Malpractice Insurance Rates Skyrocket for Real Estate Brokers
Wennegren, Mike, THE JOURNAL RECORD
Santa Barbara insurance broker Paul Manchester said more lawsuits are being filed against real estate brokers, which has caused their malpractice insurance, called errors and ommissions insurance, rates to double in the past 10 years. The minimum premium, he says, is $2,500 a year.
``And that's with a $5,000 deductible,'' Manchester said. ``It's not cheap.''
Santa Barbara real estate broker Mike Richardson said some real estate businesses have closed because of malpractice liability.
``There definitely have been companies forced out because of lawsuits and because premiums got so high,'' he said.
But as far as he can tell, Richardson said, the higher costs of errors and ommissions insurance are not being passed on to consumers in the form of higher sales commissions.
Manchester said errors and ommissions insurance rates have gone up because more people are suing real estate brokers. Santa Barbara lawyer Ken Falstrom said one reason is that people are generally more apt to file lawsuits than they used to be.
Another reason is that the courts and the state Legislature have forced real estate brokers to take greater responsibility for disclosing the condition of the property they are selling, he said.
Until 1984, he said, real estate brokers were required to disclose any material defects they knew about on the property they were selling. But a California Court of Appeals decision in 1984 made real estate brokers responsible for inspecting the property and telling the buyer about anything that could affect its value.
``Not only does he have to disclose the defects that are known to him,'' said Falstrom, ``but also the defects that a reasonably diligent and competent inspection would reveal.''
In 1985, he said, the state Legislature responded to the appeals court's decision by passing laws governing real estate brokers' behavior. Under those laws, he said, real estate brokers must disclose not only the physical defects of a home, but also anything that could affect its value.
For example, he said, a real estate broker selling a house must tell the buyer if homes in that area have had problems with ground settling. …