March 2013 | D.R. Legal News 
By Steve Bochenek, IAR Chief Legal Counsel
From time to time the Illinois Association of REALTORS® does a survey of portions of its membership to determine interest in various topics. One of the recent surveys indicated that Managing Brokers were interested in an article in the DR dealing with risk management. Based upon that request the lead article in this issue will deal with the topic of risk management. Risk management in the real estate brokerage business generally deals with three particular areas. The first of these areas is protection of the owners of the business from potential liability. Second would be protection of the entity from liability and third would be protection as regards licensing issues.
Protection of the Owners of the Business from Potential Liability
The first area of concern, that is, protection of the owners of real estate brokerage businesses is traditionally dealt with by choice of an entity to protect the business. Traditionally sponsoring brokerage companies are corporations. However, more recently we have seen limited liability companies used as the entity of choice for real estate brokerage companies. Establishing an entity for the real estate brokerage company and maintaining that entity and the formalities of that entity will help shield an individual owner of the brokerage business from individual liability for the actions of the entity. The use of serial limited liability companies may also provide some benefits from a licensing perspective to the extent that the brokerage company engages in various types of brokerage businesses such as property management, residential real estate brokerage and commercial real estate brokerage.
One of the keys to protection of the individual owner is to make sure that when the entity takes a particular action, such as entering into a contract, that there is some formality followed showing that the entity approved entering into the agreement and that the party signing on behalf of the entity (often the owner) is signing in a corporate capacity, such as president or manager, and not as an individual. More detailed information concerning the topics of choice of entity, appropriate maintenance of an entity and the protections from liability should be obtained from your own individual attorneys who can craft the appropriate structures and guidance for your situation.
The second significant issue deals with protection of the entity from risk of liability. To the extent that the entity is actually engaged in the real estate brokerage business there will always be exposure to the risk of liability for the entity. Purchase of insurance is one of the key mechanisms to provide protection for the brokerage entity as against damage claims and related expenses. There are several forms of insurance that the brokerage company will want to secure in order to protect itself. Perhaps the most common form of insurance that is discussed is professional liability or errors and omissions insurance (E&O insurance). This insurance is intended to protect the entity, and typically its individual licensees, against liability that may result from the acts or omissions of a licensee in providing real estate brokerage services.
There are several keys to look for when obtaining E&O insurance for your company. First, are all of your sponsored licensees and employees covered by the policy? This typically is a goal that your company would be looking to achieve through the policy. Second, review the specific areas of coverage under the policy. For example, does the policy cover property management services if your company or your licensees have been engaged in leasing with the markets being unsettled over the last few years? Check that other areas of the brokerage business that you are engaged in are also covered under the E&O insurance policy. Are broker price opinions covered? If not, your company may have a policy prohibiting licensees from performing broker price opinions under the name of the company. The key is for you to check what areas the policy actually covers.
Just as important may be checking what exclusions there are in the policy. For example, there probably will be an exclusion for any claim that results in alleged physical injury to the claimant. There may also be an exclusion for actions of your licensees in connection with properties in which they have an ownership interest. Again, if there are areas that are excluded from the E&O insurance policy these may indicate areas that you do not want your licensees to engage in under the name of the company.
Another insurance that your brokerage company will want to secure is commercial general liability (CGL) insurance. This insurance is not intended to cover the professional liability types of issues that may result from the acts or omissions of your licensees. Rather, this insurance is to cover liabilities that might result from an incident at your company office. You will also want to secure extended commercial general liability insurance. The reason for the extended policy is to have the policy cover incidents or injuries that may occur at an open house, for example.
There may be other types of insurance that you will want to make sure are covered in connection with the business of the brokerage company. One of these would be automobile insurance. Most real estate brokerage companies consider their sponsored licensees to be independent contractors. As such, your company may well want to require your sponsored licensees to obtain and have their own automobile insurance coverage. However, even if that is the case your company will want to ask your sponsored licensees to provide evidence that they are insured since they will be driving vehicles in connection with the business of the company.
Insurance is the mechanism to try to protect your brokerage company against damage claims or expenses that may be incurred in defending damage claims. However, any owner of a brokerage company knows that no matter how hard you try simply by being in business and doing business that those claims will occur. Thus, the importance of insurance.
It is also important to have a claims handling procedure in your office to handle issues or complaints that may arise from time to time. Having an individual trained and designated to handle issues and claims that arise can prevent litigation when a problem occurs. Failure to deal with claims or issues that arise as regards the entity many times will assure that a claim is brought and your insurance policy brought into play. Thus, in terms of managing risk make sure that your company has someone trained and designated to handle issues that will arise from time to time.
Adopt Policies and Procedures to Prevent Claims
Once your brokerage company has the insurance policies and a claims handling policy in place the next issue would be for your company to adopt policies and procedures to try to prevent claims from occurring in the first place. There are a variety of resources for obtaining information that will help you in this regard but perhaps one of the best sources is IAR. IAR provides an online Risk Management Toolbox for its members which can be found at www.illinoisrealtor.org/riskmanagement . The toolbox contains a variety of resources that can be used by your brokerage company.
Other than you and your licensees having a knowledge of the Real Estate License Act of 2000 and the Administrative Rules under the Real Estate License Act perhaps the most important risk management tool for a brokerage company is the adoption of an office policy. The Real Estate License Act of 2000 requires a brokerage company to adopt an office policy. There is a template of an office policy available in the IAR Risk Management Toolbox. That policy template will need to be reviewed, modified and adapted to fit the policies of your particular company. However, it is a good starting point both for establishing an office policy but also for reviewing the various issues that your company and its licensees will face.
Also available from the IAR Risk Management Toolbox are a variety of items dealing with specific issues. For example, under the category of “Broker Management” you will see a variety of items that may be of assistance in managing the company. Some of these are the webinars that are put on monthly by IAR. For example, there was a webinar in 2010 dealing with the Sample Office Policy Manual. That webinar would help provide you with instruction and guidance in modifying the template to develop your own office policy. There was another webinar in dealing with risk management tools which would provide additional discussion regarding some of the topics covered in this article. Not all of the tools in the Risk Management Toolbox under Broker Management will be beneficial to your particular company. However, the beauty of the Toolbox is that you can pick and choose which items you want to review, listen to or read. The IAR Risk Management Toolbox may be one of the most significant resources available to members of IAR in regards to developing policies, including risk management policies, and educating its licensees with regards to specific areas of concerns.
Educate Your Sponsored Licensees about Company Policy
Once your company has developed policies for your office it is important to educate sponsored licensees in regards to those policies. The importance of education is so that your sponsored licensees understand the reason for the policy and how to implement the policy in order to provide professional brokerage services and avoid claims. Another reason for the education is that if litigation ensues from an act or omission of a licensee it is certainly not beneficial to your company if you have adopted a policy but have not provided education to a licensee as regards that policy. Once again, the Risk Management Toolbox from IAR provides you with a variety of educational devices that you could use in regards to your sponsored licensees. This could include uploading a webinar for use at an office meeting or providing articles concerning a variety of topics for reading by your sponsored licensees.
Other resources that would be available to your brokerage company to use in connection with risk management are the Legal Hotline provided by IAR as well as the webinars available on a monthly basis. The Legal Hotline is available for questions from managing brokers or designated sponsored licensees. Although specific legal advice cannot be provided through this resource, the Hotline can provide you guidance in regards to identifying issues, guidance, in a practical sense, as to how to deal with particular issues, where to find legal information that will assist you in handling particular issues or that you can provide to your own company attorney to review in handling particular issues.
Compliance with the Real Estate License Act
A third area of risk management for real estate brokerage companies is compliance with the Real Estate License Act (Act). The first concern is to make sure that all sponsored licensees are properly licensed and have their licenses renewed as required and having agreements, either employment agreements or independent contractor agreements, with all sponsored licensees. The second concern under the Act would be making sure that your company has adopted an office policy and can demonstrate to the Illinois Department of Financial and Professional Regulation (IDFPR), how your company makes aware, trains and educates it sponsored licensees with regards to the policies of the company.
A third area of risk management for a brokerage company under the Act will be the handling of escrow accounts and making sure that the records required by IDFPR in connection with those escrow accounts can be produced upon request by IDFPR. IDFPR has a pamphlet available describing escrow requirements and how the escrow can be set up and managed or you can look to Section 1450.750, the Administrative Rules under the Act, for guidance as to what is required for escrow accounts.
Risk management is an important issue for real estate brokerage companies. This article is intended to provide some basic guidelines in dealing with risk management issues. Future articles will deal with specific legal issues presenting risk to your company that need to be managed.
“Escrow Account & Record Keeping Requirements” - Illinois Department of Financial and Professional Regulation http://www.idfpr.com/dpr/re/EscrowRequirements-1005.pdf