Significant developments in
the market have led to emerging risks
By Jude Sedliak
During the last few years, significant developments in the real estate market have led to emerging risks and an increasingly challenging professional liability insurance environment for the real estate industry. Antitrust and class-action lawsuits involving real estate agency commissions combined with higher interest rates and a tightening homeowners insurance market can potentially alter the real estate industry landscape and bring new and evolving exposures.
NAR settlement and commission changes
Last year, while denying any wrongdoing, the National Association of Realtors® (NAR), representing more than 1.5 million Realtors, agreed to settle multiple lawsuits against the trade group and several large real estate brokerages for $418 million over four years.
The lawsuits brought by home sellers claimed that homes placed for sale on NAR’s affiliated home-selling database, Multiple Listing Services (MLS), violated antitrust laws by conspiring to inflate home-seller commissions. The lawsuits also alleged that guidelines encouraged real estate agents representing homebuyers to avoid showing their clients properties where the seller’s broker offered the buyer’s agent a reduced commission.
Similar lawsuits have been brought against HomeServices of America, Anywhere Real Estate, Compass, Douglas Elliman, Keller Williams, and RE/MAX, among others.
More negotiation on the horizon
Part of the NAR agreement, the settlement reshapes the way sellers and buyers handle home sales and how real estate agents get paid. The new commission rules that came out of the class-action include the following:
- Listing agents will no longer include compensation offers on the MLS. Previously, listing brokers were required to include a dollar amount in that field. They can now put zero in the field.
- Agents and brokers must negotiate the commission fee directly with customers outside the MLS.
- All MLS participants working on behalf of buyers must have written agreements in place before touring homes.
- Listing brokers will no longer pay buyer agents automatically. Instead, agents and clients will negotiate compensation.
The bottom line: In lieu of the long-standing traditional real estate model, which paid a combined commission of 5% or 6% to seller and buyer agents, fees will be negotiable. Real estate agents may employ similar flat-fee models that appraisers and title insurance companies use. In addition, discount brokerages are expected to gain traction.
According to some analysts, the changes could result in billions of dollars in lost agency commissions in the future years. Financial services firm TD Cowen analysts project a potential 25% to 50% reduction in commissions. U.S. consumers currently pay $100 billion annually in real estate commissions, according to Ryan Tomasello, a research analyst with Keefe, Bruyette & Woods, in a November 2023 Wall Street Journal article.
Additional ramifications of the new rules could include a potential exodus of real estate agents and brokers from the industry as their compensation substantially decreases, adding to the workload of those who remain. Higher professional liability exposures could arise with fewer, perhaps even less qualified or experienced, people working on transactions.
Copycat lawsuits may be filed against local Realtor associations that provide MLS services. For example, one local Realtor association with MLS services decided to add antitrust coverage to its professional liability policy. The association requested the additional coverage before the NAR settlement, foreseeing the potential of these lawsuits to trickle down to the local level.
Antitrust and class-action lawsuits involving agency commissions combined with higher interest rates and a tightening homeowners insurance market can potentially alter the real estate industry landscape and bring new and evolving exposures.
High interest rates
With interest rates of 6% to 7%, the mortgage broker industry will likely begin to offer creative financing solutions as they did years ago with interest-only loans. Although it’s unclear how the mortgage industry will tackle the current high-interest environment, innovative and alternative products will ultimately become available.
Clients must be aware of specific exposures that may derive from new financing solutions, including truth-in-lending finance disclosures and homebuyer suitability issues.
Homeowners insurance crisis
The homeowners insurance crisis in areas across the country, such as Florida and California, has made it difficult for buyers to obtain coverage. Many insurers have left these states or are not accepting new business due to the toll that catastrophic losses took on their underwriting profitability.
According to Redfin, a full-service real estate brokerage, so far, seven of California’s biggest property insurers have limited new policies in the state amid increasing wildfire risk. And in Florida, 11 insurers have liquidated amid growing flood and storm risk.
As a result of the tightening insurance market, buyers are backing out of real estate transactions when they are unable to obtain homeowners coverage or if the policy cost is prohibitively expensive in coastal areas like Florida or wildfire- or earthquake-prone regions in California. Real estate agents can face significant exposure when buyers claim they were misled or provided misinformation about the insurance costs or availability of coverage for properties, leading them to cancel a transaction.
Ongoing effect of social inflation
Nuclear verdicts®, defined as jury awards of $10 million or more, remain an issue, as evidenced by the fast actions against large realty associations. Contingent bodily injury (BI) and property damage (PD) exposures with out-of-proportion verdicts continue to impact the industry, particularly for large residential and commercial property managers. Claims include:
- Tenant injuries due to negligent property maintenance
- The failure to disclose mold in a listing, resulting in bodily injury to the buyer or remediation costs due to property damage
- Safety negligence following a shooting at a multifamily property
Including contingent BI and PD insurance under the professional liability policy continues to be problematic for these real estate subclasses. Underwriters can apply sub-limits, raise retention levels and exclude this coverage in highly litigious jurisdictions.
Real estate professional liability market
A potential emerging exposure for the real estate industry is the explosion of artificial intelligence (AI) on the scene. The use of generative AI to describe fake listings or to make a commercial or residential property appear more attractive to buyers with misinformation can lead to additional exposures. It’s an area to keep a close eye on.
The residential real estate professional liability market continues to experience a high frequency of claims, with certain venues more problematic than others due to their litigious environments. Class-action suits, anti-trust exposures, nuclear verdicts, and contingent bodily injury or property damage claims are ongoing trends in the residential property management sector.
The commercial real estate professional liability space, on the other hand, has been more stable and consistent.
Agents and brokers should discuss these and other exposures with their real estate clients, review any changes in coverage terms and conditions, check for gaps, and determine how to best address them. They should also monitor the rule changes to real estate agency commissions, any potential fallout, and the impact on exposures as the industry grapples with a new normal.
The author
Jude Sedliak is senior vice president of underwriting at Berkley Service Professionals, a Berkley Company. With more than 25 years of experience in underwriting professional liability in the admitted and non-admitted markets, he is responsible for contributing to the growth of Berkley Service Professionals’ expanding miscellaneous professional liability, insurance and real estate services portfolio. The views expressed in this piece are Mr. Sedliak’s and do not necessarily represent the views of Berkley Service Professionals or W. R. Berkley Corporation.
