A Florida homeowner is suing real estate brokerage eXp Realty and several of its executives, alleging the company allowed an agent to act as contractors on properties they represent, violating company policy. Filed in federal court in Miami, the lawsuit accuses eXp of fraud, conspiracy, and negligence, claiming over $700,000 in damages. According to HousingWire, eXp has called the claims “without merit.”
The homeowner seeks a jury trial, compensation for damages with the option of “trebling” — or tripling — the amount, and for eXp to acknowledge the agent’s alleged violations and implement two years of independent compliance audits.
“An allegation of fraud against a real estate agent is nothing new in the business,” said Christian Hamlin, Senior Broker, Professional Liability, Burns & Wilcox Brokerage, Scottsdale, Arizona. “This is an interesting case because the lawsuit alleges they violated their own independent contractor agreement, not because they broke the law.”
When a real estate agent faces a lawsuit related to their professional services, their Real Estate Errors & Omissions (E&O) Insurance, also known as Professional Liability Insurance, can help pay for legal defense and other expenses. In this case, the brokerage firm’s Directors & Officers (D&O) Insurance — designed to cover a company’s directors and officers for their decisions or actions — may be more likely to be triggered, as it “tends to be more broadly worded,” Hamlin said.
If a jury trial is being demanded, the company would incur significant defense costs. In addition, a verdict from a jury could lead to a pretty substantial payout.
In either case, those named in the lawsuit can expect to encounter significant costs while defending against the claims, said Nick Esty, Broker, Professional Liability, Burns & Wilcox, Boston, Massachusetts.
“If a jury trial is being demanded, the company would incur significant defense costs. In addition, a verdict from a jury could lead to a pretty substantial payout,” Esty said. “It is also possible that this could lead to a pretty substantial payout.”
More real estate agents involved in home renovation
In the lawsuit, the homeowner claims that his real estate agent acted as both a contractor and an agent on properties she represented for him, despite eXp publicly advertising that its agents are not allowed to act as contractors for homes they represent, HousingWire reported. Due to potential conflicts of interest, brokerages often have policies preventing agents from serving as contractors for homes they represent — terms typically outlined in their independent contractor agreements. While local regulations on the issue may vary, it is generally not illegal for agents to act as contractors, Hamlin said, though it may be discouraged to maintain ethical standards.
“In California, for example, many Realtors will act as the contractor on a flip or they will even front the money to do improvements and recoup it on the back end when they sell the property,” Hamlin said.
House-flipping has surged as a lucrative trend in the U.S., with real estate agents often playing a role in buying, renovating, and reselling properties for profit. According to real estate data firm ATTOM, 67,817 single-family homes and condos were flipped in the first quarter of 2024, representing 8.7% of home sales nationwide during that period. It is a trend that has appeared to draw more real estate professionals into the renovation business, Esty said.
“Home flipping is more common now,” he said, adding that many real estate agents are getting involved in renovation projects in addition to listing homes for sale. This could lead to more real estate agents being sued related to home-flipping projects or transactions, Esty said. “We see a lot of real estate agents buying and flipping houses now to earn a living. There might be conflicts of interest or they could be sued if the buyer finds a problem with the house, and they think the work the agent did was subpar,” he said.
Real estate agents often wear a lot of different hats. . . You want to make sure your policy has a broad definition of professional services that will cover you for all of the services you are performing.
Real estate agents who are involved in property management or notary services could also face an increased exposure. “Real estate agents often wear a lot of different hats,” Esty said.
With that in mind, it is important for real estate professionals to ensure that their Real Estate E&O Insurance policy is broad enough to cover all their activities. “You want to make sure your policy has a broad definition of professional services that will cover you for all of the services you are performing,” he said. “Make sure that those services are not excluded on your policy. Looking at the policy language is important.”
Lack of disclosure, discrimination among more common real estate claims
According to real estate franchise NextHome, 1 in 4 real estate professionals will be sued at some point in their career. In September last year, a Florida man who sold his $79 million home to Jeff Bezos sued the real estate agent who handled the sale, claiming that the agent did not disclose the name of the buyer, which allegedly cost him up to $6 million, Fox Business reported.
In early 2024, 20 property companies and real estate brokers in the Boston area were sued by a nonprofit housing watchdog group over alleged discrimination against low-income tenants, WBUR reported in February. In 2022, a housing discrimination lawsuit filed in Michigan by an interracial couple, who claimed they were treated unfairly when trying to buy a home in a predominantly white area, ended in an out-of-court settlement, MLive reported.
Failure to disclose information about a property — whether termite damage, mold, radon levels, or other details — is one of the most common claims made against real estate agents in lawsuits, Esty said. Agents can also be sued over discrimination, misrepresentation of a property, wrongful eviction, and more. Real Estate E&O Insurance may have different sublimits for some of these allegations, Esty said.
“There may be different insuring agreements or sublimits — one could be Professional Liability, and another sublimit could apply for disclosure claims, or Fair Housing Act violations,” he explained, adding that separate limits are also possible for lock box coverage or liability claims arising from showing a property during an open house.
Listing a property too late, contract errors or mistakes made in escrow could also lead to lawsuits from buyers or sellers, Hamlin said. Any lawsuit against a real estate professional could lead to immediate legal expenses as well as longer-term impacts. “It could damage their reputation, first and foremost, which could be more damaging than the lawsuit in terms of future business,” Hamlin said.
An agent’s Real Estate E&O Insurance policy will usually include a “duty to defend,” meaning the insurance carrier would provide legal representation and cover the costs of defending against the claims, even if the allegations are unfounded. If an illegal act such as fraud is alleged, defense could be covered “until it is proven fraud,” Hamlin explained. Intentional acts may also be excluded.
[The lawsuit] could damage their reputation, first and foremost, which could be more damaging than the lawsuit in terms of future business.
“Fraud is not going to be insurable, because at that point, they have committed a crime,” he said. “You cannot insure crimes.”
Depending on the services they offer, real estate agents may also want to consider purchasing Real Estate Developers Professional Liability Insurance, which can include coverage “for the transaction as well as the ground-up development of the property,” Hamlin said. All agents, meanwhile, should purchase Cyber & Privacy Liability Insurance due to the growing risk of data breaches and wire fraud, he emphasized.
“The Cyber policy covers a lot, including business interruption, and it is very affordable,” he said.
‘Controlling exposures’ is key for agents
When purchasing Real Estate E&O Insurance and other policies, real estate professionals should ask their broker about whether defense costs are included inside or outside of the limits of the policy. “Defense outside the limits of liability is beneficial because the insurer would continue to provide defense after your policy limits have been exhausted,” Esty said.
In addition to coverage for legal defense and settlements, a Real Estate E&O Insurance policy could also cover the expense of public relations support following a professional error. Depending on the situation, “they might want a public relations firm to deal with the fallout,” Esty said.
Another important insurance policy for real estate companies is Employment Practices Liability (EPL) Insurance, which can help protect against claims related to employment practices such as wrongful termination, discrimination, and harassment, he said. This can extend to a real estate firm’s employees as well as third parties they work with.
Ultimately, independent contractors need to have their own insurance — for whatever they are doing. They should be controlling their own exposures and managing their own risks by properly insuring themselves.
While larger brokerage firms may be more likely to employ risk managers and have the necessary insurance policies in place, smaller real estate companies could be less prepared but just as likely to be sued, Esty said.
Real estate agents should discuss the risks associated with their professional services with a specialized insurance broker and understand that E&O Insurance is not the only important policy they should carry, Hamlin added. They also should avoid assuming their real estate company’s policies will extend to them. “Not all policies will cover independent contractors,” Hamlin noted. “Cyber & Privacy Liability Insurance is often one of those.”
Instead, real estate professionals should “control their own destiny” and seek out insurance to help mitigate their risks, Hamlin said. “Relying on others is a bad situation,” he said. “Ultimately, independent contractors need to have their own insurance — for whatever they are doing. They should be controlling their own exposures and managing their own risks by properly insuring themselves.”
