BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
In October 2023, Broker Risk Management (“BRM”) hosted a webinar with Josh Sharfman, California Association of Realtors’ Chief Technology Officer, to discuss the use and risks of artificial intelligence (“AI”) in real estate agents’ practices. At the time, BRM posted a tip addressing those risks. Since that time, there have been new developments in technology, which agents are beginning to use in their practices, particularly in their marketing efforts. Unfortunately, that AI, unless used properly, can create unforeseen legal risks to agents and brokers.
SCENARIO NO. 1: I am a listing agent. I have found AI that will call buyers after an open house and mimic my voice to follow up. This will save me a significant amount of time and effort. What are the risks associated with using this AI?
RESPONSE: We have viewed demonstrations of this AI. On its face, it appears to be effective and efficient. However, if the AI answers a buyer’s question incorrectly and makes any type of misrepresentation, you will be held liable for that misrepresentation. Also, any statements made by AI must be language that was drafted by the listing agent, and not a summary or other aggregation of that agent’s actual writings. Another recent development is that errors and omissions insurance companies will not provide coverage for errors by bots, as bots are not insured under these policies. An insured is generally defined in errors and omissions policies, as the broker and the agents. Therefore, not only could you be held liable, but you may not have any available insurance.
SCENARIO NO. 2: I am a listing agent. I did not have any listings, but I had a prepaid advertising commitment in local media. Because I did not have any inventory to market, I created a new fictional home using AI and marketed it. My competitors filed a claim before the local Association. The Association found me guilty of violating National Association of Realtors’ Code of Ethics and fined me $1,000. In addition, the insurance company denied coverage, claiming it was an intentional act, which are not covered. Do you agree with this finding?
RESPONSE: Yes. You created a non-existing home using AI and marketed it as if it were an actual property for sale. That is false advertising. You are lucky that your competitors did not report you to the California Department of Real Estate (“DRE”), which would likely have taken action against you for misrepresenting facts to the public. If you are going to create a mythical home using AI, you need to make that disclosure as part of your advertisement. With regard to insurance, insurance companies cannot under the law insure anyone for intentional acts. The intentional creation of a home and publicly marketing is an intentional act.
SCENARIO NO. 3: I am listing a home which is in disrepair. The sellers do not have the money to properly prepare it for market. Therefore, it is a “fixer upper.” I am using AI to create marketing showing how the property could look when it is finished. I am also using AI to show how the property would look staged. Is there any risk in doing this?
RESPONSE: Potentially, there is risk. Please ensure that your creations through AI and all marketing specifically provide the following disclaimer: “This image has been altered and does not portray the property as it exists today. Certain elements may have been deleted, color, brightness and contrast have been edited.” It is important to ensure that the public knows that this is a creation and not a representation of the actual condition.
DISCUSSION: AI can be an extremely useful and important tool if used correctly. However, it is a developing area and ripe for legal claims and insurance coverage issues.
Agents using AI in marketing need to be cautious that their representations to the public are accurate. If agents are using AI, that needs to be disclosed as part of the advertisement. It is recommended that the above disclaimer be utilized.
Errors and omissions insurance companies are attempting to address coverage issues as they arise relating to AI. At this point, there is no definitive policy in the market addressing AI. However, there are two areas where insurance companies have denied coverage arising out of AI:
- If agents intentionally misrepresent properties by using AI, insurance companies will deny coverage claiming it is an intentional act; and
- If the alleged misrepresentation was made by a bot or AI app, those are not considered insureds under errors and omissions insurance policies. Therefore, there will be no coverage.
Another area that real estate agents and brokers are attempting to develop or use AI is in file reviews. At this point, the law has not progressed to a point where AI can replace a human in reviewing a transaction file to ensure a client is properly protected. While it is possible to use AI, to confirm that certain documents are in the file, AI cannot review disclosures such as seller’s comments or emails to determine whether those items are material or immaterial. AI also cannot determine whether a party is properly represented. At this point, using AI to replace file reviewers is an extremely risky practice and likely not condoned by the DRE, which requires that an actual licensee comply with broker supervision requirements of DRE regulations.
PRACTICE TIPS:
- Agents should advise their managers if they are using AI in any part of their real estate practice to ensure the manager or brokerage has vetted the AI output and that it meets the brokerage’s standards.
- Agents using AI in advertising need to ensure that the advertising is accurate and that they properly use a disclaimer if creating demonstrations of how a property could look.
- AI should not be used by brokerages to replace file reviewers as the DRE has not yet approved such programs.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.