Real estate brokers errors & omissions coverage

Rough Notes, Jun 1995 by Clapp, Wallace L Jr

Real estate brokerage is one of the most popular small businesses in the U.S. One reason for this is the ease of entry into the field because of the low cost of starting up and little need for a formal course of preparation to be a real estate agent or sales person other than training to become familiar with the fundamentals in order to pass a state licensing exam.

According to the National Association of Real Estate License Law Officials (NARELLO) more than two million licenses are issued annually to real estate agents and brokers. In some years--when there is a depression or slump in business activity--this figure may be less than 1.5 million. In the mid-1980s there were about 1,800 local affiliates of the National Association of Realtors with a combined membership of 750,000.

Real estate brokers are considered professionals under the law. If such a person is a member of the National Association of Realtors, or the National Association of Real Estate Brokers, he or she is required to abide by a rigid code of ethical behavior.

Real estate brokers are regulated by law in all states and territories, and the District of Columbia. The regulation is governed by a system of licensing. There are two types of licenses available: the broker's license and the real estate salesperson's license. In most states one is required to hold and practice under a sales person's license for a certain minimum time before he or she is allowed to apply for a broker's license.

Although there is no recognized formal course of study or certification needed for entry into the real estate profession, an equivalent of a high school education and some college-level general education is generally required by the state. Overall requirements for state licensing vary by state from a minimum of 24 to 30 clock hours in study of real estate transactions and fundamentals for persons to 300 hours of specialized education for brokers' license applicants. In more recent years there has been a trend to add a requirement for continuing education for all license holders. This requirement is in effect in all but two states.

Similar to most other professions, the real estate brokerage business is covered by a large body of law. This business represents a combination of the principles of the law of principal and agent and the law of contracts. Agency law describes the responsibilities of the brokerage's function as an agent to its customers, while contract law governs much of the business activity of the brokerage firm in drawing up of contracts and agreements between sellers and buyers, etc.

Changing legal atmosphere

The changing legal atmosphere has affected the real estate broker in much the same manner as in other professions today. Our legal system and its interpretations are undergoing a significant change in favor of consumer protection. The old doctrine of caveat emptor--let the buyer beware--is rapidly being eroded. Today buyers have become very sophisticated and aware of their rights, and all levels of government have enacted laws defining just what these rights are and what responsibilities sellers have.

The activities of real estate brokers have been particularly affected by the following changes in laws in these areas:

Disclosure--Under the disclosure duty to the owner, a case in California settled in 1984, Easton v. Strassburger, 152 CA3rd 90, the court found that the agent was responsible for damages to the buyer of real property when he knew the house was built on fill and that erosion and settlement problems were likely to occur.

Effective in January 1987, the state of California enacted a new law that requires sellers of residential property to complete a form called the "Real Estate Transfer Disclosure Statement." Varieties of this statement are now mandatory in at least 19 states.

The form asks the seller to check what features the house has--ranging from burglar alarms to water softeners--and to tell whether these are operational. A second portion of the form addresses defects and malfunctions in major components and systems in the house. The greatest potential for litigation, however, exists in the final section of the form which asks for disclosure of general conditions which may adversely affect the property value, such as noise, drainage, settling, easements, deed restrictions and zoning violations.

This document makes the seller solely responsible for the information provided, but brings in the listing broker who has to declare his or her assessment of the condition of the property. Listing or selling property "as is" does not guarantee that the broker is relieved of responsibility should the broker discover some defects not disclosed.

Environment--The real estate professional can expect customers to become more concerned about pollution. There has been considerable legislation aimed at protecting the consumer from the ill effects of contamination by harmful substances. The Resource Conservation and Recovery Act (RCRA) set up the Environmental Protection Agency (EPA) which has created regulations for the generation, transportation, storage, use, treatment, disposal and cleanup of hazardous substances.