Use a Lifeline: Smaller companies need to manage risk in an uncertain market

October 25, 2012 

Mired in a difficult market, real estate agents, brokers, and property managers are encountering adversarial situations and hostile clients. When deals don’t work out as hoped with San Diego investment real estate, buyers and sellers look for someone to blame. Increasingly, they are finding fault with their real estate professionals and slapping them with lawsuits.

When that happens, real estate professionals need the protection of a comprehensive insurance program. While most large firms require their agents, brokers, and managers to have insurance, many independents and small-agency personnel are uninsured. That’s a particular problem, because small operators are especially vulnerable to the financial and professional repercussions of litigation. 

The troubled San Diego investment real estate market isn’t expected to improve substantially anytime soon. As a result, there’s a greater likelihood of disputes over property condition disclosures and commission payments, according to the National Association of Realtors’ 2011 Legal Scan, a biennial study of legal issues facing real estate professionals. 

The huge amount of real estate-owned property in the hands of banks and other lenders is also a potential stumbling block. Nearly 60 percent of real estate professionals surveyed say they believe REO-related disputes will increase over the next two years, and 76 percent believe it will be among the top three issues they will face, the survey found. The study polled real estate agents, brokers, attorneys, and educators. 

Problem Issues 

Clearly, San Diego investment real estate professionals at all sizes and types of businesses face multiple risks. Among the scenarios:   

Defects. After closing a sale, a new property owner finds defects with the property. The new owner sues the real estate agent for the diminished value of the property, alleging the agent did not disclose the defects.  

Negligence. Property values continue to fluctuate, which leads to cases of “buyer’s remorse.” Following the close of the sale, a client may blame the agent for what the client perceives as overpayment for the property. The agent is then faced with claims of supposed negligence in researching the property’s value. 

Unlawful Discrimination. If an apartment building manager denies a potential tenant a lease, the manager could face a claim that the applicant was denied a lease because of race, religion, or gender. 

Bodily Injury. If a potential buyer or visitor falls and is injured in the agent’s office or property, a real estate agent could face a bodily injury lawsuit. 

Agents, brokers, and property managers need to protect themselves with insurance, which can be difficult, particularly now, when budgets are limited. However, some insurers are offering affordable policies that cover the special risks real estate professionals face. 

Even if a covered claim is groundless, as many are, the insurer will still provide a defense and other services. If the agent, broker, or property manager is found to be at fault for the claim, the insurer will pay damages, up to the limits of the policy. 

Liability Issues 

Professional liability and general liability are the foundation of any insurance program for real estate professionals. Professional liability, often called errors and omissions, covers risks incurred in carrying out one’s professional duties. Risks can include giving incorrect advice, omitting or failing to disclose material information, or failing to deliver services in some way. 

Depending on the specific policy and insurer, coverage may include alleged or actual negligence; defense costs; personal injury, such as libel or slander; and claims arising from services done by employees, temporary staff, and independent contractors. Some policies cover claims arising from services provided in the past. 

General liability insurance, also called commercial general liability insurance, covers third-party claims for bodily injury, associated medical costs, and damage to someone else’s property. 

Real estate professionals in San Diego investment real estate continue to face a challenging market and demanding clients. If a claim is filed against them, and they don’t have insurance, even before the claim is decided, they will have to devote scarce time and limited resources to managing and defending against the claim. Often, the real estate professional will have to hire an attorney. If they lose the claim, the settlement or judgment could land a substantial financial blow, putting them out of business or even into bankruptcy.  

While cutting back or foregoing insurance altogether can seem like a reasonable way to cope with the economics of today’s real estate market, the bottom line is that lawsuits are an ever-present threat. Just one claim, even if it’s baseless, could wipe out years of hard work and decimate an agent, broker, or property manager’s finances. With the high stakes involved, insurance is not an option. It’s a necessity. 

Source: CCIM 

DISCLAIMER: This blog has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger and does not necessarily represent the opinion of Pacific Coast Commercial.