How Agents Can Limit Their Liability with Regard to Home Inspections

by Joe Ferry, Esquire and Nick Gromicko, InterNACHI Founder

In a world where litigation is the preferred method of resolving even the most minor conflicts, it should come as no surprise to real estate agents that they are increasingly finding themselves named as defendants in lawsuits wherein purchasers of residential real estate are claiming damages as the result of the alleged fraud and/or negligence of one or more of the participants in the transaction.

Aggrieved purchasers of residential real estate are operating in a target-rich environment and have a remarkable array of potentially responsible parties from which to seek financial redress for their claimed grievances. In lawsuit after lawsuit, one finds multiple defendants: the sellers, the sellers’ agent, the sellers’ agent’s broker, the buyers’ agent, the buyers’ agent’s broker, the home inspector, the pest inspector, and so on. The alleged grievances can include multiple counts, as well: fraud, negligence, breach of contract, etc.

Once a lawsuit has been filed and you have been named as a defendant, you can kiss your E&O deductible goodbye, even if you are blameless, which, in the overwhelming majority of instances, you are, because the overwhelming majority of these types of lawsuits is completely devoid of merit. The size of these complaints and the sheer number of their allegations guarantee it. No competent lawyer could possibly read and respond to the vastly overblown pleadings that normally characterize these types of lawsuits for anything close to the typical real estate agent’s E&O deductible.

Therefore, the best strategy is to avoid being named in the suit in the first place. Fortunately, there are a number of effective policies that, if followed, can sharply reduce and even eliminate your exposure to being named in a meritless lawsuit.

Lawsuits resulting from a residential real estate transaction almost always result from a feeling on the buyers’ part that they got less than they bargained for. After they moved into the property, they discovered that it was not all that it was cracked up to be. Sometimes, the alleged defects were present at the time of the home inspection but, for one reason or another, were not discovered by the home inspection. The fact that the alleged defects were not discovered by the home inspector does not automatically mean that the home inspector was negligent or that you were negligent for recommending the inspector -- far from it.

There could be a large number of reasons why the alleged defect was not discovered at the inspection that fall well short of actionable negligence. The defect could be something that is not discovered because its inspection is simply not contemplated by the home inspection, such as a determination of the adequacy of any structural system or component, for example. Such a determination is outside the scope of a home inspection. Or it could be something that is not reported because it was concealed by furniture on the day of the inspection, or was located in an area that was inaccessible. Not infrequently, known defects are deliberately concealed by the sellers. And far more frequently than anyone would imagine, the alleged defect that is the subject of the buyers’ complaint was actually discovered by the home inspector and noted in the inspection report, but not acted upon by the buyers because they did not bother to read the inspection report.

Therefore, when selecting a home inspector for your client, you should bear uppermost in your mind that the home inspector is your first line of defense against a meritless negligence claim.

Top Eight Ways You Can Sharply Reduce Your Professional Liability Exposure:

Insist that your client hire a professional home inspector to inspect the property, and strongly recommend that the inspection also include ancillary inspections for the presence of wood-destroying insects, and such harmful pathogens as mold and radon.
Take the time to manage your clients’ expectations of what can reasonably be discovered by a limited visual inspection of a property that is full of furniture, carpets and stored items that further physically limit the scope of an already limited inspection.
Be sure to carry your own Professional Liability Insurance to protect yourself from allegations that you should have independently verified that the property was defect-free.
Review the inspector’s Pre-Inspection Agreement to make sure that it contains a Notice Clause that requires the buyers to notify the inspector within no more than 14 days of the discovery of any defect for which they believe he is responsible.
Avoid conflicts of interest. Never recommend an inspector who participates in preferred vendor schemes. All major inspector associations prohibit participation in such undue praise-purchasing schemes. You have a fiduciary duty to recommend the very best inspectors based solely on merit, not money. And it goes without saying that you should never recommend any inspector with whom you have a close personal or blood relationship.
Recommend the high-value inspector, not the low-price inspector. Good inspectors charge accordingly. Trying to save your client $100 on an inspection could cost them $10,000.
Only recommend inspectors who adhere to a strict Code of Ethics and Standards of Practice, such as members of InterNACHI.
Always attend the home inspection. Many real estate agents have been advised never to attend a home inspection, allegedly by real estate attorneys. Agents who say that they have received such advice are never able to articulate its rationale. You are not any less likely to be named in a suit by hiding during the inspection, and the reasons for attending the inspection are quite compelling. First, your presence is a clear indication of your professionalism and concern for your client’s interests, two factors well-known to engender referrals. Secondly, it affords a very cogent opportunity to refocus your client’s attention to the limited nature of the inspection. For example, you could note the numerous obstacles, such as furniture, carpets and appliances, that can obviously inhibit the inspector’s ability to see certain areas of the home. Finally, should this transaction come to grief, your interests are usually perfectly aligned with the inspector’s, and your recollection of such limiting factors would provide powerful corroboration of the exonerating reasons that a defect was not discovered during the inspection.