As a matter of (very) prudent practice to limit personal liability, active real estate brokers and agents are encouraged to purchase negligence insurance, known as errors and omissions insurance (E&O insurance). With the payment of a premium, E&O insurance protects you from the cost of defending against a negligence claim made by a client or others.
Claims against brokers and their agents for tortious conduct of all sorts arise out of listings or sales transactions solicited and negotiated by you or your agents. Thus, coverage is needed to defend and pay these claims.
Claims presented to E&O insurance carriers often involve:
- alleged negligence;
- professional negligence;
- negligent misrepresentations; and
- breaches of fiduciary duty by real estate licensees.
When you carry E&O coverage, the insurance company defends claims and pays settlements or judgments against you up to the limits of liability stated in the policy.
E&O insurance premiums are somewhat costly. To make premiums more affordable, E&O insurance carriers offer discounts on their premiums and deductible amounts when risk mitigation measures are taken. These measures include the use of “industry-standard” agreements and disclosure forms, in addition to regular risk management training for licensees.
Many real estate professionals have been misled to believe “standard” forms are those published by trade unions such as the California Association of Realtors (CAR).
However, a standard form is a document containing boilerplate provisions conforming to:
- local, state and federal laws and regulations; and
- the general practice for the real estate industry.
A reader recently questioned how the use of first tuesday forms impacts their ability to qualify for E&O insurance discounts requiring the use of “standard” forms. I contacted a couple of prevalent E&O insurance carriers for their take on the subject.
These E&O insurance carriers confirmed that the term “standard” form does not refer to any particular publisher’s forms. A broker qualifies for discounted E&O rates simply by using forms and disclosures with boilerplate provisions based on laws and regulations – exactly what first tuesday forms provide.
The discount offered by E&O insurance carriers encourages licensees to avoid creating their own provisions, agreements and disclosure forms. The use of “standard” is a poor word choice, but it doesn’t indicate the insurance carriers endorse one publisher’s forms to the exclusion of all others’ forms.
The only party who has any say over the forms a licensee uses is their employing broker (and every once in awhile, a wayward lender.)
Still, the myth persists among licensees that CAR forms are the only forms approved for use by the California Bureau of Real Estate (CalBRE). In reality, forms are not approved by CalBRE, the State Bar (although they had a slip of the brain and tried it in the ‘80s before we called them on it), the trade unions or E&O insurance carriers. To do so is an illegal combination and an anti-competitive activity in violation of anti-trust laws.
Each publisher is legally responsible for the compliance of their own forms to law. The content of forms is:
- mandated by statute or CalBRE, such as;
- the Agency Law Disclosure – Disclosure Regarding Real Estate Agency Relationships [See first tuesday Form 305];
- the Condition of Property Disclosure – Transfer Disclosure Statement (TDS) [See first tuesday Form 304];
- the Natural Hazard Disclosure Statement [See first tuesday Form 314];
- the Good Faith Estimate (HUD-GFE) [See first tuesday Form 204-5]; and
- the Truth-In-Lending Disclosure [See first tuesday Form 221]; or
- generic, such as;
Each form mandated for use by the state has the same content, no matter who publishes it.
To address the concern of improved risk management, first tuesday forms are deliberately engineered simple — a feat that takes extraordinary effort and skill to accomplish. The lengthy and obtuse language which clutters other forms is eliminated in first tuesday forms, replaced with “plain language” provisions worded to be concise, complete and easily understood. [See first tuesday Forms-on-CD]
first tuesday forms are drafted to provide maximum loss reduction protection for brokers and their agents. To meet this goal and as a matter of good public policy, our forms do not contain clauses which increase the risk of litigation or work against the best long-term interests of the buyer, seller and broker. It’s the same intent that drives E&O insurance carriers to offer discounts for the use of “standard” forms.
first tuesday forms deliberately exclude:
- attorney fee provisions, which tend to promote litigation and inhibit resolution;
- time-essence clauses, since future performance (closing) dates are, at best, estimates by the broker and their agents of the time needed to close, and are too often improperly used by sellers in rising markets to cancel the transaction before the buyer or broker can reasonably comply with the terms of the purchase agreement;
- liquidated damages provisions, since they create wrongful expectations of windfall profits for sellers and are nearly always unenforceable forfeitures of the buyer’s money; and
- arbitration provisions, since arbitration decisions are final and unappealable, without any judicial oversight to assure the arbitrator’s award will be fair or correct.
Your sales agents are required to use the forms mandated by you, as their employer. Don’t perpetuate the myth that union forms are the only forms out there. Use first tuesday forms, and make sure your agreements, purchase and listing packages are the best out there.