Understanding and Avoiding Claims for Fraud

What is the one thing that every agent should have but they hope they’ll never need? It’s their Errors & Omissions insurance (E&O). The E&O providers have compiled a list of the top 10 claims made against real estate agents. And the #1 claim is Fraud. This month’s Article will be the first in a series explaining each of these “Top 10” claims including how they occur, what the consequences are, and how they are avoided.

Fraud is what is called an “intentional tort”, ie: an injury caused to someone intentionally. To prove fraud, a claimant must prove 5 things:
(1) defendant made a false statement of material fact to claimant;
(2) defendant knew the statement was false when made;
(3) defendant made the statement intentionally to induce claimant’s reliance and action;
(4) claimant reasonably relied upon the truth of the statement and did not know of the falsity; and (5) claimant was damaged.
A “material fact” is something that would make a difference in the value of a property. For example, a leaking roof is material, a broken sprinkler head probably is not.

At BPE Law, we handled a case where the seller and agent represented that the home had a new roof with permits and was up to Code. After Buyer purchased and moved in, the roof leaked. Upon investigation, it was discovered that the roof was improperly installed without permits and not to Code. Buyer had no reason to know about this beforehand. Cost of repair was over $200,000 to remove and replace the top of the home and fix related damage. Buyer sued the Seller, Agent, and inspectors for Fraud and other claims. The case ultimately settled shortly before trial.

What is critical for agents is that fraud is an “intentional” bad act. There is no E&O insurance protection for this… and if this is proven, it could be grounds for BRE to revoke the agent’s license. Smart attorneys generally couple fraud claims with other “insured” claims such as “Negligence” which I’ll cover next month. Doing so may bring in the insurance money and allow claims to be settled without any court finding that anyone did anything wrong.

As with all claims, there is a Statute of Limitations on how long an injured party has to bring a claim. In the case of Fraud, the deadline for filing is 3 years from the date that the claimant knew or should have known that they have been injured. As a result of this “Discovery Rule”, a claim could be made long after 3 years from close of escrow. In one case we handled, the Buyer did not discover the defect (square footage) until they went to resell the property six years later. The difference changed this into a short sale causing the buyer credit damage and also proving that the Buyer overpaid for the Property when it was originally purchased. Since he made his original purchase in reliance on the square footage number provided by the Listing Agent, that Agent became a defendant in the lawsuit.

The best way to avoid a claim against you for fraud is to be diligent and honest in your inspections and disclosures. If you learn of a defective condition, you must disclose it to all parties on your TDS statement and on your AVID. If you are pressured by your Seller to not disclose because they fear the affect on their sale, they are inviting you to commit fraud. After the sale, they may be long gone but you, your insurance, and your license will still be here as attractive targets for the Buyer’s lawsuit. If faced with this conflict, you must disclose even if it kills the sale. The alternative could be much more costly and besides, if the Buyer wants the home, the defective condition may be able to be negotiated into the deal.

For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate licensees in dealing with their legal concerns and maximizing their opportunities. If you would like a consultation with us, please call our office at (916) 966-2260. If you have legal questions, give us a call at 916-966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.