Sometimes the past is one of the best learning tools around! Use the following Real-Life Errors & Omissions Claim Situation involving disclosure to avoid a similar legal showdown happening to you in your everyday real estate career. And be sure to have a good Real Estate E&O Insurance policy in place to protect you in case you find yourself in the middle of a court battle over failure to disclose.

A real estate agent listed a residential property on behalf of sellers who were involved in ongoing litigation with their neighbors over ownership rights to a driveway that straddled the property line. The neighbor was attempting to prevent the sellers from using the driveway because of the encroachment.

Problem:
In the course of the litigation, the neighbor filed a lis pendens (Latin for “a suit pending”), which provided the sellers with notice that there was a claim on the property. The recording of a lis pendens informs the general public—and particularly anyone interested in buying or financing the property—that there is this potential claim against it.

Mistake:
Because the property was located in a state where a Seller’s Property Disclosure Statement was not required, no written publication as to the property’s legal status was provided to potential buyers. Moreover, the agent learned about the pending litigation from his sellers but misunderstood the ramifications of not disclosing it to those interested in purchasing the property.

Result:
The property went under contract to some unknowing buyers who ultimately decided to cancel the Purchase Agreement just prior to the close of escrow upon discovering the existence of the lis pendens. They subsequently sued the agent, his broker, and his sellers alleging that they misrepresented the property’s legal status and demanded the return of their deposit money, as well as moving & storage expenses, home inspection costs, bank fees, and the lost opportunity of a favorable interest rate, among other damages. The case was settled quickly since it was clear that the court would likely determine that the property’s legal status was material information that the buyers should have been made aware of.

Prevention:
In this situation, the agent should have followed pre-established office procedures and asked for assistance from his broker to learn what the impact of existing litigation would have on the sale of the property.  And regardless of the state’s written disclosure requirements, the agent should have had the sellers provide a document to any potential buyers informing them of the legal dispute with the neighbors. Also, the broker may have prevented the agent and business from being sued if he closely supervised the agent throughout the transactional process.

Do you have a similar story involving disclosure to share with us? Send us your learning experience or just let us know what you think about this one! Just leave a reply below!

If you have any questions about Pearl’s Errors & Omissions Insurance for real estate professionals, give us a call at 800.447.4982—whether you’re looking for a new E&O policy or have questions about your current one. We’d love to hear from you!

You can also visit www.pearlinsurance.com/eo to find out more about our quality Errors & Omissions program, including policy features, risk management tools, and much more.