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No real estate business wants to get sued in a class action or pay the associated legal costs, which can be hefty. The question often arises then: Will my company’s errors-and-omissions insurance protect me if we are hit with a class action? The answer is “maybe,” and, in any event, your insurer will almost certainly fight you over the matter. So prepare yourself for a protracted legal fight against a determined adversary. The good news is that, sometimes, insureds can and do win these battles.

The main dispute with your insurer will normally be, of course, over the language in your insurance policy and any applicable exclusions. For example, in a recent ruling by a Georgia federal court, First Multiple Listing Services, Inc. (FMLS), sued its insurance company to recover $4 million that it spent successfully defending itself in a class action, which had alleged that the company’s listing fees amounted to unlawful kickbacks. The court found that the policy’s exclusion for “professional services” did not apply and that the insurer was therefore on the hook for defense costs. The insurance company also tried to argue that lawsuit expenses did not qualify as covered “losses” under the policy. Luckily for FMLS, the court ruled that the insurer had waived that argument.
What other situations are you likely to face in a dispute with your insurance company over class-action coverage? The most frequent:
  • Adequate notice. Any insurer’s first line of defense is probably going to be that you failed to provide it with timely or sufficient notice. So you should notify your carrier the moment you learn of a class-action lawsuit.
  • Your insurer will likely assert that it should not be liable for any transactions that involve different service providers. Since class actions typically pull in all sorts of different participants in real estate transactions, this can be a tricky obstacle for you to navigate. In a lawsuit I handled in 2013 involving this issue, the court found that the jury had to decide the question of causation.
  • Reasonableness of defense costs. For three reasons, defense expenses will escalate quickly. First, you will need to hire a sophisticated law firm that has experience handling class actions. Second, the usual strategy for defending class actions calls on the defendant to try to get the case dismissed as soon as possible, which leads to expenses for motions to dismiss or attempts to defeat class certification. Third, class actions are almost always asymmetrical in terms of discovery: the plaintiffs demand a mountain of documents from you and themselves have little discoverable information.
  • Temporarily floating your own defense costs. An insurer will often deny coverage and then bring a lawsuit to have a court declare its obligations under the policy. This will put the defense costs on you until that matter is resolved.