E&O Risk Manager: Agent Suffers Financial Loss and Disciplinary Action

A Real-Life Situation on the Importance of Discussing Pending Projects

Situation:

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An out-of-state couple inquired about a seasonal cottage in a private beach community that a real estate agent was selling on behalf of her clients. The property was one of about 300 others within the association, each containing its own septic system. Environmental studies however, revealed that numerous system failures over the past 90 years had caused soil contamination throughout the neighborhood, including the boat basin and saltmarsh. When the owners completed the Seller’s Property Condition Disclosure Statement, they correctly indicated that their septic system was operating properly. The couple decided to purchase the property based, in part, on this representation.

Problem:

It was well-known in town that the regional sewer authority planned to expand service into every beach community along the shoreline in order to prevent further contamination and potential public health issues. The agent was fully aware of this; she was not only a veteran agent, but also served as a member of the town council.

Mistake:

While showing the property to the buyers, the agent assumed they knew about the pending project because they had rented cottages in town for many years.

Result:

Within days of the closing, the town and beach association entered into an agreement allowing the sewer authority to go forward with the five-year project. The couple enjoyed a few weekends at their new beach house with friends and family before the end of the season, but in late September, the property owners received warning of upcoming charges: a connection fee of $100 per linear foot, and an annual usage fee of $750.

The unhappy purchasers sued the real estate agent and seller, alleging they failed to disclose the proposed project. The sellers however, claimed they were unaware of the proposed project and argued the agent should have better protected them by recommending disclosure on the property condition statement. The claim was ultimately resolved, with the agent’s broker paying the lion’s share of the settlement.

Prevention:

In addition to the financial loss, the agent’s incorrect assumption resulted in disciplinary action by the local real estate board. To some extent, the agent was fortunate in the outcome, because a jury could have awarded the buyers punitive damages if they believed she intentionally withheld information about the project. This situation is a prime example of how an agent could avert a claim by discussing a pending project with sellers, and recommending full written disclosure with a signed acknowledgment by the buyers.

The recommendations in this article may differ from state and local practices. Greenwich Insurance Company and Indian Harbor Insurance Company Coverage is not available in all jurisdictions.

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