BUSINESS LIABILITY PLAN - DO YOU HAVE ONE?
Tuesday, January 18, 2011 at 5:19PM Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
The only way you can truly avoid all liability is to do no business - not an attractive course of action. The truth is that the more successful you are, the longer you are in the business, the more likely you will be sued or become embroiled in a regulatory action. If you commute to and from work each week for 30 years, the odds are that you are going to be in an accident no matter how careful you drive. While that fact should not deter you from commuting to work, it should encourage you to drive safely to make an accident less likely and to hopefully lessen the severity of the accident if it does occur.
You should run your business the same way. You must accept that there are risks and the likelihood of a lawsuit or other trouble will increase the more successful you are. You have a choice: either you plug the liability holes as as the leaks appear, or you develop a plan to lessen the chances of springing a leak and to minimize the damage if a leak does occur. The first option only works out if you never have a problem.
A Business Liability Plan
Every business should have a business liability plan. Without such a plan, you are rolling the dice and leaving your business and wealth to fate. During the real estate boom many of us forgot that things do not always work out. Of course, now we are reminded daily of all of the trouble that is out there waiting to take you down.
What is a business liability plan? There are three essential parts to every business liability plan. The first part is a plan to help avoid liability, the second part is a plan to discover problems before they turn into a lawsuit or regulatory action and the third part of the plan is what happens when faced with a lawsuit or regulatory action.
Each part of the business liability plan is equally important. For the plan to be effective is must be followed on every file as there is no way to predict which file may ultimately result in a lawsuit or regulatory action.
Part I: Avoiding Liability
Checklists
One common method of minimizing risk is to create checklists for the file that agents must follow to make sure that important actions or documents are completed. It is important that checklists are constantly updated since the real estate world is constantly and quickly changing.
File Storage
Another common method of minimizing risk is to have an organized system of keeping files and their contents. This may involve keeping the physical file and/or may involve keeping digital files. No matter how you store this information is it vital that you store it safely and in a way that the information is easily accessible.
Retaining Documents
A less common part of a business liability plan is to determine what documents must be saved. Documents that can help explain why certain actions were taken, that show that the agent was diligent and served the interests of the client should be saved. Lawsuits and regulatory actions often come long after the file was put away and forgotten yet you always are defending what was done when the file was active. While you can always try to reconstruct the file, the most effective way to demonstrate how you properly represented your client is to have the documentation in your file.
A common example of this would be the pricing of a home. If comps were pulled and used in the determination of value, those comps should be retained in the file. Having them in your file is an effective way of showing that you were diligent in protecting your client and didn't just pull numbers out of the air. While you can re-create this information, it simply is not as effective as it is to actually be able to testify that you pulled comps and those comps are in your file.
Any document that shows what you did for you client is worth saving as it helps paint a more complete picture of your representation.
E-mails
E-mails are increasingly being used to communicate with clients. Your business liability plan should include a procedure for saving the e-mails relating to each file. This can be done electronically or by printing out the e-mails and putting them in the file. No matter how they are retained, they must be accessible. In other words, it does no good if all e-mails are saved but you cannot easily find the e-mails associated with a particular file.
Part of your e-mail policy might require that verbal communication is followed up with an e-mail. This practice can go long way towards avoiding the "he said/she said" problems with verbal communication.
Another part of your e-mail policy should contain rules for e-mail contents. Since an e-mail creates a communication record, you have to make sure that e-mails that are sent will appear professional and appropriate in tone. E-mails that contain misspellings, poor grammar or abusive language will create a communication record that you don't want. You also have to be careful that e-mails accurately convey the message you are actually trying to communicate. E-mails are "cold", that is, an e-mail can come across as harsh, mean or cold even when not intended. This is especially true when there is a dispute or tension between two parties to the e-mail. If in doubt, have someone else read the e-mail before it is sent.
Scripts
Do you find yourself saying the same thing over and over again when dealing with clients and potential clients? This is the beginnings of a script that you can use over and over again. Why require the use a script? It helps you be effective in what you say, helps eliminate saying something that is incorrect and helps you later on if you find yourself in a lawsuit or regulatory action and you have to testify as to what was said.
While scripts develop naturally over time, the script that is the most effective for avoiding liability is the script that has been carefully developed so that is conveys exactly what you intend and does not provided incorrect information. Scripts must be constantly reviewed to make sure that they are current and accurate, especially in today's real estate world where you are constantly facing new challenges.
Scripts should be practiced so that they are second nature. Scripts are especially helpful when dealing with tricky or high risk situations. What do you say when the client asks a legal or tax question? What do you say when the client asks if a short sale is better fro them than letting the property go by foreclosure?
Notes
In many industries, notes are taken to protect from misunderstandings and to help document what was done or said if a future problem arises. Unfortunately, many in the real estate industry have ever taken or been required to take notes yet it is an extremely effective way to avoid problems and to defend yourself if a problem arises.
Since problems often do not come to the surface until months or years have passed, it is extremely difficult to remember what was done or said in that transaction. Notes help you remember what and when something was said. Not only what it is written but notes will also help trigger your memory that you might not otherwise been able to remember.
Taking notes conveys to your clients and potential client that you are a professional and details are important to you. Aren't these qualities that consumers are looking for in a real estate professional?
Some will argue that they just aren't very good at taking notes. The reality is that the consumer does not know if you are good at taking notes or not but will most likely assume that you are good at taking notes or why else would you be taking them? This might head off a dispute (especially a "he said/she said" type of dispute) if the consumer assumes that your notes are more accurate than their memory.
Notes do not have to be detailed. You need enough information that the key elements of the conversation are written down and there is enough information to trigger your memory. You can also have a note outline that you take to the meeting where you just fill-in below each heading or topic. This works well with a script.
Notes will help your memory and give credibility to your testimony of what was said or done, especially if the other person did not take notes.
Insurance
E & O insurance is like any other insurance, it is only as good as its coverage. If the insurance policy does not cover all of the activities of your business you either need to negotiate better coverage or you have to realize that you have no protection for certain activities.
Coverage issues are especially troublesome doing periods of times where there are many changes in the marketplace. While many of the activities of real estate professionals have been around for decades, many activities engaged in today have not been commonly engaged in by real estate professionals until the last couple of years. Are those activities covered by your E&O coverage?
Since the real estate world continues to rapidly change, you should be constantly reviewing your insurance coverage.
If you have no coverage for certain activities, you must decide on whether to allow those activities and, if so, what restrictions you want to impose on those engaged in such activity.
Legal Counsel
Real estate professionals are constantly dealing with laws, rules and regulations. As a result of the real estate implosion, it is likely that laws, rules and regulations will be imposed. It is also clear that consumers are more likely to sue, bring an ethics complaint or a complaint to the Department of Commerce in tough economic times. Your business liability plan has to address how legal issues are to be addressed to make sure that laws, ethical rules and regulations are followed.
Members of your business must have access to a good, experienced real estate lawyer. Lawyers, like most professions, tend to concentrate their practice into certain areas. You do not want to see a real estate lawyer about a DWI and, likewise, you do not want to consult a criminal defense attorney about a real estate issue. It is also preferable that your lawyer understands the real estate market in your area. Law school does not teach lawyers how a real estate transaction takes place in the real world, only experience teaches the lawyer the realities of the real estate world.
You need a plan as to how best to use the services of a lawyer. Do you hire an in-house attorney? Do you put an attorney on retainer? Do you consult with an attorney on an as needed basis? Does the individual agent pay the cost for their transaction or does the company pay? The answer to these questions will depend on a number of factors including the size of your business and the economics of each option.
No matter how you use an attorney, you must decided who has access to the attorney.
Part II - Enforcing the Business Liability Plan
Requiring any of the above will not be effective if they aren't done in every file. The best way to ensure that your requirements are followed is to require them to be followed in every file so that it becomes a habit. It is also impossible to predict which file may become the subject of a dispute months or years down the road. If you only take liability prevention actions only in files where you think there might be a problem you will ultimately guess wrong.
In order to know whether the liability prevention actions are being undertaken in each file, an audit system must be developed. The person reviewing the files must be trained and understand what they are looking for. If something does not seem right, they should be encouraged to ask questions until they are satisfied. While nobody likes to have their files reviewed and questioned, the fact is, it is being done for their own protection.
If someone fails to follow the business liability plan, there must be penalties imposed. Everyone should be made aware of these penalties so that nobody is surprised when they are imposed. Everyone must understand that the business liability plan is for everyone's protection.
Once it has been determined that all of the necessary documentation is in the file, there must be a system in place as to how the files are to be stored and indexed. There should also be a policy in place as to how long the files will be kept. It should be kept in mind that in Minnesota a lawsuit on a contract can be brought within 6 years of its breach.
Part III - Dispute Resolution
Even with the best business protection plan, disputes will arise so you must have a plan in place as to how to respond the the different kind of disputes that may arise.
Insurance
Each E & O insurance policy will have a requirement as to when a dispute must be turned over to them. In the past, many insurance companies were very liberal in allowing the agent or broker to try to resolve disputes before turning them into the insurance company. This allowed brokers to reduce the number of insurance claims and gave them the ability to solve the problem before a great deal of expense was incurred. More and more, insurance companies will not allow the insured this option. The danger you run if you do not turn file into the insurance company when required under your policy is that the insurance company will deny coverage if the file is later turned over to them.
Make sure you have a thorough understanding of your insurance policy as to when a dispute or potential dispute has to be turned over to the insurance company and make sure your business liability plan takes this into account.
Not all disputes are covered by insurance. Your business liability plan must have a procedure whereby each dispute is evaluated as to whether it is covered by insurance or not. There are many activities engaged in today be real estate professionals that have not traditionally been undertaken by real estate professionals. Are those activities going to be covered by insurance?
Legal Representation
Your business liability plan should include a policy of when a lawyer is brought in to review a dispute or potential dispute. The elements to be considered are the cost of the dispute, the stage of the dispute, and whether insurance coverage is available or not.
Early Detection/Early Action
Real estate disputes do not generally get better with time. All disputes should be handled as soon as they arise so that you have the best opportunity to resolve the dispute before it escalates into an impossible situation, before significant time and money need to be expended and before options begin to disappear.
It is common for many people to avoid bad situation. Who wants to deal with the unreasonable client who can never be made happy? Unfortunately, avoiding this client only makes the situation worse. The office manager or company attorney can often be more successful because they are more detached and less likely to avoid dealing with the "problem", since they are not personally involved in the problem they can often see a solution and they don't carry with them the emotional baggage that the agent and client have developed over time.
Conclusion
When a problem arises I always ask the client for a copy of the file. That is my starting point. Unfortunately, in many of the files that I have reviewed, there are no notes, no e-mails records and very little in the way of documentation. In many cases, not all of the actual transactional documents are in the file. At that point in time, I know that we are going to have an issue about what was said and done and my best tools to establish credibility are not available. While it doesn't mean that that the client cannot prevail, it does mean that the job just got tougher.
Why put yourself at a disadvantage? Why not adopt a liability business plan today, to put yourself in the best position for dealing with liability tomorrow?
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NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm |