Title Insurance and Rule E-14: Are you Vulnerable to a Lawsuit?
Lawsuits are every broker’s nightmare. Even for the most well-meaning broker, the slightest mistake could end up costing a great deal of money, stress, and time.
One of the most common lawsuits brought against real estate brokers is for breach of duty – duty in this context is defined as “always acting in the best interest of the client.” Duty can be breached intentionally, or perhaps most commonly, negligibly (unknowingly).
When it comes to negligence, many Colorado brokers are unaware of an inconspicuous rule in the Colorado Real Estate Manual, Rule E-14. This rule is a prime example of how a real estate broker can leave themselves vulnerable to the threat of a lawsuit from a slighted client.
But before we examine that rule, let’s first talk about title insurance.
This hot topic was recently in the news when a large real estate company received millions of dollars in kickbacks from a title insurance company for referring business to the real estate company, and failing to disclose this relationship to its [the broker’s] clients. The deep impact from this federal case was felt even by Colorado title insurance companies and new 2017 regulations were subsequently implemented to change how a title insurance company can market to real estate brokers.
With all this heightened awareness and sensitivity around title insurance at the moment, brokers should be careful not to neglect this important component during the home buying process. Title insurance is important because it protects the home buyer from unknown title defects, like forgery, fraud, undue influence, incompetency, tax-lien, encroachment, encumbrance, and unmarketable title.
Enter, Rule E-14.
Not only should you advocate for your client to purchase title insurance because it’s in their best interest to do so, but also because rule E-14 requires Colorado brokers to “recommend, before the closing of a real estate transaction, the examination of title and the use of legal counsel.”
What does this mean?
It means that if a Colorado broker does not recommend that their client have their title insurance reviewed by a state licensed attorney, that the client can turn around and sue the broker to cover their losses sustained from a defective title.
This legal review is not only important because it protects your professional career from impending lawsuits, but it’s also is smart for your client. Title insurance companies are for-profit. While this isn’t bad in and of itself, it means that a title insurance company will sometimes offer a policy that is in the best interest of the company, rather than that of the home buyer. A lawyer can review the insurance policy and negotiate with the title insurance company to ensure that the policy sufficiently protects the buyer’s (and your) interests.
If you have questions about title insurance and how you can further protect yourself from lawsuit, please call our real estate attorneys at 303-688-0944.