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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
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.
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.
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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
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.
Insurance with General Liability
For more information feel free to contact me on Linked In or by e-mail at firstname.lastname@example.org.
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