By Bob Aaron
A recent Nova Scotia court judgment emphasizes the importance of providing timely notice of potential claims and regulatory complaints to the errors and omissions insurer of a brokerage.
Hermiena Murphy was a real estate agent who had been working for 20 years with Halifax brokerage Hants Realty Limited, a company owned by Larry Matthews.
In April 2005, Robert and Anita Patten purchased a home at 26 River Court, Enfield, N.S., from CIBC following a foreclosure action. It turned out that the home had an inadequate supply of domestic water. Murphy was the agent in the transaction.
The property buyers filed a complaint with the Real Estate Commission that Murphy did not inform them about the inadequate water. Unfortunately, the complaint was not reported to the insurer for Hants during the policy period.
The buyers then sued Murphy and Hants Realty, alleging negligence, misrepresentation and breach of contract. Murphy cross-claimed against Hants and Matthews.
At the 2015 trial, the case against Murphy and the brokerage was dismissed. The judge found that Murphy did not know of any latent water supply defect. When the real estate agent and the home inspector raised concerns about the well, the Pattens made it clear that they were not concerned because they planned to drill one.
In her lawsuit against Hants and Matthews, Murphy asked the court to award her a reimbursement of her legal fees, taxes and disbursements in the Patten lawsuit because Hants/Murphy had not reported the complaint to the professional liability insurer of Hants during the policy period.
As a result of the failure to put the insurer on notice, Murphy was denied insurance coverage in defending herself in the Patten negligence action and was personally responsible for her legal fees.
The issues in the court case were whether Hants/Matthews owed Murphy a duty to report the complaint and whether Matthews was personally liable.
Murphy argued that as Matthews had told her there was no need to report the claim he was personally liable in negligent misrepresentation. Matthews stated it was his belief that only lawsuits needed to be reported to the insurer and not complaints, which were not included in his understanding of a “claim” under the insurance policy.
Matthews testified he had not read the insurance policy. Hants and Matthews also argued Murphy had deliberately withheld material facts about the claim contained in third-party emails regarding the inadequate wells, and thus acted in bad faith.
The trial took place in Nova Scotia Supreme Court last September before Justice Ann E. Smith. The judgment was released in November. Murphy was awarded damages of $75,711.
The judge found that Matthews’ claim that Murphy deliberately withheld information about the well problems was without merit. The judge also ruled that it was an implied term of Murphy’s contract that Hants would report any claim against her to the insurer within the policy period.
When it failed to report the complaint to the insurer, Hants had breached Murphy’s employment contract. The complaint was clearly a claim that fell within the policy definition.
The court held that Hants owed Murphy a duty to exercise reasonable care when determining whether to report the claim. Matthews knew, or could reasonably have known, that the complaint was a possible claim under the policy, and it was reasonably foreseeable that failure to report the claim would cause Murphy harm.
Hants therefore breached the duty of care owed to Murphy. Matthews had also made an untrue, inaccurate and misleading statement in telling Murphy the complaint did not need to be reported. Matthews had acted negligently by not reading the policy.
Murphy acted reasonably in relying on Matthews’ representations, given their relationship history and she had also suffered loss.
As a director of Hants, Matthews was personally liable for any wrong that he committed while acting in the course of his duties.
The court ruled that Hants and Matthews were jointly and severally liable to Murphy for damages of $75,711 plus pre-judgment interest.
I always advise my agent and broker clients that when it comes to a claim or regulatory complaint, or even potential claims or complaints against them, the safest course of action is to report it to the insurer at the earliest possible moment.