|> E&O/GL Insurance for Home Inspectors|
Competitive Rates, Broad Coverage, Free Risk Management, online inspection
support for tough questions, discounts on education and more…
Professional Coverage, Competitive Pricing
Shop OREP today!
Inspector Claims and Risk Management: An Inside Look
By Isaac Peck, Senior Broker at OREP insurance
At OREP, we have the privilege of working with several thousand home inspectors every year—providing risk management, insurance, and liability advice to help inspectors stay out of trouble and, unavoidably, defending our inspectors when trouble comes.
While you and I may have never met, I know you work hard for a living and I know you do the best you can to provide a thorough, high-quality home inspection for your clients.
With that said, and at the risk of sounding like a wet blanket, this is America. There are more lawyers per capita in the United States than any other country in the world.
But perhaps more impactful than our society’s litigious nature is the unique position home inspectors find themselves in with respect to liability and “blame.” The combination of unrealistic expectations of what a home inspector can detect, buyer’s remorse, and “wanting someone to blame-ism” when a home defect is discovered—all too often creates a perfect storm of unreasonable demands and inflated lawsuits against this noble profession.
Home inspectors are much more likely to receive a demand letter or a lawsuit than any other real estate professional—and most tradesmen or professional service providers generally.
A few days before Christmas last year, I had three claims against OREP home inspectors cross my desk in a single day! It’s not pretty, but it’s the truth. Risk is real.
Consequently, it’s more important for home inspectors (especially) to build in professional procedures, inspection processes, disclaimers, disclosures, and key contract clauses that will help them avoid claims and put them in the best possible position if a claimant does come knocking.
Here are some practical tips on protecting yourself and staying out of trouble based on recent claims that have crossed my desk.
This one comes up several times a year. Polybutylene piping was a popular water supply pipe material used by builders from 1978 and 1995. Polybutylene was originally thought to last as long as copper. It is flexible and can be bent, which made it easier to install (and it was relatively inexpensive).
However, in the late 1990s a series of class action lawsuits were filed against Shell Oil Company (which supplied the polybutylene fittings) and other pipe manufacturers. In total, Shell paid over $1 billion to settle several class action lawsuits over the defective nature of polybutylene piping.
After a flurry of intense litigation, polybutylene is now widely regarded as a defective product and homes that still have the piping continue to experience sudden pipe bursts, leaks, and water damage.
Home inspectors frequently mistake polybutylene piping for PEX, checking the PEX box in their home inspection report. Or, perhaps the home has been replumbed in specific areas (like the laundry room) with copper piping. Seeing copper piping in one area of the home, the home inspector might confidently report that the plumbing is copper.
We have seen cases where all visible piping in a home was copper but the interior piping in the walls throughout the home was all polybutylene.
Consequently, home inspectors are frequently blamed by new homeowners for failing to call out polybutylene piping. The argument is usually that the home inspector reported the piping as “PEX” or “copper,” but in reality, there was polybutylene piping and therefore the home inspector should pay for it. The cost to replace polybutylene piping with PEX or copper piping can run anywhere from $10,000 to $20,000.
How to identify polybutylene piping:
• It often has a stamp reading “PB2110”
• It is most often a gray plastic, but can also be silver, blue, white, and black
• It is usually ½” to 1″ and is used only for water supply, not drainage or waste
A good approach that I heard recently on how to handle this was from Ian Robertson, when we were chatting on his Inspector Toolbelt Talk podcast. Instead of reporting that the home has one type of pipe, Robertson reports something like this:
The majority of piping that could be seen at the time of inspection was [PEX/copper/etc]. Other plumbing materials may be present but were not detected at the time of inspection.
This gives the home inspector a good hedge against this fairly common claim. Of course, you want to be on the lookout for polybutylene piping, checking all piping that protrudes from the wall (the water heater, kitchen, bathtubs, jacuzzi, etc.) and do your best to report it and protect your clients.
(story continues below)
Like Reuben Saltzman says (pg. 24), if you’re inspecting an attic and you can’t see what you’re stepping on, you don’t know what you’re stepping on! Be very careful about where you step/place your weight in an attic. Many home inspectors have a policy that they don’t walk where there’s no decking. That’s prudent. We’ve seen home inspectors step through ceilings and/or break rafters.
Perhaps more devastating (and expensive), is if you step on a sprinkler pipe and break it—like in a case I saw last year. The home was a three-story condo/townhome and there was no water shutoff at the street. Water flooded the home from the attic down through all three stories for over a half hour before the fire department to shut off the water. In this type of case, even a strong and experienced defense team can’t save you. Restoration and dry-out expenses, tear-out, build-back, damage to property, and loss of use—you name it. The settlement for these claims can approach six figures.
Foundation and Decks
These are two areas where it pays to slow down, follow a clear process, and perhaps take some extra training (if needed). There’s quite a bit of science and “standards” that go into the proper construction of both decks and foundations.
Exterior decks can quickly become a safety issue for new homeowners and there’s a lot that goes into making sure a deck is properly constructed. Are the spindles spaced too wide? Are the deck posts grounded in cement? How is the attachment to the main home? Is the railing firm? Is there sufficient support and adequate use of strong-ties in the construction to ensure the deck’s structural integrity?
Some of these issues may not be expressly stated in your Standards of Practice, but if you’re going to inspect a home with a deck, I’d strongly advise taking some specific education around this subject. There’s a lot that goes into proper deck construction and while it’s not realistic to expect home inspectors to be deck experts, a little knowledge can go a long way towards helping you avoid claims and also keep your clients’ families safe.
Foundations are a similar situation, especially with wood, crawlspace stem, and “pier and beam” foundations. A little extra training on these systems is invaluable. It also pays to slow down in this area of the home. A home inspector who is rushing can easily overlook a missing joist or key structural support in the foundation. Depending on what’s missing or defective, this can be costly.
With foundations that have crawlspaces, if you do not inspect the entire crawlspace—don’t say that you did. It’s not uncommon for a home inspector to inspect a portion of the crawlspace and report an “all clear,” but face a claim when the uninspected crawlspace areas are found to have serious structural defects, mold, water damage, and so on. If you can’t access the entire crawlspace, state so clearly and disclaim it. There are a number of tools you can use to conduct thorough crawlspace inspections as well (See How Robots Can Help Your Business).
Hold Harmless and Indemnification
If you are using subcontractors at all, you should have an agreement that requires them to “indemnify” you for any errors they make in their services.
There are many different ways this can play out (depending on the type of subcontractor), but here are two examples:
• Scenario #1: In addition to your home inspection, you offer ancillary services to your clients such as WDI/Termite inspections or Sewer Scoping inspections. Instead of performing those inspections yourself (you might not have a pest license), you sub that work out to a pest inspector or a plumber. Since you’re smart, you verify that these professionals are carrying their own E&O insurance.
• Scenario #2: You have home inspectors working for you as independent contractors (1099) and in an effort to insulate yourself (and your insurance) from their mistakes, you prudently require them to carry their own E&O insurance.
In both of these scenarios, even if these other professionals are carrying insurance, you still need a separate agreement between you and the subcontractor that the subcontractor will indemnify you and hold you harmless for any errors that they make.
The reason for this is that your company is the one being hired by the homebuyer to perform the work. So, if something goes wrong, you are the one who is going to face a claim or receive the demand letter.
The fact that the subcontractor is carrying their own insurance policy means little if YOU are the one who is named in the lawsuit or demand letter. Neither your subcontractor or their insurance will volunteer themselves in your defense. Without an indemnification agreement between the parties, the best you can hope for is to get your insurance company to argue with your subcontractor’s insurance company and try to get them to pay, but I wouldn’t bet on this approach. I’ve seen this happen often and recently. Indemnification agreements are incredibly common in other professions and home inspection firms should follow suit.
Here’s the moral of the story: If you are working with subcontractors in any capacity, then you need an indemnification agreement between you and them. This will allow you to easily push the liability for a subcontractor’s real or perceived errors onto them (rightfully so) and let them and their insurance handle the claim instead of you being the primary bag holder and face of the problem. (OREP provides drafts of Indemnification Agreements to its Members at no extra charge.)
Your contract is one of the most important risk management and defense tools you have available to you. It sets expectations for your inspection and should clearly define what your home inspection includes and what it does not include.
If you don’t have a limitation of liability in your agreement, you need to URGENTLY add one to your agreement (unless it is prohibited in your state: NJ, MA). We recently defended a home inspector who was confidently texting his angry and demanding client that his contract was “iron-clad” and had been reviewed by a lawyer. You can imagine my surprise (and disbelief!) when, after reviewing it, I found he did not have a limitation of liability clause in his contract.
Key clauses you want in your inspection contract include:
• Limitation of Liability (unless illegal in your state)
• Statute of Limitations
• Services/Inspections that are Excluded (this should be a long list)
• Notice and Waiver clause
• Confidentiality/Exclusivity clause
• Broad Definition of Client
• Attorney’s Fees (if applicable)
If you don’t know what all of these clauses mean or stand for, I’d be happy to help.
To reiterate: your inspection contract is one of the most important tools you have to defend yourself. You should consult with a knowledgeable real estate attorney, or your E&O insurance provider if they have extensive experience in this space. (OREP provides attorney-reviewed drafts of Pre-Inspection Contracts to its Members at no extra charge.)
Report Demands, Get Help
Experienced home inspectors are skilled at dealing with upset clients. Many inspectors handle these situations masterfully—explaining to the demanding client that the home “defect” in question was not visible at the time of the inspection, outside the scope of the inspection, and/or that the inspector’s liability is limited to a refund of the inspection fee.
Some home inspectors even go above and beyond—endeavoring to “make it right” where possible and financially feasible.
While this level of personal claims handling is admirable, it is still imperative that you notify your insurance company of any threat, claim, or incident. The reason for this is if you fail to notify your insurance company, and then the issue develops into a full-blown claim six, 12, or 18 months later, your insurance company is likely to deny coverage and you’ll end up facing the claim out of your own pocket.
This happens for two reasons. First, by not notifying your insurance company, you have arguably disadvantaged the insurance carrier from potentially handling the issue earlier. And second, when you fill out your renewal application for insurance and represent that you have no knowledge or claims or “circumstances that might lead to a claim,” your insurance company now has ample grounds to argue that you lied on your application and use that as grounds for denial of your claim.
Here’s a story that makes the point. A home inspector performed a home inspection for a lawyer (speak of the devil), and shortly after moving in, the client/lawyer discovers minor water damage and mold on the floor behind a piece of furniture. The client then requests the home inspector’s insurance information so he can “make a claim,” but the inspector handles the matter himself, explaining to the client he’s not responsible for moving furniture and can only report on what he can see. The inspector does not notify his insurance company.
Months later, the home inspector subsequently renews his insurance with a different carrier, representing that he has no knowledge of any claims or “circumstances that could result in a claim.”
Then comes a formal demand letter from the attorney for over $500,000. The letter explains that extensive mold was discovered at the property and considerable remodel work was required. The property was unusable for months and the inhabitants all report significant “health problems” because of exposure to mold.
The home inspector’s new insurance carrier declines coverage, arguing that the home inspector clearly knew of this situation as they had received an email demand from this same claimant nearly a year ago—and had failed to disclose it when renewing their insurance. The home inspector was then, unfortunately, left to defend against a very significant claim without any insurance coverage.
Home inspectors often opt not to report threats or “incidents” because the inspector worries that by notifying the insurance carrier, their insurance rates will go up substantially. Who you have insurance with is definitely a key factor in how this is handled (see below), but setting that aside, failure to report can end up being much costlier in the end if the claim develops and you’re left to defend it alone.
Pick Your Insurance Carefully
Reporting claims to your insurance company is important, but ultimately how that claim, threat, or circumstance is handled is one of the most important considerations when selecting who to insure with. There are a lot of options for inspectors today, including several “insurtechs” who are new to this space, but there are only a few companies who truly specialize in home inspector insurance and have been defending home inspectors for decades.
If you’re facing a complaint, demand letter, or claim, you don’t want your insurance adjuster or attorney to be new to the home inspector arena. We’ve seen cases where inexperienced adjusters quickly roll over and pay out $20,000 to $30,000 on a frivolous claim just to get it off their docket. This leaves the home inspector with a substantial “loss” on their record and leaves them either uninsurable or paying a very substantial premium for the next five years (when the claim will finally drop off their record).
Who you select as your risk management and insurance partner matters. In OREP’s case, we have a network of attorneys and claims adjusters with deep experience in the home inspection and real estate professions. For example, Geoff Binney, one of the nation’s foremost home inspector defense attorneys, has been defending home inspectors for over a decade.
Mr. Binney currently runs OREP’s pre-claims program, advising our Members and responding to frivolous claims and demands from all over the U.S. Our approach is to respond aggressively to meritless claims against our Members before they turn into claims. We also don’t raise your insurance rates unless defense expenses are substantial or a settlement is paid out.
Other considerations for your insurance are:
• E&O and GL: You want a policy that includes both Errors and Omissions (E&O) and General Liability (GL) in a single policy. Purchasing just a GL policy or just an E&O policy leaves you with substantial exposure.
• Look for a policy that covers you for ancillary exposures: mold, WDI/termite, radon, lead paint, drones, EIFS, pool and spa, carbon monoxide, and so on. Things like mold, radon and lead paint are often excluded in home inspectors’ policies under environmental exclusions and leave home inspectors with significant coverage gaps.
This article certainly does not capture all the liability and risk factors that home inspectors face, but as a home inspector would say, it provides a good “representative sampling” of some of the latest issues I’ve seen recently. If you ever have any questions about your inspection contract, key disclaimers or disclosures, or home inspector insurance, please reach out to us at OREP—call (888) 347- 5273 or visit OREP.org/inspectors.
We’ve been serving home inspectors with risk management information and E&O/GL insurance for over 20 years.
Stay safe out there!
About the Author
Isaac Peck is the Publisher of Working RE magazine and the Senior Broker and President of OREP.org, a leading provider of E&O insurance for savvy professionals in 49 states and DC. Over 11,000 real estate professionals trust OREP for their E&O. Isaac received his master’s degree in accounting at San Diego State University. Reach Isaac at firstname.lastname@example.org or (888) 347-5273. CA License #4116465
OREP Insurance Services, LLC. Calif. License #0K99465