If a licensee embezzles earnest money, who is ultimately liable?

In the situation where a licensee embezzles earnest money, the ultimate liability falls on the licensee's firm. This is because real estate firms are responsible for the actions of their agents when those actions are conducted within the scope of their employment. The firm is typically held accountable for the financial practices and misconduct of its employees, as they have a duty to supervise and ensure proper handling of funds and ethical behavior.

When a licensee misappropriates funds, the firm must address the loss to the affected parties, such as the buyer or seller, as they are the ones who suffer the financial damage. This relationship is part of the legal framework governing agency and fiduciary responsibilities in real estate transactions, which places the onus on the firm as the entity that licensed the agent and is expected to maintain professional standards. Consequently, the firm often has liability insurance to cover such incidents, further emphasizing its responsibility in such cases.