The Risk Manager, Fall 2001

Real estate malpractice claims are historically second only to personal injury-plaintiff claims in terms of frequency. This high frequency is attributable more to the large number of lawyers that practice real estate law than to any lack of competence in that part of the bar. Real estate malpractice, however, more than other areas of law involves substantive errors. They center on title searches, document preparation, and failure to know the law.

Real Estate Malpractice Errors

• Erroneous description in deed of property to be conveyed
• Misstated date to which interest was to be computed
• Failure to fill in blank on form
• Failure to reserve mineral rights
• Failure to advise on impending change in law
• Unauthorized delay or failure to strictly enforce closing time limits
• Failure to discover encumbrances on the property:
  • mortgage lien or deed of trust
  • tax lien
  • mechanic's lien
  • right-of-way
  • mineral lease
• Failure to attend commissioner's sale
• Failure to know other applicable law, e.g., probate, tax
• Failure to assure that clients received or conveyed title as represented:
  • remainder
  • dower
  • outstanding life estate
  • lease
• Errors in the description of the property
• Failure to perfect security interest:
  • failure to prepare mortgage document
  • failure to update title search at time of closing
  • failure to record or timely record a mortgage
  • filing in the wrong county
  • failure to obtain releases of other encumbrances
• Failure to collect or protect security interest

A recent ABA study showed that nation-wide for the period 1996-99 real estate malpractice claims accounted for nearly 17% of all claims. As the box showing Lawyers Mutual’s real estate malpractice history reveals, we in Kentucky have apparently surged ahead of the 1999 national average in the last two years.

It is always difficult to pinpoint reasons for increases in a type of malpractice claim, but there is a clear correlation between economic downturns and real estate claims. Businesses go bankrupt and buyers of real estate default on mortgage payments. Tax and mechanic’s liens are recorded in increasing numbers. The result is that undetected errors in real estate transactions begin to surface. Usually at this juncture everyone is insolvent and uninsured except for the lawyers who become the deep pockets in the equation. What follows is an outline of risk management principles for real estate practitioners. This is a review for most, but now is the time to be especially cognizant of real estate malpractice risks.