Risk Management Bulletin: How Insurance Saved Home Inspection Businesses

The following bulletin is provided as a service by Business Risk Partners (BRP) and their claims administrator, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP. BRP is an endorsed ASHI provider. Please note that this bulletin is merely a general discussion of topical matters involving the home inspection industry and is not and should not be construed as legal advice of any kind. Further, as laws differ from state to state and because the law related to home inspectors changes regularly, please consult with an attorney in the proper jurisdiction to obtain legal advice on any particular matter.

The home inspector’s pre-inspection agreement

While it is always appropriate to highlight the importance of errors and omissions insurance as a device to insulate home inspectors from poten-tially financially crippling claims, at the outset we once again would like to underscore the importance of obtaining a signed pre-inspection agreement. Although exculpatory clauses contained in such pre-inspection agreements are adjudicated differently throughout the country, having a signed agreement with language limiting the home inspector’s liability continues to serve as the first line of defense when a claim is made, irrespective of the jurisdiction. Further, clearly defining the scope of the inspection within the terms of the agreement can serve to insulate home inspectors from broad negligence claims.

The home inspection

Home inspectors frequently find themselves facing the following dilemma: The client expects the home inspector to be their expert contractor, structural engineer, entomologist, etc. with regard to the detection of every potential issue within the home. However, noting every potential issue with the home is not always realistic. Many conditions and situations limit the ability of the home inspector to perform up to the lofty expectations of the client, and when the client’s expectations are not met, claims and litigation can ensue. Without the proper liability insurance, a slight oversight in a home inspection can potentially expose home inspectors to thousands of dollars in personal costs and expenses.

How E&O insurance may save your business

By way of examples below, we illustrate the importance of errors and omissions insurance. Given the ever-increasing value and often age of homes that home inspectors are contracted to inspect, we believe errors and omissions insurance is a tool to potentially save the home inspector’s business and personal assets.

We recently handled a matter in which, during the course of a February home inspection, the inspector shut off the power to the property’s furnace in order to inspect the furnace filter. However, upon completion of the home inspection, the inspector neglected to turn on the power to the furnace. The property owner returned to the home a few days later to find the furnace off and the water pipes frozen. The pipes burst, causing tens of thousands of dollars in damage as the result of an innocent mistake. However, because the inspector carried errors and omissions insurance, it only cost the inspector $2,500 out-of-pocket for damages that might otherwise have ended his business.

In another recent matter, a home inspection company decided to expand by hiring someone who they believed to be a licensed home inspector. However, the inspector’s license was revoked shortly after he accepted the job. A claim was subsequently filed against the home inspection company due to the alleged negligence of the unlicensed inspector. Though the allegations against the inspector were questionable, we were forced to settle the matter due to the licensing issue. Here, a mere oversight in hiring, coupled with no apparent extensive mistakes in the inspection of the home, still would have cost the home inspection company more than $100,000 but for its errors and omissions insurance.

As a final example, we recently handled a matter in which the home inspector was sued for failure to detect mold, problems with the air conditioner, electrical problems and visible evidence of moisture. Consequently, the homeowner sued the home inspector for $20 million in punitive and compensatory damages. In this instance, it was uncertain whether the home inspector had been negligent as related to the inspection of the home. With our extensive experience in these types of lawsuits, we were able to assign the case to a uniquely capable local attorney and direct an aggressive defense of a potentially devastating lawsuit. Ultimately, the court held that the home inspector’s pre-inspection agreement (which limited damages to the cost of the inspection) was enforceable and the court awarded the homeowner only $450. Notwithstanding, the cost of defending the lawsuit exceeded $25,000, but the inspector was only responsible for $5,000, his policy’s deductible.

We hope that these scenarios provide valuable lessons for all inspectors. While mistakes can happen, not all claims can be avoided and even baseless lawsuits can be extremely expensive to defend. Proper insurance can save home inspectors thousands of dollars, their businesses and their reputations in the event that a claim is made.