In a disputed-value claim, a buyer alleges the sale price exceeded the true market value. You, as the seller’s agent, can be sued by a buyer who is alleging the seller disclosed inaccurate or misleading information.

That information could come from public records, but usually it’s shared by the sellers themselves. They might misrepresent the property’s square footage or number of bathrooms, or they might fail to disclose unpermitted additions or defective conditions.

Another type of disputed-value claim is when sellers allege the property was worth more than the sale price because the appraiser inaccurately calculated the square footage.

Richard J. Monahan is Divisional Assistant Vice President for Great American Insurance Group. Great American works with The Herbert H. Landy Insurance Agency, a Texas REALTORS® risk management partner. Here’s what he suggests for avoiding disputed-value claims.

The stages of a claim

The buyer’s attorney may send you a demand letter before a lawsuit is even filed. Notify your errors and omissions (E&O) provider immediately when you receive a demand letter. You and your attorney could try to work out the situation and avoid the claim altogether.

The buyer may file a lawsuit naming you, your broker, and the appraiser as defendants. The buyer may make other allegations such as negligence and fraud.

Your attorney can try to have you dismissed from the lawsuit. If that doesn’t work, you can try to settle or go to trial.

The lawsuit will proceed through the exchange of discovery. Parties will conduct interviews and share transaction documents such as emails and texts between the involved parties, Monahan continues. “For example, if the documents show that a real estate professional had no knowledge that the square footage was inaccurate or that there was no easement affecting the property’s value, it lends support to the defense of the claim,” he says.

Disputed-value claims can be resolved within days or as much as five to six years after the commencement of a lawsuit. Most cases are resolved before trial.

How to defend yourself

Losing a lawsuit can be expensive—as high as hundreds of thousands of dollars. Defending a lawsuit, even if you win, can also be expensive. “Typically, higher-value homes and ZIP codes could lead to higher damages valuations and expectations from the claimants,” he says.

Your E&O insurance may cover your legal fees and costs plus indemnity for settlement and judgments up to the policy’s liability limit. Your coverage may connect you with claim representatives and experts who can help guide you. Reach out to them first.

Next, seek out legal representation; a strong reply to a demand letter from your attorney can sometimes fend off lawsuits before they start. Your E&O provider may choose an attorney for you.

When defending you, your attorney may cite the provision of The Real Estate Licensing Act, which says you can’t be held liable for a misrepresentation or concealment of material facts made by a party in a real estate transaction unless you knew the representation was false and failed to disclose it to the other party in the transaction.

Obtain a written seller’s disclosure notice during the real estate transaction. There are different approaches as to how involved a real estate professional should be in a seller’s disclosure, but Monahan recommends reviewing the document to verify the disclosed information is consistent with known information. “Having said that, a real estate professional has no duty to inspect listed property,” he says. “But if a real estate professional knows that a property’s square footage was increased with an unpermitted addition, it should be disclosed to the buyer.”

How common are these claims?

Most real estate claims nationwide involve an element of disputed value; Texas claims are no different, Monahan says. A common claim in Texas arises from failure to disclose defective foundations.

Monahan says there’s no sign yet that the recent market cooling will lead to more claims. “However, if history repeats itself, mortgage lenders may seek to recoup losses from brokers and appraisers after foreclosing on non-paying borrowers by alleging excessive sale prices,” he says.

Monahan recommends avoiding future claims by never interpreting property conditions, such as calling foundation cracks “minor”; never acting outside of your areas of expertise; following pre-established office procedures; and maintaining a well-documented file including written confirmations of conversations.