BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
When a claim arises against an agent, it is important to work toward an early resolution of that claim for many reasons. Many times, agents are resistant to a settlement or resolution, because they do not believe they did anything wrong, and the matter should be vigorously defended or even litigated. This tip addresses the reasons for considering early resolution.
SCENARIO NO. 1: I am a real estate agent. I represented the buyer in a transaction. After the close of escrow, the buyer claimed that the seller did not disclose the extent of the roofing repairs. The buyer alleged a claim against me that I did not properly recommend a roof inspection given that the seller disclosed repairs. My broker wants to settle the case to avoid litigation. I do not think I did anything wrong, and I do not want to settle. I do not understand why my broker is insisting on settling. Please explain to me the reasons why I should settle.
RESPONSE: There are many reasons, both economic and non-economic, for settling a claim before it morphs into a lawsuit. Primarily, if a reasonable settlement amount can be reached, depending on the amount of claim and preliminary evaluation of liability and damages, it is almost certain that the settlement will be less than the cost of litigating a case. Therefore, if there is a reasonable opportunity to settle the case at the outset and avoid litigation, it is preferable. Further, the defense of the case is time consuming, which distracts from an agent’s business and almost always negatively impacts on the agent’s productivity. If an agent is sued, it takes a mental and emotional toll on that agent. Therefore, a reasonable settlement is almost always preferred.
DISCUSSION: If an agent receives notice of a claim or a potential claim, the agent must promptly speak with their manager regarding handling. Broker Risk Management (“BRM”) is available to consult with the manager or broker regarding the handling of that claim. The goal should always be to attempt to resolve a case as early as possible for a reasonable settlement amount. A reasonable settlement amount is determined by an initial review of liability and damages. Sometimes, if a small settlement can be reached, i.e., $1,000 to $3,500, or perhaps up to $5,000, depending on the sales price of the property, the case can be resolved for “nuisance value” irrespective of liability and damages.
If a claim cannot be immediately resolved, the errors and omissions insurance company should be put on notice of the claim. Many insurance companies will allow us to notify the insurance company of the potential claim and take no action while we work toward resolution.
It is important to timely and properly notify insurance companies of claims to avoid the insurance company later arguing that there is no coverage because it did not receive timely notice or that the broker’s actions prejudiced the insurance company. If the insurance company is notified of a claim, but the claim is resolved within the retention (deductible), or the insurance company is not required to make any payments, there should be no or little impact on future renewal costs.
If a claim is resolved early, a settlement agreement can be prepared with the release of liability. Depending on the amount of the settlement, the scope of the release can be limited or broad. A limited release generally relates to a specific issue, whereas a broad release can relate to the entire property including known and unknown future potential claims. BRM can assist in preparing these settlement agreements and releases.
If an agent is requested to attend mediation, or if transaction documents are requested by an attorney for a party, it is likely that a claim is being, or is about to be, asserted. The agent should promptly consult with their manager who can consult with BRM as to whether the agent and/or brokerage should participate in mediation, or deliver the requested documents.
While sometimes we may not opt to participate in mediation (e.g., cases involving deposit disputes between buyers and sellers), if a claim has been asserted against an agent it is generally recommended that the broker and agent participate in mediation, so long as all pertinent parties participate (buyer, seller, and agents on both sides of the transaction). The value of a mediation is that it gives the parties an opportunity to explore early settlement and gives the attorneys an opportunity to evaluate and learn more about the cases. Even if a case does not settle at the mediation, many times the mediation can still be useful as a mechanism for organizing the handling of future claims such as organizing the exchange of documents, scheduling a site inspection, etc., thus limiting future attorney’s fees. Please note that agents should never attend mediation or any legal hearing or proceeding without counsel.
If a case does not resolve, the claimant, often a buyer, must make the election as to whether to abandon the claim or file a lawsuit. If a lawsuit is filed, there will be various future opportunities to explore settlement, but likely, the attorney’s fees spent before the next opportunity to settle could be in the range to upwards of $25,000. Further, if litigation is filed, the agent will need to participate with the attorney representing the agent in preparing a defense. For example, the agent will need to provide documents, information, review discovery responses, potentially attend a deposition, and attend any future mediation. Sometimes courts also require that agents attend hearings such as settlement conferences. Such participation can be extremely time-consuming – all of which distracts from an agent’s business and productivity. Just as important, litigation can be extremely stressful and emotionally taxing for agents. Many times, agents lose sleep and they worry about the impact of the litigation on their career and reputation.
If the retention (deductible) is spent, and the insurance company is required to pay attorney’s fees, costs, or a judgment, the amount will be reported on the brokerage’s loss runs by the insurance company, which are used by the insurance company and future insurance companies to evaluate the cost of insurance in the future. Therefore, if significant amounts are spent in defending a case, it will impact the cost of insurance in the future.
For all of these reasons, agents and brokers should be open to finding ways to resolve claims as early as possible for the least cost.
PRACTICE TIPS:
- If an agent receives notice of a claim, the agent must immediately report the claim to their manager.
- An evaluation needs to be made as to whether the claim should be reported to the insurance company. BRM can assist in this evaluation and, where appropriate, report claims on its clients’ behalf.
- If an agent is requested to participate in mediation, that agent should immediately consult with their manager and an evaluation should be undertaken as to whether the agent should participate. Agents should never participate in mediation without being represented by counsel.
- If there is an opportunity to resolve a case as early as possible, agents should embrace that opportunity to avoid the economic and non-economic costs of handling claims and expensive litigation.
- Under the law and most contracts, brokers have the right to settle claims over the objections of the agent. Nevertheless, resolution with all parties in agreement is preferable.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION. Do not forward to sellers, buyers or third parties. This Weekly Practice Tip is 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. 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.