Real Estate Downturn Could Impact E&0 as Lawsuits Crop Up

The trouble the real estate market is experience can well extend to the area of professional liability coverage for the real estate industry, with potential lawsuits cropping up. One such case is the married couple in San Diego County who have sued their real estate agency. They maintain that they paid too much for their home. The suit, filed in July of 2006, is still working its way through the California courts. But if it succeeds, industry officials said it could have a significant impact on professional liability coverage. 
 
“Underwriters are reactionary,” said Michael Klaschka, a principal at broker Integro Insurance Brokers, about the potential impact on errors and omissions coverage in real estate. 
 
Alexandra S. Glickman, the California-based managing director and practice leader for broker Arthur J. Gallagher’s worldwide real estate operations, agreed. 
 
“The professional lines are 99.99% litigation-sensitive,” Glickman said. “So what happens to one company or entity, if they start to see a trend, the insurers generally do what they can do to mitigate or at least contain their exposure. Unfortunately, insurance sometimes is a knee-jerk-response industry.” 
 
“If they win, then everybody and their mother will look at the decreasing values of the homes that they bought in the last 18 months and will be saying, 'Clearly, I have been the victim of some great conspiracy,' and they’re going to start suing,” said Glickman. “Then what happens is the cost of E&O goes up and the defense costs go up, and you have yet another cottage industry and lawyers are suing because someone has to be responsible. I’ve been doing this for 25 years, and it just blows my mind when I see things like this.” 
 
Legal claims against real estate professionals are not new, of course. 
 
“Broker misrepresentation forms the majority of actions filed against brokers,” said Clifford Horner, a California attorney who has written extensively about that state’s real estate law. “That issue is not new.” What is new, he said, “is the valuation side of it. This seems to be a new type of lawsuit." 
 
Valuation itself has a long-standing role in litigation involving real estate professionals. 
 
“The broker is not an appraiser and does not have a duty to opine about value,” said Horner. “But once you make certain statements about value -- if you say that nothing’s sold for less than this in the neighborhood for the past six months -- that is actionable if it’s wrong.” 
 
“Leading the purchaser to rely on the fact that the price is going to go up – that’s totally different,” said Ralph Holmen, associate general counsel of the National Association of Realtors. “You can’t do that.” 
 
Promising that a property’s value will increase in the future long has been restricted in coverage, said Klaschka, and a verdict against the real estate agent in the California case could lead to expanding the restriction. 
 
“Future value guarantee is an exclusion in many these policies,” he said. “You could see a modification of that to include any valuation, rather than just the future value exclusion.” 
 
Said Glickman, “You’ll see language tightening, you’ll probably see higher deductibles -- every insurance company has different language in its E&O policy, but it absolutely will point them to a tightening of conditions.” 
 
Even without a new precedent extending the concept of valuation into liability coverage for real estate, the ongoing mortgage crisis and falling real estate values predictably have led to increased litigation, said Holmen. 
 
“We’re definitely seeing more claims on the E&O front because the American way is to blame someone else when something goes south,” Glickman said. As a result, she said, “We are seeing