Fraud, Misrepresentation and Errors and Omissions Insurance

Material Facts, Misrepresentation, and Fraud

In real estate transactions, a material fact is any piece of information that could reasonably influence a party's decision to buy, sell, or negotiate terms. Misrepresentation occurs when an individual makes a false statement regarding a material fact, or when someone fails to disclose a material fact that they have a legal duty to reveal. Licensees must understand that providing incorrect information or staying silent when disclosure is required exposes them and their brokerage to serious liability.

Misrepresentation generally falls into three distinct categories based on intent and standard of care: innocent, negligent, and fraudulent. Innocent misrepresentation occurs when a licensee makes a false material statement in good faith, with a reasonable basis for believing it is true and without negligence or intent to deceive. Negligent misrepresentation takes place when a licensee makes a false statement without a reasonable basis for believing it to be true, thereby failing in their required professional duty of care. Fraudulent misrepresentation, also known as actual fraud, requires the legal element of scienter, which means having actual knowledge of the statement's falsity or acting with reckless disregard for the truth. Broadly, fraud involves knowingly or recklessly making a material false statement, or intentionally concealing a fact one has a duty to disclose, specifically to induce reliance that causes harm.

Depending on state law, constructive fraud may arise when a breach of duty misleads another party and causes injury, even in the absence of an actual intent to deceive. Furthermore, active concealment, such as a party painting over structural water damage solely to hide it from prospective buyers, constitutes fraudulent misrepresentation. By contrast, puffing is an exaggerated statement of personal opinion or sales hyperbole that a reasonable person would not rely upon as factual, such as calling a property 'the coziest bungalow in town.' While puffing is generally not actionable as misrepresentation, licensees must exercise caution to avoid opinions or sales claims that misleadingly imply factual knowledge.

A claim of ignorance may not shield a licensee when applicable law imposes a duty to discover or disclose facts that reasonable professional diligence would have revealed. Changing brokerages does not extinguish a salesperson's potential liability for actionable misrepresentations made while affiliated with a prior supervising broker.