Disclosure law spawns home sellers insurance

May 29, 1994|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

Home sellers in Maryland are being encouraged by a growing number of real estate agencies to insure themselves against unintentional failure to tell buyers about property defects.

"Errors and omissions" insurance -- similar to malpractice

insurance and typically used by real estate agents -- has been widely available to home sellers for just a matter of weeks. Real estate professionals disagree about its benefit to consumers, while some say it's still too early to judge the new product's popularity.

About 50 real estate companies in the state have started offering basic insurance packages at no cost to sellers who list properties with them. The seller has the option of paying to expand coverage through Homeowners Marketing Services Inc., a Hollywood, Fla.-based company and the sole source of such insurance, according to several real estate brokers.

Sellers need extra protection because of tighter state disclosure requirements that took effect this year, said Allen Pyles, president of HMS Mid Atlantic.

Maryland law requires sellers to fill out forms disclosing defects, such as a history of wet basements or leaky roofs, or to file disclaimers selling the property as is.

As has happened in other states with similar laws -- such as California -- sellers who unintentionally leave something off a disclosure form open themselves to lawsuits, Mr. Pyles said.

In one case, whose appeal is pending, a seller was held liable and ordered to pay $25,000 for failing to disclose that a neighbor ran a small business out of his house. In another, a seller who failed to disclose a visible sump pump was held liable and the buyer awarded $11,500.

Sellers have been sued for failing to disclose that a leak in a roof had been repaired or that a death had occurred in the house, Mr. Pyles said.

HMS has offered errors and omissions insurance to real estate brokers for a decade, paying over $100 million in claims during the past three years. In those cases, buyers filed suit against real estate agents after a sale.

HMS sells memberships at $49.95 in its Homeowners Association of America to real estate agents. The brokers, in turn, offer memberships -- which include insurance at no charge for a six months -- to clients who list properties with them.

The basic, six-month package includes a $5,000 deductible and covers up to $25,000 in claims for up to six months after settlement. For a $200 premium, the seller gets coverage for a year for up to $100,000 for unintentional misrepresentation. About 20 percent of those who are given the basic package choose to buy the expanded package.

"This is the most economical but beneficial listing tool a Realtor has had in 10 years," he said.

"I believe within two years every transaction will include something like this. I can't imagine a seller listing his house without getting this type of protection."

Neither can some of the real estate companies that now offer it.

Because of the new law, "all the responsibility will be directed back on the seller and not on Realtors," said Arlene DuBose, co-owner and manager of Century 21 Home Specialists, which signed on with the HMS program about a week ago. "Up until now there was never any protection for the seller."

Offering the free service has meant new listings for Joan Ryder & Associates in Bel Air, said owner Joan Ryder.

"It's something that gives sellers piece of mind, in case they make a mistake or something happens down the road, they feel at least protected," she said.

"It's not costing the seller, and he's getting extra protection. Now the seller has more of a liability put on him. Anything we can do as an industry to protect him is good."

Carole A. Greenwald-Ryan, president of Prudential Preferred Properties, said she initially introduced the product at four offices and plans to expand to all Prudential locations.

"This is filling a need that no one in the marketplace has filled before," she said. "The seller can only disclose what he's aware of, and often the seller may not be aware of something."

At Century 21/Schwender and Associates in Golden Ring, which began testing the product last year, "We were all a little scared about the disclosure law, so it sounded like a wonderful thing last fall," Allen Schwender said.

But about half of his agents -- independent contractors who must pay for memberships -- have opted not to offer the insurance to clients because, "with a $5,000 deductible, a lot of agents perceive that as not a great value," he said.

"We were gung ho with it, but we want to see how it unfolds to see if in the long run we'll stay with the program," Mr. Schwender said. "To me the program is winding down unless we see a reason to crank it up. It's a little early to say what the disclaimer law is doing."

Other companies have opted to wait to see whether consumers begin demanding the coverage.

Glen Phillips, an insurance specialist with Long & Foster Real Estate Inc., said the company hasn't decided whether to promote the program.

"We still have to determine whether it would be a benefit," Mr. Phillips said. "I don't know whether it will become generally accepted or whether more insurance companies will provide it. It's something very new."

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