The House and the River

House on the water

The Facts

The insured, a real estate agent, listed a home for sale that was located on a river bank. The sellers completed a written disclosure which said, in part, that they had modified the river bank and stabilized it with rip rap. The insured was contacted by a potential buyer to view the property and ultimately wound up as a dual agent in the transaction. The house sold for $280,000.

Subsequent to the sale, the buyers discovered the river bank was shifting and settling dramatically. They alleged the house would ultimately fall into the river. They claimed the sellers and the agent didn’t fully disclose the extent of the problem although the disclosure document was provided. They further alleged that the agent failed to recommend that they engage experts to inspect the modifications made by the sellers to determine adequacy. However, the agent said he had suggested to the buyers that they might want to have the river bank inspected by a professional such as a soil engineer or have soil tests done. The buyers deny having received any such recommendation, and there was no written evidence that the advice had been provided.1

The buyers sued the agent and the sellers. The defense engaged a real estate expert to provide an opinion on the insured’s standard of care in handling of the transaction. An engineering expert also was engaged to examine the river bank and determine if anything could be done to reduce the erosion to an acceptable level. Both opinions were negative. The real estate expert said that any recommendation made to the buyers to obtain an inspection should have been made in writing, and the buyers should have been required to sign off on the recommendation to eliminate any subsequent dispute. The expert also testified that the agent should have verified the work that had been done to the river bank and determine if it was adequate.2 

Concerning the condition of the river bank, the engineering expert testified that the river would indeed consume the house, sooner rather than later, although no exact date could be given.

Additional repairs to try to stop the river bank erosion were investigated. The cost would run in the $250,000 range. The cost to move the house would be $150,000 to $225,000, depending on the cost of a new lot, a new foundation, and the distance of the move. Attempts to obtain financial aid from FEMA or any other government agency were unsuccessful.


The Result

This case was eventually settled for $115,000 on behalf of the agent; this amount was lower than anticipated because the buyer was able to negotiate a lower payoff for their loan on the home. Defense costs through settlement totalled $66,000.

Inadequate disclosure is a significant problem giving rise to claims, and the problem is even greater when dual agency exists. Dual agency will typically be viewed by judges and juries as an inherent conflict of interest. Written evidence of full disclosure to both parties of all matters material to the transaction, as well as acknowledgement of and consent to dual representation by both parties, serve as critical evidence supporting the agent’s work in the event of disputes between the parties. 

Risk Factors

Risk Factor #1

In a case where dual agency exists, the agent must take every precaution to document disclosures appropriately and document recommendations to both seller and buyer. It is important to have clients sign off on any recommendations made by the agent, regardless of whether or not the clients follow them.

If any of the documentation precedes the nominal or execution date of the agency agreement, the agreement may need to specifically note that the prior recommendations survive the agreement.

Risk Factor #2

Often contracts explicitly or by operation of law supersede and nullify prior writings. Additionally, while dual agency is permissible in the jurisdiction where this occurred, there are a few states—Colorado, Florida and Kansas—where dual agency is prohibited by law. In states where dual agency is permitted, there may be specific required disclosure forms and statutory language that may need to be included in disclosures.

Always consult with either your agency’s attorney or those responsible for legal and regulatory compliance before entering into any dual agency relationships. 

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