The High Cost of Winning

Lessons in Risk Management
The High Cost of Winning
By Michael Casey, ACI and David Madariaga, Esq

When we attend home inspection conferences one of the main comments from home inspectors is that insurance companies always try to settle claims even if liability against the home inspector is questionable. While this is mostly true, the policy actually benefits the home inspector involved and the industry as a whole.

Litigation is expensive, and litigation through to a defense verdict or award is very expensive. In most cases, attorneys’ fees that represent the bulk of litigation costs are not recoverable. If insurance companies paid to litigate every questionable claim to its conclusion instead of seeking reasonable settlements in exchange for complete releases to avoid further litigation costs, insurance premiums to home inspectors would skyrocket. It costs a lot of money to prove you are right, and these costs are continually going up. Mike Casey can remember when first searching for E & O insurance in the 1980’s the quoted premiums were upwards of $10,000 annual. These days premiums for home inspector E & O are of the lowest we’ve ever seen. This is partly due to the ability of insurance companies to reduce litigation costs by negotiating early settlements in exchange for a full release.

Recently, Fowler Law Group obtained a ruling in a binding arbitration action that the home inspector had not breached the standard of care with regard to his listing inspection of a single-family residential house. Plaintiff, the purchaser, sought damages of over $239,000 for past and future repairs, alleging that the sellers intentionally concealed and failed to disclose material defects as part of the sale. The sellers denied any liability, but still cross-complained against the home inspector who performed the inspection for them. Although Plaintiff did not sue the home inspector directly, she repeatedly argued that he had breached the standard of care and was jointly liable for a substantial portion of her alleged damages. The binding arbitration process, while much quicker than a court action, still lasted eight months and involved substantial written discovery and numerous depositions. Mike Casey acted as the standard of care expert for the inspector and offered valuable testimony at deposition and arbitration. The binding arbitration hearing lasted five days and cost $5,811 (1/3 third share of the arbitrator’s fees). In total, attorney’s fees and costs for the defense of the home inspector exceeded $50,000, none of which was recoverable.

In another recent binding arbitration action, the arbitrator granted the summary judgment motion filed by Fowler Law Group, which argued that Plaintiffs had discovered all “material defects” alleged more than one year prior to filing her Complaint against the home inspector. In this case the CREIA Standard Residential Inspection Contract was executed, and it clearly reduced the time limit for filing this type of claim from the four years standard statute to one year from the date of discovery. Plaintiff sought damages in excess of $1,000,000 for property damage and personal injuries from exposure to toxic mold, and alleged that the home inspector was jointly liable for all damages despite alleging that conditions were concealed by the sellers. In this case, Plaintiffs actually argued that the home inspector, based on his skill and expertise, should have discovered that the sellers had concealed defects by patching and painting the house prior to the home inspection. Mike Casey acted as the standard of care expert for the inspector. The legal fees and costs billed to the home inspector’s insurance company totaled over $88,000. The cost for the arbitrator to consider and rule on the motion for summary judgment was in excess of $11,000. Again, we were unable to recover attorney’s fees, but in this case we were able to recover prevailing party costs under the fee shifting provisions of California Code of Civil Procedure § 998 regarding settlement offers (Plaintiffs did not accept a reasonable settlement offer of $55,000 and opted to continue to pursue an aspirational amount). After granting the motion for summary judgment, the arbitrator awarded over $23,000 in prevailing party costs to the home inspector. Fowler Law Group is currently working to collect this judgment from Plaintiffs through a wage garnishment and bank levies.

In yet another recent matter handled by counsel in South Carolina that Mike Casey worked as a consultant for the defense, the home inspector was sued in 2013 by his client, the buyer, along with many other defendant parties for defects in a home inspected and purchased during early 2009. Monetary demand was upwards of $140,000. During the litigation the Plaintiff continued to ignore reasonable settlement offers and site inspections were performed and several depositions were taken. Conveniently, during 2013 in the subject state an appellate decision was published enforcing the limit of liability (liquidated damages) clause in a home inspection contract regarding another matter. The inspector’s attorney, provided by his insurance company, filed a Motion for Summary Judgment based in part, on this recent decision. The motion was heard and the Summary Judgment was granted and the inspector was ordered to pay the $200 inspection fee back to the client as per the contract as full settlement. Of course, the cost to obtain this Judgment was over 100 times the cost of the Judgment.

Aside from the cost savings, settlement has other values to a home inspector. A settlement resolves the claim without the inherent risk of litigating a matter to judgment or award. No matter how good the facts are for the home inspector or the robust testimony of the home inspector and their experts, there is no guarantee that a jury or an arbitrator will agree that the home inspector has no liability.

A settlement is not an admission of guilt, and the terms of the settlement can be kept confidential. A judgment against a home inspector is a public record and can affect personal and corporate credit ratings. Settlement eliminates the risk of a judgment against the home inspector. Settlement agreements can also contain remedies that would not be available even if the home inspector prevails, such as a requirement that negative internet postings be removed. An early settlement also allows the inspector to avoid the stress and time of appearing at deposition and testifying at trial. Finally, settlement allows the inspector to move on, get back to work, and stop worrying about the litigation.

The moral of all this is that you can be right or you can have lower insurance premiums, but you can’t have both. So the next time your insurance company or defense counsel recommends an early settlement, don’t fight it. Instead, work with them to obtain the best settlement possible, as early as possible. Sometimes Plaintiffs can be unreasonable and trial or arbitration will be necessary. Insurance companies are prepared for that and will defend their insureds through to the end if necessary. If the home inspector has insurance, the insurance company will pay the costs of litigation. We caution that not all matters work out as well as the ones presented herein, and in litigation, there are no guarantees.

Author Bios:

David Madariaga, Esq. of Fowler Law Group defends home inspectors throughout California for several errors and omissions insurance carriers. He has been a speaker at COA and ASHI conferences and has authored articles in NAHI, CREIA and ASHI magazines. Mr. Madariaga is AV rated by Martindale-Hubbell, and is the managing partner in charge of litigation and lead trial counsel at Fowler Law Group, where he also handles construction defect matters, transportation, and premises and products liability. He has been practicing law for over twenty-two years and is licensed in California and Nevada.

Dave can be reached at dmadariaga@fowlerlawgroup.com

Michael Casey, ACI, MCI is the 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 and Code History Master, Michael has authored numerous other technical books, has taught home and building inspection nationwide and has an expert witness and claims consulting practice throughout North America since 1987. Mike has inspected over 10,000 buildings in his over 28-year career in the inspection profession and has served as a consultant or expert regarding over 600 inspector claims for both claimants and defendants.

Mike can be reached at Mike@MichaelCasey.com


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