Editor’s note: This is the second in a two-part series on regulations governing the marketing of home warranties by real estate brokers and agents. Part one, "Settlement reached over alleged home warranty kickbacks to brokers," examines regulators’ recent interpretations of the Real Estate Settlement Procedures Act (RESPA), which define how home warranty companies may pay real estate brokers and agents, and describes settlements American Home Shield Corp. has reached in two class-action lawsuits.
In settling two lawsuits alleging that it paid illegal kickbacks to real estate brokers to market its home warranties, American Home Shield Corp. has been careful to protect real estate brokers and agents from liability.
American Home Shield — the nation’s largest provider of home warranties — has denied that the payments it’s made to real estate brokers who market its products violated the Real Estate Settlement Procedures Act, or RESPA.
The company admitted no wrongdoing when it recently agreed to pay up to $26 million to resolve allegations that the payments violated RESPA because they were intended to reward brokers and agents for referring business to the company.
American Home Shield put a positive spin on the settlement, noting that it released brokers and agents from liability, and supported the company’s position that its current broker compensation program, ProConnect, "is in compliance with RESPA guidelines and regulations."
About 500,000 homebuyers and sellers who purchased warranties between May 27, 2008, and March 4, 2011, may be eligible to receive an average of $52 each under the terms of the settlement. Additional information about the settlement of the case, Abney v. American Home Shield, are available at AbneyClassAction.com, a website maintained by the independent claims administrator in the case.
Final approval of the Abney settlement was delayed when a homebuyer in Texas objected that it released real estate brokers and agents from liability.
Those objections were withdrawn after American Home Shield agreed that consumers filing claims will not be asked whether their decision to purchase a home warranty was influenced by a real estate broker or agent, and a formula that will be being used to calculate claims was adjusted to provide for slightly larger payments.
In another, less publicized case, in 2010 American Home Shield agreed to pay $5 million and revise its policies concerning the marketing and fulfillment of home warranty contracts in Texas. American Home Shield admitted no wrongdoing in its settlement with the state of Texas, which also sought to protect real estate brokers and agents.
American Home Shield’s related legal troubles began in 2003, when the Texas Attorney General’s Office opened an investigation into whether the company had fulfilled the promises it made when marketing its warranties to consumers.
The investigation landed in court in the spring of 2006, after the Attorney General’s Consumer Protection Division served American Home Shield of Texas Inc. with a formal records request for 17 categories of documents. American Home Shield filed suit against the state in Harris County District Court to quash the demand, calling it "overbroad and unduly burdensome."
A week later, the Texas Attorney General filed a 10-page counterclaim alleging that American Home Shield of Texas had engaged in "false, misleading or deceptive acts and practices" by "refusing to repair or replace … major systems and appliances as represented and warranted."
In their April 2006 counterclaim, Texas authorities alleged that American Home Shield "routinely" denied most "big-ticket, high-dollar claims, including (air conditioning) repairs and replacements, water heater replacements, and most plumbing repairs." Contractors hired by the company to perform repairs had "a built-in incentive to" deny claims, because it increased their chances of winning more business, Texas claimed.
Similar allegations would be made in two class-action lawsuits filed against American Home Shield the following year: Faught v. American Home Shield, filed in U.S. District Court Northern District of Alabama in October 2007; and Edleson v. American Home Shield, filed in California Superior Court in San Diego in July 2007.
The California court rejected a proposed settlement of Edleson v. American Home Shield, which would have created a review desk for homeowners to resubmit previously denied claims.
The court hearing the Edleson case expressed concern that American Home Shield would have the right to readjudicate claims, and that consumers included in the settlement would be giving up "viable" and "realistic" rights in exchange for the hope "that a defendant that has allegedly not acted in good faith" before would do so.
After the proposed Edleson settlement was rejected, American Home Shield reached a tentative settlement in Faught v. American Home Shield, which also called for a review desk for consumers to resubmit claims.
The proposed Faught settlement was opposed by 24 homeowners and the Texas Attorney General’s Office.
In a friend of the court brief opposing the Faught settlement, the Texas Attorney General’s Office complained that it provided no monetary relief for consumers, and did not require American Home Shield to pay restitution or penalties.
Texas officials argued they had "a strong case" against American Home Shield, which, in marketing and administering its home warranties, had allegedly violated the Texas Deceptive Trade Practices Act (DTPA) on numerous occasions, leaving the company liable to "enormous" penalties.
The act gave Texas the right to seek civil penalties of up to $20,000 per violation, with no maximum; "disgorgement" of any "ill-gotten gains"; and comprehensive injunctive relief curtailing American Home Shield’s future business practices, the Texas Attorney General noted.
Not only was American Home Shield liable under DTPA for allegedly not providing the level of coverage implied when marketing their warranties, Texas officials claimed, but the company had paid "kickbacks" to real estate brokers, violating both RESPA and DTPA.
"For many, many years, American Home Shield has been making payments to real estate brokers, as a commission on the sale of American Home Shield warranties to the brokers’ clients," Texas officials alleged.
The payments were "viewed by its own industry as illegal" because they were made on a referral basis. Marketing agreements with brokerages required that they "deal exclusively with American Home Shield — thus freezing all other warranty companies out of the market."
(In settling the Harris County case, American Home Shield denied all of the allegations made by the Texas Attorney General’s office, or of having "engaged in any conduct in violation of Texas or other law." The company said it agreed to the settlement, "solely to avoid the expense and uncertainty of litigation.")
To back up their claims, Texas officials filed a copy of a Nov. 1, 2006, marketing agreement between American Home Shield and Ebby Halliday Real Estate Inc. The agreement stipulated American Home Shield would pay the Dallas-based brokerage a $90 "service fee" for each home warranty sold by its agents, and $40 for each renewal of a warranty originally sold through Halliday.
The marketing agreement stipulated that Ebby Halliday agents would present warranties to potential customers "by describing features (and) marketing the benefits and limitations of the program, including coverage and pricing options."
The brokerage was to promote American Home Shield warranties in local prospecting and marketing materials, including displays, listing presentation packets, buyer packets, and classified advertising "at Halliday’s discretion."
The agreement stipulated that competitors’ marketing materials "may not be prominently displayed but may be available if requested by a seller or buyer."
"Whenever possible," Ebby Halliday agents were to complete the AHS warranty application for their clients and transmit it to AHS for processing.
American Home Shield promised to provide Ebby Halliday with service-cost reports "for managers to use at sales meetings to reinforce value of the AHS home warranty," and also "assist Halliday in tracking agent usage of contracts on (a) monthly basis via monthly sales reports provided by AHS."
The agreement called for American Home Shield to "work with Halliday and its staff to train and develop their skills to utilize the online ordering capabilities offered by AHS."
American Home Shield also promised that if the marketing agreement landed the brokerage in any hot water — if it faced a RESPA claim or other legal "actions, losses, claims, liabilities, damages or expenses" — the warranty company would indemnify the brokerage.
Texas officials submitted a report by an expert witness, attorney Fred Hagans, who concluded that "the fact that AHS attempts to indemnify the brokers from RESPA liability in the marketing agreement evidences its actual knowledge that the agreement may constitute an illegal kickback arrangement."
The one-year marketing agreement, signed by Ebby Halliday President Mary Frances Burleson and American Home Shield President David Crawford, is no longer in effect.
"Ebby Halliday Real Estate has no marketing agreement with American Home Shield, and respectfully declines any further comment," said David Patton, vice president of Ebby Halliday, in an email.
Because American Home Shield was paying brokers to sell its warranties and offer its products exclusively, Texas officials said the company’s claims that real estate professionals preferred its products over those of other home warranty companies were also deceptive.
"Every time that (American Home Shield) represented that ‘Realtors recommend AHS over twice as often as the nearest competitor,’ it was a violation of the DPTA," the Texas attorney general alleged. "Every time that AHS paid a kickback to a real estate broker, it was a violation of the DTPA. The total number of DTPA violations committed by (American Home Shield) are sizable."
In objecting to the settlement in Faught v. American Home Shield, Texas officials said it would prevent the state’s consumers from receiving any benefits from the state’s enforcement actions, and "prohibit the class members from participating in any lawsuit, whether class action or state enforcement action, relating to the ‘business practices’ of American Home Shield for a period of two years."
Consumers, Texas officials said, "are simply not receiving a benefit worth of such a sacrifice, particularly since the state of Texas is using its best efforts to obtain meaningful monetary restitution for them."
Texas officials said they were conferring with other state attorneys general and hoping others would join in objecting to the settlement. None did.
In an April 2010 opinion granting final approval of the Faught settlement, U.S. District Judge R. David Proctor noted that "Texas has been litigating for over four years and to date has not yet obtained anything of value for its citizens." The Faught settlement, on the other hand provided "valuable benefits" for consumers — not to mention certainty, Proctor said.
Proctor noted the Texas Attorney General’s Office and American Home Shield had both sought to postpone a summer trial date for the Harris County case, and "no evidence has been presented to the court that establishes that (consumers) from Texas would be better off rolling the dice in a case not yet decided."
In approving the Faught settlement, Proctor noted that it did not bar consumers from filing claims in the related RESPA case, Abney v. American Home Shield.
Proctor’s approval of the Faught settlement was appealed to the 11th Circuit Court of Appeals, which upheld the settlement.
A major provision of the Faught settlement is the creation of a review desk for consumers to resubmit rejected claims to American Home Shield. The California state court that rejected the proposed settlement in the Edleson case questioned the effectiveness of such remedies.
But the Faught settlement included staffing requirements designed to make the review desk more effective, and also included "strong incentives for (American Home Shield) to properly settle claims," the 11th Circuit Court of Appeals ruled in an Oct. 31, 2011, opinion upholding the settlement.
Although Texas had objected to the Faught settlement, it did not join the appeal. In August 2010, the Texas Attorney General and American Home Shield settled the lawsuit they had been litigating for more than four years in Harris County.
The settlement required that American Home Shield terminate any marketing agreements that called for real estate professionals to receive payments in exchange "for marketing or selling a residential service contract to a particular consumer."
American Home Shield was allowed to make any outstanding payments owed to real estate brokers under those agreements.
Without admitting wrongdoing, American Home Shield agreed to pay the state of Texas $3 million to reimburse the state for attorneys’ fees, court costs and investigative costs.
In addition, the settlement required that the warranty company make charitable contributions totaling $2 million to consumer law clinics at Southern Methodist University Law School, the University of Houston Law School, and St. Mary’s School of Law.
The charitable payments to consumer law clinics were to be made in three installments through 2013. American Home Shield will be released from making those payments if, at any time, "the state asserts any claims against real estate professionals" arising out of compensation paid to them by the company.
In addition to releasing American Home Shield from claims relating to its marketing and administration of its home warranties, the Texas Attorney General’s Office also agreed "not to directly or indirectly intervene, appear, file any pleadings, friend of the court papers, or other documents" in the three class-action lawsuits against the company — Abney, Faught and Edleson.
A spokesman for the Texas Attorney General declined to comment on the 11th Circuit Court of Appeal’s ruling upholding the final approval of the settlement in Faught v. American Home Shield.
D. Frank Davis, a lead attorney for consumers in both the Abney and Faught cases, told Inman News that his law firm, Davis & Norris, wants to hear from any consumer whose claim is denied after it is submitted to the review desk to be created by the Faught settlement.
"As noted by both the district court and the Court of Appeals, the Faught settlement is more favorable to all the class (members) in many important ways," Davis said in an email.
"Under Faught, individuals whose denied claim incurred in the first year of their contract and involved a heating or air conditioning unit are very likely to have their claim paid on reconsideration because of particular language in the settlement concerning the standard to be used by the review desk. All the other claims resubmitted are also more likely to be paid on this time because of the negotiated penalty provisions."
