Lessons in Risk Management
Lessons in Risk Management
By Mike Casey, ACI, MCI & David Madariaga, Esq.
Is the inspector claiming the sky is falling?
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 and time urgency. The deficiency was identified in the report; however, the client was not savvy enough to realize the potential financial impact of the condition. The solution is better communication in the inspection report between the inspector and the client.
As we have suggested previously in past articles, it is imperative to include in your report an explanation of the seriousness of material defects (significant deficiencies) – do not assume that your client understands or that the client will be provided proper advice regarding action by someone else. We recommend identifying the deficiency, explaining the ramifications of the condition if not corrected and an urgency of time for action. This action would usually be something like “we recommend further evaluation by a licensed and qualified ______ prior to the end of the inspection contingency period to determine the scope of repair necessary to assure the system/component will perform as intended and safely, including costs for these repairs or replacement.”
We also recommend not using the “recommend further evaluation” comment when not necessary. We have desensitized readers of our reports over the past years with over-use of this phrase. In one case, the inspector recommended further evaluation of a roof, as it was worn and aged. The client did nothing during escrow as advised by the selling agent and complained later about the cost to replace the roof. The inspector was told later by the broker “we see recommend further evaluation all the time by inspectors as a CYA attempt, so we pretty much ignore it.” Clearly, this is an issue needing correction. We believe providing a reason why (ramifications) action is necessary will help us correct this problem.
Another claim we are seeing is similar – essentially the inspector identifies several deficiencies with a furnace — not operating properly and corrosion — and recommends an HVAC contractor for repair. The deal closes and the HVAC contractor recommends replacement of the furnace. The client complains to the inspector that the replacement of the furnace was not recommended and had they known about this, they would have negotiated for such with the seller. The “had I known, I would have had the seller repair” or “had I known, I would not have bought the house” laments are common to almost every client complaint we see. Again, the communication between the inspector and the client was inadequate because the client did not learn that a furnace with several problems may need to be replaced.
In order to improve communication and help prevent this type of complaint, or at least provide a better defense, we recommend the following: Don’t limit defects with a component or system to your specific list of visible defects. There are probably more. For example, if you see several defects with a furnace, you might say, “The inspector observed the following deficient conditions with the furnace, which include, but are not limited to, ______ and ______.
“These conditions can lead to furnace malfunction or the need for replacement of the system. We recommend further evaluation by a licensed and qualified HVAC technician prior to the end of the inspection contingency period to determine the scope of repair necessary to assure the system/component will perform as intended and safely, including costs for these repairs or replacement.”
Remember, many times when you specifically list deficiencies in a finite list in your report, the list is provided to a repair person with the specific instructions to repair only the items on the list. This can happen even if you say “further evaluation.” I believe being clear that your list is not all-inclusive and putting the onus on the repair person to determine what is required will help reduce this type of claim. Of course, if you do not provide the client an explaination why further evaluation is needed (because failure, leaks, could result in costly repairs), and that the evaluation must be performed prior to the close of the contingency period, it is unlikely that the client will follow your recommendation.
Lastly, with regard to underground drains for dewatering (yard drains): When you see atrium or sump drains or even drains for the gutters that are underground, be sure to tell the client that you can’t see the pipes or test the performance. Recommend inquiry with the seller regarding past performance, inform the client that if the drains are not working water will pond and possibly cause damage, and that to really determine the actual condition, a camera inspection is recommended prior to the close of the contingency period.
Remember, your job as an inspector is to provide the client with information to make a financial decision during the emotional turmoil of a real estate purchase when the buyer is being peppered with paperwork and reports. Provide the client with clear, concise information on what the material defects are, why further evaluation is necessary, and that the further investigation must be completed prior to the close of the contingency period. Do not bury this information in a long report. Do not provide opinions about the cause of a defect or opinions outside the scope of your inspection, and do not clutter up the report with information on how to maintain a house. Removing these unnecessary items will help unclutter your report and emphasize the recommendations you are making. Any extra maintenance or other information for the client should be an appendix to the report, separate book or links. Keep the report and the facts only about the specific house you are inspecting.
Michael Casey, ACI, MCI, is principal of Michael Casey & Associates, a national A.M. Best-recommended consulting firm based in San Diego. Mike is past-president of the California Real Estate Inspection Association (1994/1995) and of the American Society of Home Inspectors (ASHI) (2002). Mike is multi-code certified by the ICC and IAPMO. He is a licensed general, plumbing and mechanical contractor in several states and a Virginia Certified Home Inspector. Besides co-authoring several books in the Code Check series, Michael has authored numerous other books, has taught home and building inspection nationwide, and has had an expert witness and claims consulting practice throughout North America since 1987. Mike has inspected over 10,000 buildings in his over 27-year career
in the inspection profession, and has been consultant or designated expert regarding over 600 inspector claims for both claimants and
defendants. Mike can be reached at Mike@michaelcasey.com or 703-969-7070
David B. Madariaga, ESQ., is an AV-rated attorney and partner at Fowler Law Group, where he manages the litigation department. David has defended real property inspectors for over ten years, has authored articles on property inspections, and regularly speaks regarding risk management at COA and ASHI seminars. David had gained an understanding of building practices and procedures by defending general contractors and subcontractors in construction defect litigation for over fifteen years. In addition to his experience defending insureds, David learned risk management by supervising the handling of all claims for an insurance company that sold insurance policies to general contractors and subcontractors in California, Nevada, Arizona, and Texas. Mr. Madariaga is licensed to practice law in California and Nevada. He obtained his
undergraduate degree at UCLA and his law degree from Loyola Law School. Dave can be reached at dmadariaga@fowlerlawgroup.com
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