Recently the National Association of Realtors® (NAR) released the 2005 Legal Scan. This is a report prepared by Legal Research Center, Inc. The research project was first commissioned by NAR in 1996, and then every two years after that, to systematically collect information on over 90 issues involving the legal liability of real estate brokers, agents, and managers. Says Laurie Janik, NAR's general counsel, "… Legal Scan is our crystal ball to a better understanding of the key legal issues and trends affecting the U.S. real estate marketplace … [It] provides NAR members with a wealth of trend information on agent/broker liability … helping them better understand -- and plan for -- the legal pitfalls and compliance requirements they will likely encounter."
This year's report contains good news, bad news, and, as always, interesting news. Most brokers and agents, I suspect, would be somewhat surprised to learn in what areas of practice the most cases arise. No, disclosure issues do not rank number one, though they do come in second as the most prevalent cause of action. Ranked first, at 46 percent of cases filed, is the general area of property management. To be sure, this breaks down into more specific sub-areas (condition of the property, events that happen on the property, fair housing issues, debt collection, etc.); but, overall, property management is far and away the leading area of real estate related litigation.
Property disclosure issues come in second, at 13 percent of cases filed, and close behind at 11 percent are cases related to agency. The latter also breaks down into more specific sub-areas such as undisclosed dual agency and breach of fiduciary duty.
The proportion of cases in which real estate professionals were found to be liable is smaller than some might have thought. That is, in 72 percent of cases in which liability was determined, the brokers or agents were not held liable. On the other hand, you could read this as saying an agent has about a one in four chance of being found liable; and those odds may not be terribly comforting.
The study examined an admittedly nonrepresentative sample of cases in which damages were awarded. Of the approximately 10 percent of all cases, it may not be surprising that California had more than its fair share. California accounted for 13 percent of the cases in which damages were awarded; but it was far outdone by New York which claimed 21 percent.
Just as it might be surprising that property management issues accounted for the major portion of lawsuits, it might also be surprising that property management cases were those with the highest damage awards. Indeed, all of the top ten damage awards cases were in the property management arena, ranging from #10 at $1,570,502 to #1 at $12,842,054.
Some of the surprise goes away when you realize that these were personal injury and death cases, generally brought on by some condition with respect to the property (faulty wiring, gas explosions, etc.) These things happen in owner-occupied homes too; but frequently the injured party may have no one to sue. There, the injured party may likely be the person who caused the condition.
Finally, we note -- and no surprise here -- that damage awards are going up. In the 2003 Legal Scan it was reported that 21 percent of cases in which damages were awarded were in the range of $500,000 and up. In the 2005 report, that price range represented 31 percent of cases.
It is the job of brokers and risk managers to formulate the specific lessons to be learned from the 2005 Legal Scan. One general lesson emerges for sure: Be careful out there.
