Modern Real Estate Practice in Illinois 7th Edition
Errata (2011-09-21)
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Page/Location
Was
Change to
Page 283, question 17
b. The past address of the
grantee
b (55)
b. The full address of the
grantee
personalty See personal
property.
b (42)
c (58)
b (58)
b (102)
c (117)
a (125)
a (126)
b (137)
b (140)
c (140)
b (140)
b (184)
c (184)
b (181)
a (181)
c (190)
b (190)
b (211)
a (211)
b (228)
b (228–229, 246)
d (261)
b (262)
c (261)
d (262)
a (275)
b (275)
Page 675; insert new glossary
definition
Page 683, Chapter 4, question
4
Page 683, Chapter 4, question
19
Page 684, Chapter 6, question
16
Page 684, Chapter 6, question
18
Page 684, Chapter 7, question
11
Page 684, Chapter 7, question
12
Page 684, Chapter 9, question
5
Page 684, Chapter 9, question
16
Page 684, Chapter 9, question
18
Page 684, Chapter 10,
question 18
Page 684, Chapter 11,
question 18
Page 685, Chapter 12,
question 17
Page 685, Chapter 12,
question 18
Page 685, Chapter 13,
question 17
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
Chapter 5 Updates
The following terms should be added to the Chapter 5 Key Terms list on page 74. These
terms and their definitions should also be added to the Glossary.
 errors and omissions insurance Business liability insurance that helps protect
real estate professionals, individuals, or companies from bearing the full cost of
the defense for lawsuits relating to an error or omission in providing covered
professional services.
 fiduciary standard A legal standard that holds a licensee to the highest ethical
standards that the law provides.
 professional real estate services Services that require a person to have an Illinois
real estate license in order to perform those services on behalf of clients,
customers, and consumers.
Add the following to page 79, immediately before the “Managing Broker
Responsibilities” section.
IRS Tax Considerations: Independent Contractor/Regular Employee
One of the most important decisions a sponsoring broker needs to make is how to
classify workers for tax purposes. Determining employee classification should
always be discussed with a tax professional. This section is not intended to
provided tax advice; it is only to provide information to help a business owner
better utilize a tax professional. The relationship between the sponsoring broker
and the person who performs services for that broker is viewed by the IRS in its
Publication 15-A (2010), Employer’s Supplemental Tax Guide, as a statutory
nonemployee.
The IRS has three categories of statutory nonemployees: direct sellers, licensed
real estate agents, and certain companion sitters. The IRS has two requirements
for the statutory nonemployee:
 Payment or compensation for the service must be directly related to sales
or other work output and not on the number of hours worked.
 The workers have contracts specifying that they will not be treated as
regular employees for tax purposes.
Workers who meet these two requirements will be treated as self-employed or
independent contractors.
A sponsoring broker’s relationship with a licensee who is an independent contractor can be very different from the relationship with an employee. As the name
implies, independent contractors usually have a more flexible work schedule than
that of employees. A broker may determine what the independent contractors do
(especially because the contractors represent the broker as the broker’s agents) but
cannot dictate how they do it. As such, a company can expect independent
contractors to comply with its policies and procedures. An independent
contractor’s income is typically commission-based. Independent contractors are
responsible for paying their own income taxes and Social Security taxes.
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
It is not unusual for the IRS to investigate independent contractor and regular
employee statuses in real estate offices. Under the qualified real estate category in
the Internal Revenue Code, three requirements must be met in order to apply
independent contractor status to an individual:
1. The individual must have a current real estate license.
2. The individual must have a written contract with the sponsoring broker
specifying that the licensee will not be treated as a regular employee for
federal tax purposes and that the taxes will be paid by the licensee.
3. At least 90 percent of an individual’s income as a licensee must be based
on sales production and not on the number of hours worked.
IN ILLINOIS Illinois real estate laws do not currently define the concept of a
team, although the laws that define activities that require a real estate license in
Illinois apply to them.
The sponsoring broker must consider whether licensed real estate team members
should be treated as independent contractors or employees under the Internal
Revenue Code and the Fair Labor Standards Act, to name a couple of applicable
statutes.
If a licensed team member is a statutory independent contractor, this might be true
for tax purposes only. For other purposes, the licensee might be a common law
employee; in that case, Illinois workers’ compensation laws might apply.
A licensed team member must have a written employment contract/independent
contractor agreement with the sponsoring broker.
Unlicensed team members are regular employees. Either the sponsoring broker or
a licensed team member might compensate them. The sponsoring broker will
want to ensure that proper withholding requirements are met if a team member is
compensating the regular employee. It is vital to consult an attorney and a competent tax advisor on these issues.
Similarly, the use of an unlicensed personal assistant, whether or not a member of
a team, must comply with the laws that determine who is an independent contractor. By definition, the unlicensed personal assistant does not meet the safe harbor
provisions of an independent contractor and would likely need to be paid as a
regular employee. If the safe harbor provisions do not apply, then the employer
should review the IRS test, with the advice of a tax professional, to determine if
the worker meets the criteria.
The managing broker must remember that determining whether a worker is or is
not an independent contractor is primarily done for tax purposes and has no
impact on activities that require an Illinois real estate license.
Add the following to page 83, immediately before the “Business Planning” section.
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
Safety Concerns: Appointments and Showings
Real estate agents enjoy working with the public and have historically felt safe
while performing their jobs, but the trend has shifted in recent years, with a
number of agents robbed, raped, and murdered while showing homes and other
properties.
Many real estate firms have responded to the violence by incorporating safety
procedures into their procedure manual as a way to help keep their agents safe.
Licensees can help minimize risks by implementing the following suggestions.
 Ask the customer for work, home, and cell phone numbers and a physical
address. Verify the information by calling the customer at one or more of
the numbers.
 Give someone in your office an itinerary of properties you plan to show
and then check back in often by cell phone.
 Do not meet unknown customers at a property. Require that they meet you
at your office. Make sure someone writes down their license plate number
and the type of car they are driving.
 Never get into a car with someone you don’t know. Use your vehicle for
showings or ask your customer to follow you in another car.
 Program your cell phone to dial 911 at the touch of a button.
 Never work at a public open house by yourself.
 Do not show vacant properties by yourself unless you know your
customers, and never show properties after dark.
 Keep pepper spray or mace handy.
 Always follow the customers into the property and let them enter while
you stay by the door.
 Pay attention to exits.
 Ask someone else to accompany you to show or list property if you feel
uncomfortable about the people you are working with. Don’t assume that
women are safer customers than men. Women are as just as capable of
armed robbery and sometimes work with a partner who waits at the house
for the two of you to arrive.
For offices that don’t have office safety procedures, the National Association of
REALTORS® and other state and local associations have developed safety
guidelines that will aid licensees when showing or listing properties and holding
open houses.
Add the following to page 83, immediately before the “Personal Assistants” section.
Errors and Omissions Insurance
Sponsoring or managing brokers have an array of issues and options to consider
when deciding to obtain an errors and omissions insurance (E&O) policy. In
general they need to determine what level of protection to seek in the policy and
how to tailor the coverage to their sponsoring/managing practice. Because
insurance policies and practices vary from company to company, the sponsoring
or managing broker must be careful to review any specific policy intended for the
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
office and should discuss coverage with more than one insurance provider before
obtaining coverage.
Brokers are licensed professionals who are held to fiduciary standards. A
fiduciary standard is a legal standard that holds a licensee to the highest ethical
standards that the law provides. Licensees have the duties of advice and counsel
to the represented client and must be fair, honest, and accurate in dealing with
consumers and customers whom they do not represent. In this regard, the broker
is treated no differently than a doctor, lawyer, or other licensed professional
acting in a confidential environment. However, unlike a doctor or a lawyer, the
broker is expected to engage in sales activities that can conflict with the duties
owed by a fiduciary. This conflict can create significant professional liability
exposure for the real estate licensee.
The classes of services performed by licensees shape the types of liability claims
most often filed against real estate licensees. Real estate licensees may represent
buyers, sellers, lessors, and lessees. They coordinate a variety of services, such as
insurance, title, loan origination, home inspection, and legal. In addition they
often function as independent professionals managing their own offices,
advertising campaigns, and other related business functions. In providing these
services licensees become vulnerable to potential liabilities.
Licensees earn a specified commission or negotiated fee (typically based on some
percentage of the final sale price or annual rental cost) as they help secure buyers
or tenants for various kinds of real property usually owned by third parties.
Because earnings are a function of commission for each transaction, increasing
the number of transactions increases the annual earnings. Dual agency also
increases the total compensation through representation of both parties in the
transaction but can also increase the possibility of conflicts of interest. In order to
prevent a breach of fiduciary duty, licensees must know how to balance a client’s
specific requirements with the duties owned to third parties.
Liability claims can also arise from a number of related services provided
occasionally for a separate fee basis or are incidental to the transaction. These
include property appraisal, property management, auctioneering, consulting, and
handling earnest monies or security deposits. The real estate licensee needs to be
aware that not all these activities are covered by standard real estate broker’s
liability coverage forms. Some real estate licensee services require a special
endorsement to the insurance policy for an additional premium; other services
require the purchase of a separate insurance policy.
The most common errors and omission claims against real estate licensees include
the following:
 Mishandling moneys (earnest money or security deposits) during
transactions
 Making misstatements about material facts regarding the property, such as
the presence of lead-based paint, asbestos, or radon
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
 Misrepresenting the property dimensions or failure to measure property
dimensions accurately
 Disclosure of confidential information without authorization from the
client
 Undisclosed dual agency
 Failure to identify the real or personal property correctly in the contract
 Mistakes regarding the property tax identification number (PIN) for the
subject property or failure to provide an adequate legal description of the
property
 Misrepresentations about financing arrangements
 Failure to disclose a financial interest in the customer who is negotiating
with the client
 Failure to disclose financial relationships compensating the licensee in the
transaction
 Violations of the federal Fair Housing Act and the Illinois Human Rights
Act
 Breaching the terms of the listing or buyer agreement or the property
management agreement
Policy Protection and Covered Services
A real estate licensee needs insurance protection from claims made by clients,
customers, and consumers related to the provision real estate activities, referred to
as professional services by the insurance industry. The sponsoring/managing
broker must determine whether the errors and omissions policy adequately
addresses what
1. Services are covered;
2. Person(s) are covered;
3. Damages are covered;
4. Defenses are covered; and
5. Territory is covered
Real estate licensees should know whether the services they provide constitute
“professional services” and are thus insurable under the policy. They should also
be aware that professional services are defined differently in each insurer’s policy.
Professional real estate services typically refer to services that require a person
to have an Illinois real estate license in order to perform those services on behalf
of clients, customers, and consumers. As a prerequisite for coverage, the licensee
must possess all valid necessary licenses or certifications at the time of the act or
omission giving rise to the claim and must be acting within the scope of the
employment agreement, either written or oral. Sometimes insurance companies
will include coverage for ancillary professional real estate services rendered by
the insured for others such as a notary public’s duties.
Covered Defense Costs
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
Errors and omission policies may sometimes pay the costs involved in
investigating, defending, and settling claims. These costs primarily involve
attorney’s fees but also include related expenses required by the claim settlement
process. The sponsoring broker should determine whether defense costs are
covered by the policy or in addition to the policy limits. If defense costs are
covered within the policy limits, then as the legal fees increase, the limits of the
coverage of the policy are proportionately reduced.
Excluded Coverage
Most E&O policies exclude certain ancillary real estate-related activities. These
exclusions include a licensee’s involvement in areas that do not require an Illinois
real estate license, such as property development and insurance agency
operations.
Depending on the insurer, coverage for such services may be “bought back” for
an additional premium, if an insured’s operations require such coverage. A real
estate licensee who wants coverage for such services may obtain it by paying an
additional premium or, depending on the limitations of the policy, by obtaining a
separate policy. The sponsoring or managing broker should also be aware that
violations of fair housing laws, some civil sanctions, and criminal act are not
covered by E&O policies. Some policies will cover the legal defense for certain
issues, such as discrimination, but not the damages awarded.
Other possible exclusions from coverage under E&O policies include the
following:
 Bankruptcy of the insured
 Violation of securities law
 Wrongful termination
 Employee Retirement Income Security Act (ERISA)violations
 Claims by or against related entities
 Workers’ compensation claims
 Personal injury claims
 Claims arising from usage of vehicles, aircraft, and watercraft
 Environmental issues, such as mold and asbestos
 Real estate owned by the insured
 Commission disputes
Because there can be coverage gaps between E&O policies and commercial
general liability (CGL) policies, the sponsoring/managing broker should ensure
that excluded coverage for bodily injury, property damage, and personal injury
are covered by CGL policies or by special endorsement. Potential gap coverage
between E&O policies and CGL policies should be discussed by the sponsoring
broker with the insurer to best customize the coverage to the brokerage firm.
Covered Persons
Errors and omissions policies are intended to cover those licensees whose licenses
are held by the sponsoring broker, as well as office staff and unlicensed assistants
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
in an insured real estate broker’s office who may be involved in a transaction—
even if their function does not involve professional activities. Where the
sponsoring broker is a business entity, such as a partnership, corporation, or
Limited Liability Company (LLC), these policies can include coverage for past
and present partners, officers, directors, and regular employees. Because the
nature of the claims against the policies can survive the death or incapacity of the
insured, coverage should be structured to include the heirs, executors,
administrators, and trustees in bankruptcy of the insured.
Independent Contractors
Most real estate offices that sell residential real estate will sponsor licensees who
are treated as independent contractors. Therefore, it is important that the E&O
policies cover those independent contractors. The sponsoring/managing broker
must keep in mind that unlicensed assistants cannot be treated as independent
contractors because it is a violation of federal tax law. Therefore, the
sponsoring/managing broker must be certain that the E&O policy is written to
cover unlicensed assistants. A sponsoring broker must also address liability
arising from predecessor firm issues. For example, brokerage firm A acquires
brokerage firm B with at least 50 percent of brokerage firm B’s licensees joining
brokerage firm A or where brokerage firm A assumes at least 50 percent of
brokerage firm B’s assets and/or liabilities. Under these circumstances, a claim
against a brokerage firm B licensee (for an incident prior to the acquisition) who
currently works with brokerage firm A could become the obligation of brokerage
firm A.
Covered Territory
Most E&O policies cover claims resulting from anywhere in the world, provided
the claim and concomitant litigation is brought in the United States, its territories
or possessions, or Canada. Actions conducted outside the United States will likely
require additional coverage or separate policy. The licensee should be aware that
use of Internet Web sites with their worldwide exposure might lead to claims and
litigation outside the United States; a licensee would need a policy with
unrestricted territorial coverage to address this issue.
Other Policy Issues
The sponsoring or managing broker should be aware of additional issues that
might affect E&O coverage. The insurance claims process varies from insurer to
insurer. Therefore, licensees need to understand the procedures of their provider.
Some policy issues to be aware of include the following:
 Most E&O policies have liability caps that set a payment limit per claim
and an aggregate payment limit; the licensee should obtain coverage that
matches the licensee’s liability exposure.
 There are two basic types of deductible provisions. One type of deductible
applies to each error committed, and the other type applies to each claim
filed. Limits per error are found in a non-accumulation clause. For
example, if a licensee represents a condo developer whose units have a
©2011 Kaplan, Inc.
Modern Real Estate Practice in Illinois 7th Edition
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

series of claims filed for multiple coverage periods, the policy will restrict
coverage to the monetary limit of the first coverage period. Also, most
policies permit the insurer to assess the deductible even if the claim does
not lead to a liability against the licensee if the insurer pays for the
successful legal defense.
Most E&O policies have provisions that limit payment to the amount
offered in a settlement offer. If the licensee refuses the settlement and the
subsequent trial judgment is higher than the settlement offer, then the
licensee will be liable for the payment amount in excess of the settlement
offer, as well as the defenses costs of the trial.
All E&O policies have some additional conditions that are essential
elements of the policy’s coverage. All policies have subrogation
provisions that allow the insurer the right to initial litigation where the
insurer has paid on claims against the policy. Insurers require the insured
to cooperate with the claims process and subsequent litigation and prohibit
the insured from making voluntary settlements.
Problems may arise when one insured sues another insured. This can occur
when one licensee sues another licensee in the sponsoring broker’s office
resulting from a claim arising from professional services provided (e.g.,
one agent selling another agent’s property) in that office. The policy
should include a special clause that ensures coverage for that type of
claim.
Although most insurers limit coverage to the inception date of the policy,
some insurers will consider providing first-time insurance buyers coverage
for prior acts (for an additional premium). Generally, prior acts coverage
are limited to retroactive claims for no more than five years. If the policy
expires or is cancelled and is not replaced with a new policy with prior
acts coverage, then the licensee must have an extended-reporting-period
clause that allows a claim that occurred during the coverage period to be
processed against the expired policy. This type of coverage is usually
limited to no more than one to three years after expiration of the policy.
It is the duty of the sponsoring broker to determine what level of E&O insurance
is necessary to meet the needs of the brokerage office.
©2011 Kaplan, Inc.