Lessons in Risk Management

Recently, we have seen quite a few claims that included issues reported by the inspector, but lacked magnitude explanation and/or direction for any action.

Many of these claims were regarding conditions reported by the seller in some fashion in the disclosure statement and repeated by the inspector in the report. However, the inspector failed to comment further beyond parroting the seller’s disclosure language, did not reference the source of the information, or make any independent evaluation and provide client direction.

Let’s look at an example: Let’s say you see the disclosure statement and read the seller’s comment that the “basement leaks in spring.” You think this is great information and write in your report under the basement section: “Leaks in spring.” What happens if the basement leaks during summer, fall and winter, too? Isn’t any water intrusion a potential problem? Some clients might not be happy even though they have been forewarned of some level of leakage. This can be somewhat useful when it comes time to negotiate the claim, but not wholly effective. The fact is a claim is a claim regardless of allocation of liability and must be defended. Prevention by informing the client of the deficiency, what it means and its magnitude and what action is necessary is the best practice.

Recommendations:

First and foremost, if you read information in the seller or any disclosure statement, do not assume it is accurate. After all, most of the time they are written by non-experts and by persons with material interest in the sale.

Second, always make your own independent evaluation of the entire house. It is okay if you disagree with the information in the disclosure statement.

When referencing third-party information, such as from a disclosure statement, pest control report or comment from a neighbor, always cite the source of the information and that the facts should be verified, possibly by an expert. Be sure to provide further direction such as with the “leaks in spring” comment about the basement. Further direction such as “weather conditions may increase frequency and intensity of leakage” and/or “further evaluation and repair options should be obtained from a basement waterproofing expert, prior to the end of the inspection contingency period” should be provided.

We see some reports lately with the comment “see pest control report” after listing a deteriorated wood condition. This comment assumes that a pest control report exists and that the pest inspector actually identified the condition you are referencing. We see lots of lenders now not requiring a pest control clearance for funding, so do not assume that a pest or wood-destroying organism inspection was performed. If you see conditions that warrant it, recommend that a complete inspection be performed by a licensed pest control inspector and that the recommended repairs are performed or similar.