Claims Evaluation – Part I

By Phillip C. Querin

[PCQ Note: This is a two-part series on claims evaluation for real estate companies. These are my opinions alone and are not meant to supersede or replace any company’s policy, which may differ. Nor is it meant to be a substitute for prompt consultation with the company’s own legal counsel for instruction, advice and direction. In all cases, principal brokers are encouraged to thoroughly review potential claims with their own counsel at the earliest possible time. Lastly, this article should not be interpreted as reflecting or establishing a standard of practice.]

Introduction. Litigation and arbitration cannot be avoided forever. They are a fact of life in today’s litigious society and a cost of doing business. This is especially true in those professions where fiduciary relationships are created between the consumer and the service provider. Realtors®, doctors, lawyers, and the clergy, are just a few of the targets for litigation because of the nature of the service they provide. Trust is an essential byproduct of these relationships, and accordingly, liability is high. But this does not mean that the risk inherent in these professions cannot be effectively managed. The purpose of this article is to locate and analyze these risks, discuss how to reduce or avoid them, and develop protocols for dealing with client dissatisfaction before it ripens into an actual claim.

Identifying Risk. Every real estate company of any size should evaluate whether to create a quality assurance committee with the sole mission of determining how best to manage professional risks and handle claims. Here are some issues to consider and questions to ask:

  • Are there agents1 who have had multiple claims filed against them? Are they sufficiently counseled and supervised?
  • Are there some agents whose specialty (e.g. foreclosure properties) invites greater risk?
  • What about short sales and other distressed transactions? Is there in-house training? Are agents permitted to hold themselves out as “specialists” and if so, are they? [PCQ Note: At a time when there are very few attorneys that fully understand this new landscape, it is hard to know what actually constitutes a “specialist.” Perhaps the use of a less superlative term might be appropriate.]
  • Does the agent list bank REO properties? Are they using bank-created addenda? Has the company taken a close look at these documents? Remember, this is still a consumer transaction if the buyers are purchasing the property as a primary residence. While the bank may believe they do not have to disclose known material defects, there is an argument that the agent does.
  • Are agents permitted to develop their own forms or clauses for distressed transactions, especially short sales?
  • Does the company have meetings to address some of the ethical issues we’re now seeing in
  • short sale transactions (such as the representation of buyers making offers on multiple properties with no ability or intent to close on all of them)? Are sellers being made aware of this when the offer comes in?
  • Are listing agents withholding short sale offers from the lender? Are they counseling sellers to reject all offers until the bank has decided on the one currently being considered?
  • Importantly, does the listing agent in the short sale first determine the lender’s policy on submitting multiple offers?
  • Does the agent thoroughly evaluate whether the seller is a good short sale candidate? Do they encourage clients to secure expert outside advice where appropriate?
  • Are agents fully aware of potential tax and promissory note liability to sellers in short sales – especially where the property is not a primary residence? Do they encourage clients to obtain outside professional consultation?
  • Is the agent involved in charging clients separately from the commission for other distressed transaction assistance?
  • Is the agent involved (directly as a principal, or indirectly as a continuing referral source) with any other company, group, or individuals, holding themselves out as “consultants” or other designations, suggesting a superior skill in distressed transactions?
  • Does the company encourage the use of the OREF short sale forms (or a comparable substitute that has been reviewed and approved by the company attorney)?
  • How many agents is the principal broker responsible for supervising? Is the ratio realistic?
  • Are there some agents with other real estate related business, such as home construction, multiple rentals they are self-managing? Are they allowed to list and sell their own properties, or do they list with others in the company?
  • Do agents have non-licensed spouses or significant others engaged in some real estate related business to whom they refer their clients? Is the relationship disclosed?
  • Are all agents encouraged to fully document their professional real estate activities for inclusion in their personal file? How long do they retain these personal files?
  • Are transactional files reviewed for completeness at the conclusion of the transaction before the commission is disbursed to the agent?
  • How many brokers have licensed personal assistants and is someone really supervising them?
  • How extensive is the company’s office policy regarding client complaints? Are agents encouraged to immediately report problems to their principal broker, or are they left to be handled by the individual agent until the last minute?
  • Is agent advertising really supervised? Are agents permitted to use inflated or misleading language regarding their experience and skill – especially in more complicated forms of transaction such as distressed sales? What about advertising condominium expertise? Does the agent truly have the experience, or are they simply trying to drum up business in that area?
  • How does the company deal with dual representation – are single agents allowed to represent both sides of the transaction – and if so, are they supervised any closer than others?
  • Is principal broker review truly a review or merely a rubber stamp?
  • Are the rules of client confidentiality sufficiently defined in written office policy and are the policies actually observed and enforced?
  • Does the company have written office policies that comply with state law and is there principal broker training to assure that each agent is familiar with them?
  • Does the company have an in-depth orientation program to familiarize new agents with all company policy – especially in identifying risk management issues early on?
  • What policies, if any, does the company have regarding allowing its agents to testify in court about “industry standards”?
  • What policies, if any, does the company have in permitting its agents to file complaints against other agents with the Real Estate Agency or local board?
  • Are the principal brokers sufficiently familiar with the company’s E&O coverage to know which activities are covered and which are excluded? If so, are agents permitted to engage in excluded activities inside the company?

These are just a few of the issues that should be addressed at the quality assurance level. A realistic evaluation of them is the best place to start when developing effective risk management guidelines. The next step is to implement corrective action to reduce or eliminate known risks. This requires management from the top down.

Claims Evaluation – Before The Case Is Filed. The most critical component in managing risk is the capacity to evaluate a claim at the earliest possible time. But this first requires that all agents be required to promptly report any potential client problems to their principal broker and that the principal broker be skilled in handling and properly evaluating the complaint. Some principal brokers are better than others when it comes to dealing with unhappy buyers or sellers. This may mean that client complaints be channeled to one or more persons who are adequately skilled in dealing with the problem. Claims management by a principal broker with a tin ear is no management at all.

Here are some tips companies may wish to consider in evaluating and handling claims before they become unmanageable:

  • Immediately call the unhappy customer(s) to let them know you’re reviewing the matter and will get back to them promptly. Then thoroughly debrief the agent(s) about the claim. Is the agent being truthful and complete in their explanation? Is the principal broker willing to ask tough questions of the agent?
  • Become intimately familiar with the entire transaction. Are all transactional documents in order, fully executed and principal broker reviewed? Make sure there are no documents in the agent’s personal file that should be in the transactional file.
  • In most cases the agent being complained about should be instructed to have no further contact with the customer – unless and until the problem has been fully resolved to everyone’s satisfaction. Otherwise, select an appropriate substitute broker or principal broker to continue working with the customer.
  • Are there any aspects of the transaction that create more concern than others? For example, was dual agency involved? If so, was it done in an even-handed manner? Was the agent engaged in any activity involving their personal business? Did the agent have any undisclosed relationships or financial interest in the transaction (besides recovery of a commission)?
  • Is the claim one for which there may be no E&O coverage? What are the reporting requirements to the company? If there is coverage, can the claim be resolved within the deductible limits of the policy? Does it need to be turned over immediately in order to avoid a risk of denial later?
  • Be extremely careful about making written evaluations of claims, since they may be discoverable by the other side if litigation ensues. If the company has legal counsel, consider having all agent and principal broker writings, explanations, evaluations, etc. directed to the attorney, since it is more likely to provide some level of privilege and immunity from review by the other side.
  • After fully investigating the case, every effort should be made to have a face-to-face meeting with the complainant(s). This may mean driving out to see them. A face-to-face meeting at their home sends a message of good faith concern and allows the principal broker to evaluate their demeanor in familiar surroundings. If the customers are a couple, try to have both of them present in order to get both versions at the same time. Take notes or make them immediately after the meeting.
  • In most cases it is not a good idea to have the agent present, since it may hamper the customers’ willingness to make a full and honest disclosure. Moreover, the agent may feel compelled to defend his or her actions which could result in a confrontation.
  • Be timely in meeting with the complainant(s). Delay will be interpreted as avoidance.
  • Be a good listener; don’t argue or make excuses. Be polite. Don’t minimize the complaint, regardless of how small it may seem. Don’t play “devil’s advocate.” Remember, the customers are probably angry and upset. It is important to let them “vent.”
  • Above all, don’t do or say anything that could be construed as an admission by the agent or the company.
  • Be careful about having your legal counsel present at such a meeting: (1) It sends a mixed message to the other side (this claim real is “serious”; or “we need to intimidate the customer”), and (2) It could result in making the lawyer a witness if the customers change their story. This could disqualify the attorney from representation should a lawsuit or arbitration be filed.
  • If the other side wants to bring their attorney, make sure your attorney has set the ground rules for the meeting. For example, if it is agreed in writing that the meeting is to be in the nature of settlement discussions, it will be protected under the Oregon Evidence Code. In this manner what is said in the meeting may not be introduced into court or arbitration. Set parameters on such a meeting and observe them; don’t let it become a shouting match. Either adjourn or terminate the meeting if courtesy is not observed or if threats are made. The goal should be solution oriented and forward looking – i.e. how can we get things back on track?
  • After the matter has been thoroughly reviewed and the principal broker has assembled all of the facts, the matter should be re-reviewed in-house. The more experienced principal brokers involved the better – group evaluation may draw differing points of view about the severity of the claim and possible legal exposure. This may be the time for legal counsel evaluation.

Conclusion: As noted above, claims are an inherent part of the business, especially where fiduciary duties are involved. But good people skills, courtesy, and a willingness to listen, will go a long way in keeping potential claims from becoming real claims.


1I acknowledge that use of the word “agent” may, be regarded by some as passe’ or inappropriate. However, now that principal brokers do not need to supervise to earn the title, there needs – in my opinion – to be some way to distinguish between the supervisors and the supervised. “Single licensing” appears to in name only. (I respectfully decline to use the “supervising” vs. “non-supervising” principal broker distinction, at least until the licensing statutes do.) Since generically, all licensees are actually “agents” in the principal-agent sense, I have elected to use terminology that most readers, including non-licensees, will understand. PCQ