The California legislature recently passed Senate Bill 764 to expand upon the types of financial security available to real estate brokers that allow authorized agents access to client trust accounts.
Under the previous law, real estate brokers that accept funds belonging to their clients were required to deposit all of those funds into an escrow or trust fund account. If the broker allowed its licensed agents or its employees to have access to and withdraw funds from a trust account, the law required the broker to obtain a fidelity bond equal to the maximum amount of the funds held in trust. A separate bond was required for each trust account managed by the broker. As you can imagine, the cost of maintaining such bonds is, for many brokers, sufficiently high enough to dissuade them from allowing their agents or employees to have access to their trust accounts, which has the practical effect of limiting a broker’s resources in the handling of their clients’ resources.
Effective January 1, 2018, brokers that desire to grant their agents or employees access to trust accounts will now be permitted to obtain insurance coverage in lieu of a fidelity bond. The insurance coverage must also be equal to the maximum amount of the trust funds to which the agents or employees have access and the coverage must protect the broker from the intentional bad acts of the agent or employee (theft, forgery, and fraud). The new law is codified in Business & Professions Code section 10145.
Many brokers already carry errors and omissions policies that would cover these types of acts but have heretofore also had to incur the additional expense of a fidelity bond. With the elimination of the necessity of carrying a bond, brokers can do away with the redundancy of both insurance and bond coverage and potentially save significant money. Brokers that have not opted to allow their agents or employees to have access to trust funds due to the prohibitive cost of carrying a fidelity bond may take advantage of the new law and gain more flexibility when it comes to the management of their clients’ accounts.
If a broker is considering utilizing insurance in order to qualify, they should carefully review their current policy to ensure that it affords coverage for the intentional bad acts of their agents and employees. A broker should also consult with their insurance agent, as adding the coverage may still cost significantly less than the cost of a fidelity bond.
Daniel Nevis is a partner at the law firm of Miller Morton Caillat & Nevis, LLP, located in San Jose, California. If you have questions for Daniel about this article, please email him at firstname.lastname@example.org
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