It is a significant sign of the times: our nation has become, according to many scholars, the most litigious and law-encumbered society in history. The law reviews are full of articles lamenting how dockets are flooded with frivolous, non-criminal lawsuits which are bogging down our American justice system, once the envy of the world.

Agency owners, managers, and salespeople must take a cold hard look around and reassess their vulnerabilities in light of our mushrooming everyone vs. everyone legal atmosphere. Fifty percent of couples now sue one another for divorce. Children sue their parents. The U.S. medical profession, also the envy of the world, has been ravaged by the soaring cost of malpractice insurance. In today's environment, even travel agents need Errors & Omissions insurance, because petulant tourists are returning home and successfully suing their travel agents for "negligence" and "emotional distress" over canceled flights and hotel reservation mix-ups. The Wall Street Journal recently reported that Berkeley Agency Limited, the largest provider of liability insurance for the travel industry in the United States, notes the number of claims it settles involving litigation has increased 25 percent over five years.

Is the Real Estate Industry Next?

Could the real estate industry be the next victim of wanton abuse of our legal system? In some cases, it already is.

In today's litigious environment, wise real estate practitioners must never lose sight of the fact that they are licensed facilitators of what is fundamentally a legal transaction: the transfer of property ownership from party to party. Agents must make every effort to fulfill their fiduciary obligations to their clients. As an authorized representative of a bigger entity, they have the same obligations to their employer, since their misdeeds could make their company liable for damages. As highly competitive business people, they must be poised in a proactive stance to protect themselves in an unforgiving marketplace.

So why do some real estate professionals continue to work in a Pollyanna world and refuse to accept the possibility that their clients might sue them? Many lull themselves into a false sense of security because of the emotional bonds they forge with clients as, together, they share the quest for that perfect "dream home." Observes 20-year real estate professional Marcy Caffrey of Century 21/Signature Realty in Richmond, Virginia, "For many brokers, this direct contact and sense of personal gratification is what attracted them to our profession in the first place." Caffrey adds, "For most of us, I believe it is still the human aspect and not the money that motivates us. It truly hurts my feelings when people assume I do what I do strictly for profit. It is the wonderful people you meet in this work who make the glory days worth the dog days."

It is easy to forget that, because home buying is such a highly emotional experience, euphoric feelings based on positive circumstances go sour. One prime example is when the new occupants of a previously owned home suddenly encounter breakdowns in the major mechanical systems and appliances. When this occurs, some occupants instantly go into an all-encompassing "sue" mode against all involved parties: the agent, the broker and the sellers.

It's possible to hear such horror stories from colleagues and think," That would never happen to me. I don't deal with vindictive people like that," or "I definitely need to check into this risk management thing ASAP, but right now I'm late for a closing."

Good News

The good news is that the steps required to assume a precautionary posture are, for the most part, simple and inexpensive. *For starters, all real estate professionals should make certain they are protected from liability through their company's Errors & Omissions insurance. E&O coverage must be considered standard operating procedure for anyone in the real estate industry, given today's climate. *Real estate agents should recommend both a home inspection and a home warranty for every sale as part of their own personal risk-management strategy.

According to Jon Coile, vice president of Champion Realty, Inc. of Severna Park, Maryland, "Our offering of a home warranty spared us from a lawsuit. Some sellers experienced heating system problems during the first month of the listing period and threatened to take us to court. We had the documentation proving we had offered a home warranty which they had refused. you must remember: these were our clients. There were no buyers even involved."

Coile emphatically stresses, "It is now mandatory for all of our salespeople to offer a home warranty in every listing presentation. Should a client pass on that package option, fine. They simply sign a waiver. This "decline and sign" policy is now a necessary part of the onerous paperwork which occupies so much of our time and energy, but we consider it standard and prudent business practice."

In other words, a home warranty will always serve a primary risk management role, even when it is refused by the client.

Burden of Proof

Unfortunately, the burden of proof is not equally shared among all agents. In many states, recently updated seller disclosure laws are often vague in terms of how "good faith efforts" and "reasonable documentation" should be defined when presenting a case before a judge. In response to consumer and consumer activist pressures, many states are enacting stricter seller disclosure laws, with California often cited by industry leaders as one of the most stringent.

In some areas, environmental concerns are sensitive issues for real estate professionals. Many disclosure obligations require advising consumers of the right to test and/or testing for the presence of hazards such as lead paint and radon gas emissions.

At one point several years ago, electromagnetic fields (EMRs) from nearby power lines became a legal hot potato. Several state high courts have recently ruled against the validity of such claims, and last year, the National Research Council of The National Academy of Sciences reported there was no conclusive evidence of a link between EMRs and health problems such as cancer. Imagine if clear cause-and-effect proof had been found, how many homeowners would now be suing their power company and their Realtor? The potential for such unpredictable liabilities is a prime motivation in acquiring a comprehensive risk-management arsenal.

How Home Warranties Work

A professional home inspection and home warranty help protect the agent, the agency, and the seller and will help minimize the possibility of lawsuits should unforeseen malfunctions arise within a home's mechanical systems and major built-in appliances during the first year. Many real estate companies are embracing home warranties as a sales tool to attract prospective buyers to pre-owned homes.

There are several possible scenarios for marketing success, depending on the agency's geographic area and its willingness to be competitive. Normally the seller will pay for the warranty as a point of closing. Sometimes the seller and buyer agree to split the cost of the warranty. In some areas, the real estate company may include a warranty in the package as an incentive to seal the deal. And in some cases, the agent pays for the warranty out of his or her commission as a good-faith gesture and as a part of their risk management strategy.

Freedom to Sue

"Every agency, whether part of a national franchise network or a family-run, mom-and-pop operation, needs to adopt a defensive, risk management approach," suggests Richard S. McNeese, real estate attorney and president of Southern Escrow Title Company of Memphis and Nashville, Tennessee. "Our legal system was designed to provide any plaintiff the right to bring charges against anyone at any time for any reason. You have the freedom to try to base your case on just about any real or imagined injustice the human mind can conceive. The generosity of our system, to some, is a virtue to be admired. To others, it is a weakness to be exploited."

The sad part is," adds McNeese, "most of the time small misconceptions and miscommunications, which could have been easily dealt with at the time of negotiation and closing, snowball into heated accusations of misrepresentation. I tell my broker clients it is their moral duty to cover all bases and leave no loose ends after the sale. If you follow the common sense rules of communication and documentation, chances are you'll never see the inside of a courtroom - except on TV."

Published: September 14, 1998

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Editor's Note: This article reflects the opinions of David J. Crawford only and not necessarily the views of this or any other publication, organization or Website owner.