LAWPRO E&O Real Estate Claims: Small, Medium and Excess (and how to avoid them)

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1 LAWPRO E&O Real Estate Claims: Small, Medium and Excess (and how to avoid them) Hamilton Law Association Lori M. Swartz TitlePLUS Legal Counsel Lawyers Professional Indemnity Company (LAWPRO ) 26,000 lawyers in private practice 30% have REPCO Real estate = one of the riskiest areas of practice HLA Emerging Issues in Real Estate Seminar 1

2 #2 Area by Number of Claims Labour 2% IP 2% Other 9% Defence Litigation 6% Plaintiff Litigation 29% Wills 8% Family 8% Corporate 9% Real Estate 27% LAWPRO claims by area of law (by count) #1 Area by Cost of Claims Defence Litigation 4% Wills 9% Family 6% Labour 1% IP 1% Other 1% Plaintiff Litigation 29% Corporate 17% Real Estate 32% LAWPRO claims by area of law (by cost) HLA Emerging Issues in Real Estate Seminar 2

3 Real Estate Claims 620 real estate claims per year 35% - resolved without any costs 49% - defence costs only 16% - indemnity and defence costs Average cost per claim: $34,500 Reported 3.5 years after error on average 4/5 HLA Emerging Issues in Real Estate Seminar 3

4 Hot Market = Higher Risks Sep 2016: o Hamilton - up 15% o Toronto - up 20% Fierce market competition Tight deadlines High pressure!! Causes of Real Estate Claims Fraud 6% Conflict of Interest 5% Other 4% Clerical 9% Communications 41% Law 6% Inadequate Investigation 27% Time Management 2% Real Estate Claims ( ) HLA Emerging Issues in Real Estate Seminar 4

5 Communication Errors Communication Errors Failure to obtain consent or inform clients about an aspect of the deal: Failure to disclose info to the lender Failure to inform clients about restrictions on land use Failure to review the survey Failure to disclose location of condo unit or parking space Failure to disclose problems arising from requisitions HLA Emerging Issues in Real Estate Seminar 5

6 Communication Errors Failure to follow client s instructions: Inquire about future use (e.g. granny flat, home office) How environmental contamination interferes with future use Failure to communicate/poor communication Language barriers Who is responsible for what? (e.g. reviewing leases) Law clerks are the primary contact without oversight Supervising Clerks HLA Emerging Issues in Real Estate Seminar 6

7 Supervising Clerks When clients allege poor communication, The clerk met with the client is a weak defence Rule 6.1-1: Supervision : Lawyers must directly supervise non-lawyers Rule 6.1-1, Commentary 5.4 Rule : A non-lawyer cannot Prevent Communication Errors Lender is your client too Get instructions in writing Discuss issues Look into future use Get title insurance on time Meet with clients in person Document the file HLA Emerging Issues in Real Estate Seminar 7

8 Inadequate Investigation Inadequate Investigation Examples include: Not looking into capacity or undue influence Misreading survey, search, or reference plan Not doing title search on commercial lease Not reviewing accuracy of discharge Condos: Review status certificate? Parking space actually for sale? Is legal description correct? HLA Emerging Issues in Real Estate Seminar 8

9 Dig Deeper Use checklists Discuss transaction with clients in person Pay attention to detail Keep copies of documents in file Investigate any and all issues Read and follow: Lenders instructions Title insurers instructions HLA Emerging Issues in Real Estate Seminar 9

10 Dig Deeper Ask: 1. Spousal interest in property? 2. Title insurance alleviating all concerns? 3. Future use of the property? 4. Mortgagor going to live in the home? 5. Information to pass onto lender? Clerical Errors HLA Emerging Issues in Real Estate Seminar 10

11 Clerical Errors Often made by clerks; missed by lawyers Delegating too much? End of the month is busy Title insurance = false sense of security Examples include: Clerical Errors Typos Not registering mortgage discharge Not explaining legal consequences of a mortgage Statement of adjustments has errors Giving e-reg pass phrase to clerk No clear policy on what lawyer and clerk each do HLA Emerging Issues in Real Estate Seminar 11

12 Prevent Clerical Errors You are responsible for all work done by your firm (it s under your insurance!) Clerks can assist but cannot replace the lawyer Be careful when delegating work to outside real estate clerks Do not share your Teraview PSP Fraud HLA Emerging Issues in Real Estate Seminar 12

13 Fraudulent Discharge Borrower needs lawyer s help to get a mortgage Search reveals recently discharged mortgage Discharge was fraudulent Borrower makes out with funds Old mortgage put back into priority Too little equity to cover second mortgage Value Fraud A series of phony sales Value of property artificially increased Fraudster gets a high value mortgage, way beyond true equity of the property HLA Emerging Issues in Real Estate Seminar 13

14 Identity Theft Fraudsters find unencumbered homes, prepare false ID, and transfer property to co-conspirator who mortgages the property Often target elderly homeowners Bogus Bank Draft on Mortgage Fraudster (pretending to be from major bank) asks lawyer to act on mortgage transaction Lawyer runs counterfeit bank draft through trust account Shelter Fraud Real purchaser doesn t qualify so his friend takes title and is the borrower True borrower defaults Friend sues lawyer HLA Emerging Issues in Real Estate Seminar 14

15 Deposit Fraud New (overseas) client from trusted referral source Asks lawyer to purchase property in ON Provides lots of info, ID, passport, etc. Provides a counterfeit cheque much larger than deposit Lawyer returns excess funds through trust account Examples include: Fraud Errors Not asking for or checking ID of new clients Not investigating suspicious power of attorney Not investigating frequent activity on title in short period of time, including failing to inform lender If lender opts to proceed, not confirming instructions in writing Not confirming purchaser plans to actually live in property HLA Emerging Issues in Real Estate Seminar 15

16 Prevent Fraud Resources: LSUC has page on its website called Fighting Real Estate Fraud LAWPRO s practicepro website Avoid-A-Claim blog (avoidaclaim.com) Time Management Errors HLA Emerging Issues in Real Estate Seminar 16

17 Time Management Errors 2 types of errors: procrastination and Missing deadlines Procrastination errors include: Not responding to requisitions well before closing Deadline errors include: Not submitting requisitions on time Not doing required searches before closing Excess Insurance LAWPRO s mandatory policy limits: o $1 million per claim o $2 million in the aggregate per year Includes defence costs, indemnity payments, costs of repairs Lawyer personally liable for costs and indemnities exceeding coverage limits Claims made policy HLA Emerging Issues in Real Estate Seminar 17

18 Excess Insurance Appreciating property values means higher damages in real property lawsuits Excess Insurance Title insurance doesn t cover everything Title insurance policy amount is a defined term in the policy Property s market value may exceed inflation coverage Property owner may go after lawyer for shortfall HLA Emerging Issues in Real Estate Seminar 18

19 E&O vs Excess Excess insurance underwritten on a firm-wide basis Lawyers claims history, experience, discipline history, etc. may affect availability and premiums You can buy excess insurance from commercial providers (e.g. Lloyd s of London) Does your firm do simple/small transactions or complex/high-value value transactions? HLA Emerging Issues in Real Estate Seminar 19

20 Horror Stories Lawyer did not identify 3 rd floor of purchaser client s unit was part of the common elements. Lawyer for mortgagor/mortgagee skipped an upto-date search. Mortgagor went bankrupt, and mortgagee became unsecured creditor. $2 million in damages. Will-drafting lawyer did not realize the client s company and not the client owned the lands. Bequest in will was void. $500k in damages. Diversity HLA Emerging Issues in Real Estate Seminar 20

21 Scenarios Over-reliance on cultural norms Not balancing cultural practices and Canadian commercial standards Letting guard down Not communicating limits of enforcing preferred lending HLA Emerging Issues in Real Estate Seminar 21

22 Over-reliance on Cultural Norms Father & daughter sued doctor for mother s death Lawyer unable to secure helpful expert reports; recommended to father to settle Clients were from patriarchal community where fathers commonly spoke on behalf of female family members Lawyer acted on father s instructions alone Daughter sued lawyer for acting without instructions Cultural practices vs Canadian standards Lawyer from tight-knit community where loans rarely documented Money often repaid on sale of property Lawyers would pay out funds from trust account without any documentation Lawyer suspected of value fraud because he had no proof of deposit Was later exonerated HLA Emerging Issues in Real Estate Seminar 22

23 Letting your guard down Racialized lawyer first licensed in her 50s Started solo real estate practice Paralegal from same background befriended her Paralegal provided office and referred files Paralegal processed all documentation Transactions were fraudulent Lenders sued lawyer She later resigned as licensee Limits of Enforcing Preferred Lending Practice Muslim woman wanted an Islamic-mortgage loan, where borrower pays periodic rent and not interest) Mortgage went into default Second mortgagee paid first mortgage s balance, but not the rent Borrower: No rent was payable anymore, because she no longer rented the mortgage funds Lender alleged lawyer was negligent in warning that rent provisions were not enforceable HLA Emerging Issues in Real Estate Seminar 23

24 Summary Questions? Contact Information: Lori M. Swartz TitlePLUS Legal Counsel Lawyers Professional Indemnity Company and Blog: AvoidAClaim.com; LAWPRO is on LinkedIn & Facebook HLA Emerging Issues in Real Estate Seminar 24