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Published by OREP, E&O Insurance Experts | August 2013

 


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In today's world a claim can come from nearly any source. Just because you're contracted to work for your client, that doesn't necessarily stop cliams from being filed by parties unrelated to the original inspection.
 

Editor’s Note: Home inspector attorney Joseph W. Denneler shares his expertise about insurance and claims.  

What One Inspector Learned the Hard Way About General Liability Insurance
By Joseph W. Denneler, Esquire

Most professional home inspectors carry some form of insurance.  Many states require certain types of coverages and minimum limits for liability.  In today’s world a claim can come from nearly any source.  Just because you’re contracted to work for your client, that doesn’t necessarily stop claims from being filed by parties unrelated to the original inspection.

Even the most diligent, well-trained and articulate home inspector can find himself or herself “in the soup,” as I’m fond of saying when describing home inspection lawsuits.  Given what I’ve seen and read over the last 15 years defending inspectors (through their insurers or independent of insurance) I cannot envision a time when I would not counsel my clients to adequately protect themselves through an insurance policy.

Simply having “coverage,” however, is not the end of the analysis.  Insurance policies insure against risks. They provide an inspector with a defense (legal costs including attorney’s fees and court costs) and indemnity (payment of a judgment on behalf of the inspector if he or she is held liable at the end of litigation).  In order to be adequately “covered” a home inspector needs to insure himself or herself against the peril of committing an error or omission while performing the professional service being provided, here, home inspection.  The only way to properly insure against that risk is through errors and omissions (“E&O”) coverage.  General liability (“GL”) coverage, while certainly warranted, simply does not provide the appropriate level of financial defense against lawsuits where an inspector is alleged to have been negligent in performing an inspection.

A basic understanding of the nuances between E&O and GL policies is necessary to appreciate the risks involved.  E&O coverage generally protects an inspector from a claim that the inspector was negligent, breached the terms of the contract to perform the home inspection, failed to provide proper recommendations about defects found during the inspection, and nearly any type of claim fashioned to pursue an award of money damages resulting from a failed inspection.  GL coverage is broader in terms of the scope of risks it protects against.  But, GL coverage is designed to act the way its name suggests: it covers general allegations and not those specifically calling into question the performance of the home inspection service. 

What is General Liability Coverage
In order to understand the differences in the coverages afforded by these two types of policies consider the following scenario.  John Smith Home Inspections is hired to provide a routine home inspection for a client.  During the inspection Smith retrieves his ladder from his truck and proceeds to place it so he can climb up and inspect the roof.  While Smith is walking with the ladder he stumbles and inadvertently smashes the windshield of the neighbor’s car parked in an adjacent driveway.  That incident would usually be covered by a GL policy, because it doesn’t relate to the performance of a home inspection.  That incident is not an error or omission in the performance of the home inspection.  Following that mishap, Smith climbs the roof and continues his inspection.  Smith completes the inspection and provides his report to his clients.  Unfortunately, Smith fails to notice an area of depression on the front of the roof indicative of a structural failure of the roof framing.  His clients later file a lawsuit because they have to repair the roof themselves and did not have an opportunity to address the defect with the sellers prior to settlement.  That failure by Smith is directly related to his performance of his professional services and presumably constitutes an error or omission (negligence) in performing the inspection.  This is a very typical example of how E&O insurance is used in today’s home inspection industry.

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A real world example of these distinctions recently played out in a federal court in Florida.  There, an inspector learned that the combination of an error in performing an inspection and a failure to carry the proper insurance coverage can be catastrophic.

In Auto-Owners Ins. Co. v. E.N.D. Services, Inc., 2013 U.S. App. LEXIS 2529, Plaintiff insurance carrier sought a judgment by the United States Court of Appeals for the Eleventh Circuit that it did not owe coverage, i.e. a defense and indemnity, to its insured home inspector under a GL policy.  The GL policy contained a “professional  services” exclusion that provided that there was no coverage under the policy for claims related to bodily injury, property damage, personal injury or advertising injury due to rendering or failing to render professional services in the performance of any inspection. Most GL insurance policies have similar “professional services” exclusions. 

The action in the Court of Appeals was the second stage of an already protracted litigation.  Originally, the clients sued the home inspector for failing to detect structural defects caused by insect infestation and water damage.  The lawsuit alleged breach of the inspection contract, negligence in performing the inspection and a violation of the Florida Deceptive and Unfair Trade Practices Act.  All of the claims were based on the alleged error in failing to detect the structural damage.

The inspector was insured under a GL policy and did not purchase E&O coverage.  The GL policy contained an exclusion that excluded from coverage claims of bodily injury, property damage, personal injury and advertising injury related to the rendering or failure to render professional services in the performance of any inspection. The inspector’s insurance carrier initially accepted the claim for coverage, retained legal counsel for the inspector and began defending against the claims.  However, soon after accepting the claim the carrier determined there was no coverage under the GL policy for the claims made in the lawsuit due to the “professional services” exclusion.  The carrier promptly denied coverage and withdrew its defense, leaving the inspector with the burden of defending himself with his own money.

After the coverage decision the inspector did nothing to defend himself.  It is unclear whether he simply had no financial resources to mount a defense or that he just didn’t understand the legal process.  Regardless, following the entry of a default judgment against the inspector for failing to defend, the court assessed the damages against the inspector at $245,940.  Take a minute and contemplate the enormity of that amount of money, particularly in light of there being no insurance to indemnify the inspector against this judgment. Think about how many inspections you would need to perform to make your client whole since insurance won’t pay on your behalf.  Imagine being in those shoes for just a second, then let your heart stop pounding and your nerves calm down and read the rest of this article.

The plaintiffs must have realized that collection of that judgment from the inspector, where there was no insurance coverage, would be nearly impossible. Accordingly, they agreed to accept an assignment of the inspector’s rights to challenge the insurer over whether coverage should have been afforded for plaintiffs’ claims. The agreement provided that the inspector would remain personally liable for any difference between the amount recovered from the carrier and the amount of the judgment.  That proved to be a prudent undertaking.

The insurance carrier filed its own lawsuit against the plaintiffs and the inspector, seeking a declaration by the court that the GL policy in fact did not provide indemnity for this loss. Plaintiffs argued that the GL policy should have provided coverage because the inspector was not properly trained or experienced enough to be a true “professional” and as such could not have been providing any “professional services” at the time of the subject home inspection.     

The court held that the “professional services” exclusion applied to the claim that the insured home inspector failed to detect and report on structural defects and termite damage during a routine home inspection. The court determined that the “professional services” exclusion was unambiguous, despite there being no written definition for “professional services” contained in the GL policy.  The court found that despite the lack of a written definition within the policy, the exclusion was clearly written so that no definition was required under Florida law.  Consequently, the home inspector was liable for the damages of $245,940.00 and had no insurance coverage for the loss. 

Part of my law practice involves traveling around the country providing risk management seminars for home inspectors through franchise organizations, local chapters of home inspector associations, and the like.  I’ve met many home inspectors.  I have yet to meet one that could bear the cost of paying off that judgment because it’s simply a function of economics.  In order to offer competitive rates in the home inspection industry, the average inspection costs about $350-$450 these days.  Using that price range, an inspector would need to perform about 614 inspections to cover the judgment, not to mention having to put food on the table and a roof over the family’s heads.  Suffice it to say, incurring that large of a debt would likely bankrupt most inspectors, and, if they’re in a state that allows it, may make the inspector personally liable for that judgment regardless of how their business is structured or their assets protected.

E&O Insurance with General Liability
Weighing the risk of ending up on the hook for a six-figure judgment or buying proper coverage should result in the balance scale tipping quickly toward buying the proper insurance.  In most cases, E&O coverage would have provided the inspector above with a defense and indemnity against the plaintiffs’ claims in the original lawsuit.  GL coverage is typically cheaper than E&O coverage, primarily because the risks of being sued for an error in performing the inspection is greater than the risk of damaging a neighbor’s property or committing some other general act of negligence while performing a home inspection. 

When shopping for a policy, going for the cheapest product is not always the best way to go.  Look for a policy that includes both errors and omissions and general liability. Take the time to understand your policy and how it relates to your professional work.  Given the litigious nature of our society, particularly in a bad economy where homebuyers may not have the resources to make repairs that arise during their ownership, having the proper insurance protection is critical.  Otherwise, you may one day find yourself staring down a judgment that could’ve easily been avoided.

For more information feel free to contact me on Linked In or by e-mail at jdenneler@srstlaw.com.

 

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