No Coverage Under E&O Policy for Real Estate Transaction Involving Payment of Undisclosed Fee
The Supreme Court of Utah has affirmed summary judgment in favor of an insurer, holding that language regarding the scope of coverage under a real estate brokerage company’s insurance policy encompassed only services performed for compensation through a traditional real estate commission. Compton v. Houston Cas. Co., 2017 WL 1101816 (Utah Mar. 23, 2017).
The brokerage company had a professional liability errors & omissions policy that provided coverage for insureds when acting “[s]olely in the performance of services as a Real Estate Agent/Broker of non-owned properties, for others for a fee.” In a prior action, a group of real estate investors obtained a judgment against a real estate agent working for the insured. The agent had arranged for a transaction between the investors and a developer where the investors deposited $705,000 into escrow as a “reservation deposit.” The developer was to develop land into individual lots, after which the investors would pay a final contract price. The agent did not disclose that he was to be compensated by the developer out of the $705,000 for bringing the investors into the deal. The developer breached the contract, and the investors discovered that much of the $705,000 had been spent, including some in payment to the agent. The investors obtained a judgment against the agent for approximately $1 million. They then settled with the agent and acquired his claims against the brokerage company’s E&O insurer.
The investors sued the insurer for failing to defend and indemnify the agent. A lower court granted summary judgment for the insurer, holding that, because the agent did not act “solely” as the investors’ real estate agent on behalf of the brokerage because of his “dual or competing roles,” there was no coverage available under the policy.
On appeal, the court did not address the sole capacity issue and instead based its ruling on the alternative ground that the agent had not been performing services “for a fee.” The investors argued that the clause required only “the payment of money.” The Court rejected that interpretation, concluding that “for a fee” meant “traditional real estate commissions to be paid to the agent from the brokerage out of funds transferred at the closing of a real property transaction.” In so holding, the court noted that Utah law required money paid to real estate agents to first go through a broker and found it “unlikely that the parties intended the word ‘fee’ to stretch so broadly as to include the payment of money in violation of law.” Because the agent did not expect to receive such a fee and in fact testified that the deal involved “no commissionable event,” the court held that the policy did not provide coverage.