Lawsuits against agents and brokers are on the rise
Agents worry about homes showing well or deals falling through — should they also worry about getting sued? Unfortunately, it happens more than you may think.
- Between 2021 and 2022, lawsuits filed against real estate professionals were up 9%.
- Liability insurance may cover claims, but premiums will likely go up, and dealing with a suit saps time and energy.
- More training and a handful of proactive measures could help agents and brokers avoid legal woes.
More than 40 million lawsuits are filed every year in the United States, and a growing number of those actions are against agents and brokers. According to Victor Insurance Managers, a global insurance underwriter, lawsuits against real estate professionals increased 9% between 2021 and 2022.
"It's real," says Matt Alegi who heads the real estate law department at Shulman Rogers, a law firm doing business in Washington, D.C., Maryland and Virginia. "I've seen firsthand the increase in my caseload."
Alegi believes the red-hot market of the past two and a half years is at least partially to blame for the jump in litigiousness. Homebuyers found themselves being outbid multiple times. They knew they had to move fast or they'd lose out again — so a lot of buyers skipped getting inspections.
"People are already thinking they overpaid for their house and then the water heater breaks or they start renovating the basement and they find mold," he says. "They're having buyers' remorse. They're upset and they want someone to pay."
In Alegi's opinion, many of these lawsuits could be avoided if buyers had gotten inspections.
"Agents need to be clear with their clients that not having an inspection contingency is different than not having an inspection," he says. "Inspections don't blow up deals unless there's something really, really wrong."
Rick Rosenblum, vice president of brokerage projects at T3 Sixty, believes more stringent agent training requirements could go a long way toward reducing lawsuits against real estate professionals. (Note: Real Estate News and T3 Sixty share a founder, Stefan Swanepoel.)
"An airline can't hire a pilot unless they have at least 1,500 hours of flight time," he says. "A lawyer trains for three years, a doctor goes to college for eight — more if they specialize. Your real estate agent is in charge of guiding you through your largest purchase, but they only need a high school diploma and training that lasts 80 hours or less."
Many real estate companies and brokerages provide mentoring and continuing education. Many others don't. That can lead to lawsuits alleging wrongdoing such as nondisclosure, negligence or misrepresentation. These lawsuits often trigger payouts through the agent's or broker's errors and omissions insurance or their professional liability insurance policy. The average paid claim, according to Victor Insurance Management, was $39,000 in 2022, a 13% increase over the previous year.
"Some real estate companies aren't on top of these areas as much as they should be. They'd rather pay $100,000 fixing a mess than $10,000 teaching agents to prevent the problem," says Rosenblum, noting that even if insurers make the payout, real estate agents ultimately pay in the form of higher premiums.
To help agents avoid legal trouble, Rosenblum encourages companies and brokerages to start by focusing on these three preventive measures:
Educate their agents
Devise checklists and systems that keep everybody safe
Bring in outside experts to conduct mock audits and reviews
For their own protection, he suggests agents also do a better job documenting interactions with clients.
"If you're speaking of something that could bite you later, you need to document. It can be as simple as an email to the buyer or seller recapping a conversation," he says. "I always tell agents, you can't over-document if you're doing everything right."