up in a lawsuit and we wanted none of it.

We talked to our Errors and Ommissions insurance representative and he told us he sees cases like this all the time. The Realtors have done nothing wrong but don't want to get into litigation. They just cough up what it takes to put it behind them.

Our representative said we could take a stand and fight it out with both our buyer and our seller, who had already lied. Or we could pay our deductible and walk away from it. We took his advice, paid the E and O deductible and moved on.

Errors and Omissions Insurance

E and O insurance should protect you against lawsuits as long as you haven't done anything illegal or fraudulent. It's a "must" for all agents.

Will you ever need to use your E and O insurance? Hopefully not, but if you find yourself in a tough situation, it's nice to have them in your corner.

Large companies like Keller Williams usually take out a small amount on every transaction to cover their Errors and Ommissions policy. Our cost is $50 per transaction at the KW Allen office and it's a nice perk. It could cost a thousand times that amount or more for a smaller independent broker producing at a high level.