Professions
Misrepresentation in Real Estate
What is misrepresentation and how does insurance help?
Last updated 13 Jul 2021

To most people, it’s property. But as a real estate agent, ensuring your listing stands out from the crowd and attracts the right buyers is critical to securing the best outcome for the vendor. But imagine if an advertisement you post has incorrect information, which a client relies on and suffers a financial loss? This is known as misrepresentation, and is a very real risk for real estate professionals. Let’s take a look at misrepresentation in a little bit of detail, and clarify where insurance coverage can apply.

 

What is misrepresentation?

Misrepresentation occurs when an agent (unknowingly or deliberately) portrays or describes a property (usually in an advertisement) in a way that is not accurate, or is considered misleading or deceptive. To demonstrate how claims can come about, here is an example of a misrepresentation claim from an Aon client.

Maxine* bought an apartment through Robert*, a real estate agent. When Robert advertised the apartment, the advertisement stated that there was a carpark allocated to the unit. However, after moving in, Maxine realised that the property did not have a car park allocated. Maxine obtained a valuation of the property to find out what it would actually be worth without a carpark and found the value of the property to under what she paid. She took legal action against Robert for the difference, as she believed Robert’s ad had misrepresented the property, which led to her paying above what the property was worth. Robert had Professional Indemnity Insurance arranged through Aon, which covered the legal costs necessary to defend himself. As there had been misrepresentation of the property, Robert was required to pay Maxine an amount of compensation which was also covered by Robert’s PI Insurance.
 

Is misrepresentation covered by insurance?

Misrepresentation is an event that may be covered under Professional Indemnity Insurance, depending on the level of cover you arrange. If a client alleges misrepresentation on your part, they may take legal action against your business if they believe they made a decision based on your advertisements which caused them to suffer a financial loss. If this happens, you’ll firstly be faced with the cost of legal representation – even if the claim made by your client has no basis, you may incur some legal expenses defending the claim.

In addition, if the claim is proven to be legitimate, and you did make a misrepresentation, it’s you may also have to pay financial compensation to your client. Depending on the nature of your misrepresentation, a successful claim may also lead to a penalty from a regulatory body. In such a case, professional indemnity may help cover both the legal costs you incur in defending yourself, compensation you’re required to pay, as well as financial penalties (non-pecuniary) to regulatory authorities.

Preventing misrepresentation

Allegations of misrepresentation may happen to even the most seasoned professionals. Although you can’t control how someone may interpret your advertisements, there are some areas, which, if paid specific attention to, can help prevent the likelihood of misrepresentation claims:

  • Communication – Sometimes, claims of misrepresentation can be avoided with clear communication. If you receive instructions or information which appear vague, no matter what aspect of your service it relates to, ensure you reiterate with your clients before acting.

  • Records of conversations Written records of conversations often prove to be the most helpful if disputes or allegations arise. Even if you and your client agree to something on a phone conversation, it’s good practice to send an email afterwards confirming your understanding

  • Stay within your scope of work You may prioritise exceptional customer service above all else, but in doing so, sometimes it's easy to cross the line, and provide advice that is outside your qualifications or field of expertise. Therefore, always be mindful of the bounds of your role and act in accordance with what your client has hired you for.

 

When to contact your broker

Under most insurance policies, you don’t need to contact your broker until you need to make a claim. However, as misrepresentation is an event usually covered under Professional Indemnity, you may need to contact your broker as soon as you receive a hint of an imminent claim. It may not be enough to wait until you actually have to make a claim. If you sense a client of yours has been unhappy with any of your actions, and feel they may take legal action against you, you should contact your broker immediately and notify them. Even if a claim doesn’t perpetuate, your broker needs to be made aware.


*Names have been changed for privacy reasons.