Referral risks
As trusted advisors during the home buying and selling process, real estate professionals are often asked by clients to provide referrals for various vendors. These may include but are not limited to title and settlement companies, lenders, home inspectors, pest removal providers, contractors, painters, landscapers, interior designers, and home warranty providers. What happens, however, when the recommended vendor leaves your client feeling dissatisfied, or worse, causes damage to the client’s home or neighboring properties? Can you be held liable?
Claim scenario
This was the question in LM Ins. Corp. v. I Do Albuquerque, 527 P.3d 685 (N.M. App. 2022), which held a real estate agent and his brokerage liable for over $143,000 in damages after the roofer they recommended caused a fire that destroyed the client’s home.
The issue began when the homeowners were unable to find a roofer to address “ponding and poor drainage” issues identified during a home inspection. Their listing agent assured them that he “would take care of it” and subsequently presented the homeowners with two vendors for consideration. The homeowners ultimately selected the lower cost vendor based on their agent’s apparent familiarity with the roofer and assurances that he could vouch for the roofer since other agents in the brokerage had used the roofer’s services without incident. Unfortunately, early one morning as the roofer was working, he caused a fire that completely destroyed the home. It was later discovered that the roofer was neither licensed nor insured. The agent had not verified the qualifications of the roofer and simply relied on the recommendations of another agent at the brokerage.
At trial, the homeowners alleged the agent and brokerage (defendants) were negligent for failing to (1) verify that the roofer was licensed and insured, and (2) relay to the homeowners that he was unaware of the qualifications or insured status of the roofer. In response, the defendants claimed they had no obligation to verify the vendor’s qualifications or insured status for the following reasons:
- The defendants had not entered into an agency relationship with the homeowners. Under the terms of the listing agreement, the defendants’ role was “transaction broker,” thus they had no agency relationship nor owed fiduciary duties to the client.
- The listing agreement placed the duty to investigate contractors on the homeowners. More specifically it read, “If Broker recommends a builder…or any other person or entity to Seller for any purpose, such recommendation shall be independently investigated and evaluated by the Seller…”
The court did not find the defendants’ arguments to be persuasive and concluded:
- Even without the existence of an agency relationship, transaction brokers are licensees and subject to the requirements of the state’s real estate commission, which include a duty to exercise reasonable care. “Reasonable care” under these circumstances required the defendants to recommend qualified, licensed vendors; or, if the defendants were unaware of the vendor’s licensing status, to disclose this lack of knowledge.
- Though the listing agreement created an obligation on the homeowners to independently investigate and evaluate recommended vendors, it was silent as to the defendants’ duties and, therefore, did not alter or limit the defendants’ duty of reasonable care that obligated the defendants’ to make sure only licensed and insured contractors were recommended, or to appropriately notify the client of these limitations.
For these reasons, though the homeowners were partly at fault for hiring a roofer without inquiring whether the professional was licensed and insured, the court concluded that the agent’s recommendation and procurement of the roofer without determining whether such professional was licensed and insured was negligent and the brokerage’s failure to train the agent to only recommend licensed and insure contractors was also negligent.
Accordingly, the trial court apportioned liability as follows:
- Roofer was 50% at fault for causing the fire.
- Homeowners were 5% at fault for retaining the roofer without confirming the roofer was licensed and insured.
- Agent and brokerage were 45% at fault: the agent for recommending the roofer without confirming that the roofer was licensed and insured and the brokerage for failing to train the agent to recommend only licensed and insured contractors.
This decision was upheld by the appellate court, leaving the agent and brokerage liable for over $143,000 in damages.
Other claims scenarios
Referrals may seem like a simple favor, however, they can expose you to liability for the vendor’s mistakes or negligence and pose serious risks for your business and brokerage. This is a common and often overlooked hazard for many real estate professionals. Examples of claims involving referrals include a real estate professional’s recommendation of the following:
- A home inspector who inadvertently flooded a property by leaving water running in the primary bathroom, and another who triggered an electrical fire by leaving the oven on, causing the oven’s junction box to overheat.
- A cleaning service that accidentally flooded a vacant rental property by leaving an upstairs sliding door open during a rainstorm, with the damage going undiscovered for weeks.
- A trash removal service that unintentionally started a fire that damaged several neighboring properties by burning trash negligently on the premises.
Managing risks
If a client asks you for a referral or recommendation, here are some things to consider:
- Establish clear policies and expectations. Brokers should communicate to their agents what the minimum requirements are for vetting vendors before making recommendations and provide training on how to manage the risks associated with making referrals.
- Seek contractual protection. Include language in your listing and buyer representation agreements to limit your liability appropriately. This language should make clear that the client has the obligation to independently investigate and evaluate recommended vendors. Consult with legal counsel to ensure the drafted language is enforceable.
- Vet vendors. Agents should properly vet vendors’ credentials and reputations before referring them to clients. This process should include verifying that the vendor is properly licensed and insured and has the appropriate qualifications and reputation in the industry. An online search of reviews from past clients and sites like Better Business Bureau can also help you identify any complaints that may have been lodged against the vendor, including how issues were resolved.
- Document disclosures to clients. Allow the client to select the vendor. Make clear that your recommendations are a starting point in the client’s search for qualified vendors and document appropriate disclosures in writing. Even something as simple as a follow-up email or text can help to establish the client’s awareness of the limitations of your recommendations and protect you from costly consequences.
- Monitor vendor performance. Should a client retain a recommended vendor, consider following up with the client to monitor the vendor’s performance. Feedback on response times, timeliness of completion, and customer satisfaction can help you update your vendor list and direct your clients to qualified and reliable vendors.
These precautions can help you safeguard your clients, reputations, and businesses from costly consequences. For more tips on how to stay protected when making recommendations, you can view the National Association of Realtor (NAR)’s Window to the Law: Tips to Avoid Liability When Making Referrals video.
The value of E&O insurance
In the event a claim is filed against you relating to your vendor recommendation, Victor’s E&O policy can protect you from financial losses stemming from actual and alleged mistakes, errors, omissions, claims of negligence, or other deficiencies in the provision of your services.
Additionally, the Victor and CNA E&O policy provides coverage for the following, subject to terms and conditions (state specific forms are available for CA, HI, LA, NY, and PR and VI):
- Pre-claims assistance: coverage for costs incurred in investigating and addressing a situation that has the potential to become a claim against you.
- Public relations: reimbursement for reasonable public relations expenses incurred to manage a “public relations event” as it is defined in the policy.
- Real estate licensing proceedings: coverage for costs incurred in investigating or defending you in a proceeding before a real estate licensing board.
- Loss of earnings: coverage for lost earnings for each day or part of day you are asked to attend a trial, hearing, or arbitration proceeding involving a claim against you.
- Subpoena assistance: assistance in responding to subpoenas arising out of lawsuits to which you are not a party.
- Privacy breach response: coverage for costs incurred in (1) investigating the cause and extent of a network security breach or the release of confidential or personal information, and (2) providing notification as may be required by law to affected parties.
Whether or not your E&O policy provides similar protections will depend on who your insurance provider is and the exact terms of your policy. A trusted insurance agent or broker can help you assess the coverage offered by each policy and procure one that aligns with your firm’s needs.
How Victor can help
In partnership with the National Association of REALTORS® under NAR REALTOR Benefits®, Victor provides a first-class E&O insurance program for NAR members. Several premium credits are available, as allowed by state law, including credits for being an NAR member and holding select NAR designations. Get your free quote in just a few easy steps—click here to get started.
