Corporations and Personal Liability

Many of the home inspectors who attend the Law and Disorder Seminar are shocked, shocked to hear me say that their corporate entities, be they Subchapter S or Limited Liability Corporations, do not insulate them from personal liability for conducting a negligent home inspection.

For my part, I am shocked, shocked that they could possibly believe that. And to an individual, they absolutely swear to me that that is exactly what their attorneys told them when they formed their corporate entities. And even if that is not what their attorneys told them, it most definitely is what they heard.

Corporations do protect their shareholders from personal liability for obligations of the corporation, for example business loans or credit obligations to a supplier or a landlord. Thus, if the corporation defaults on a bank loan or a lease, the creditor can not look to the shareholders for payment. That is the reason that banks, suppliers and landlords, if they are even half-way sophisticated, always require loans, credit lines and leases to corporations to be personally guaranteed by the corporation’s owners. That is often true even for closely held corporations that have high credit ratings and substantial retained earnings on their balance sheets.

Even when creditors do not require personal guarantees, the protection from liability is not absolute. An inspector whose business is organized as a corporation can be held personally liable for errors and omissions that he personally makes in the conduct of an inspection or if he injures someone while driving a company vehicle or if he defrauds someone.

Owners of multi-inspector firms that are organized as corporations are, however, insulated from personal liability for the negligent inspections conducted by their inspector employees. The corporation, however, would not be and would be subject to liability based upon the legal doctrine of respondeat superior.

Respondeat superior is a common law doctrine under which employers can be held liable for the negligent actions of their employees; and principals for the actions of their agents.

Thus, a client who believes that he has sustained damages as a result of a negligently conducted inspection can look not only to the inspector but to his corporation, as well, for redress.

The Law and Disorder Seminar for Home Inspectors

For the last four years, I have traveled the length and breadth of America - well, the lower 48 - presenting the Law and Disorder seminar. The first time I gave it was in early 2007 - to four (4) [count ‘em] - home inspectors in Plymouth Meeting, Pennsylvania.

Now, at 6’ 2”, I’m accustomed to being the tallest person in the room. Not that day. Two of the four inspectors who came were Ben Gromicko and Bruce Lampe, and both men tower over me. Another one was John Murray who came all the way from the Cincinnati, Ohio area to attend. I could pick the fourth out of a lineup but, alas, encroaching geezerhood is thwarting the retrieval of his name from my memory bank.

Since that inauspicious beginning, about 1,500 inspectors have attended the seminar in both the United States and Canada. I really enjoy giving the seminar and meeting the home inspectors who attend. And I never tire of hearing how much inspectors enjoyed the seminar and how grateful they are to have finally found a lawyer who “gets” it. It’s very gratifying. And humbling.

The problem with the seminars though - to be blunt - is that they are a pain in the (you know what) to put together. I’ll plan, say, to be in Columbus, Ohio four weeks out. Well, to make that event viable for me, I have to clear $700. Just to cover my expenses: travel, hotel room, meals and cost of venue. So, at $40, I have to get at least 18 registrants to break even. Piece of cake, right? Who’s not going to part with $40 to listen to me speak for four hours. And get 4 CE Credits in the bargain? Nobody, right?

Wrong! The problem is folks won’t register early. They’ll wait til the last minute. I can’t tell you the number of seminars that I cancelled only to hear from “disappointed” inspectors who would not have been “disappointed” had they registered early.

Consequently, I am no longer scheduling seminars. I’m still going to give them. But only if they are sponsored by local chapters of national associations or major state associations. So, if you are the Education Chairman of your local InterNACHI or NAHI or ASHI chapter and you would like me to speak at your next Summer, Fall, Winter or Spring Convention call or email me. All I require is that you pay my expenses - airfare, hotel and meals.

And if you’re anywhere near Flatwoods, West Virginia, I’ll be speaking at the West Virginia Association of Home Inspectors 5th Annual Winter Workshop on February 4, 2011. I hope to see you there or at your own local Convention next year.

How to Use the Disclaimer

One of the tools and techniques that I teach in the Law and Disorder seminar and that I encourage home inspectors to incorporate into their practice is the appropriate use of the disclaimer. While home inspectors and other real estate professionals know that there are many, many issues implicated in a home buying decision that are not going to be addressed or uncovered by a home inspection, their clients are almost universally unaware of that.

For example, a home inspection is not going to determine a property’s boundaries or whether appropriate permits for additions or improvements had been obtained. Nor will it address title or zoning issues. Or any of a myriad of other matters. Easements, covenants and the like.

Consequently you have to disclaim any responsibility for those issues. These are issues that are common to all properties.

You also have to disclaim responsibility for issues that are idiosyncratic to this property. The roof may have been covered by ice and snow. Therefore, you would have to disclaim any ability to offer an opinion on the roof.

Oftentimes, many areas of the home are inaccessible. Access to the attic or garage may be obstructed by an accumulation of stored items that inhibit visibility. Crawlspaces may have insufficient clearance.

If you are effectively prevented from inspecting any area of the property, you need to note it, corroborate your finding with photos and disclaim responsibility for those areas of the house.

You should also advise them to seek further review by the appropriate professional of any system or area for which you are disclaiming responsibility due to inaccessibility.

I am sometimes asked by home inspectors whether it is possible to have "too many disclaimers." I understand the concern. Can you have so many disclaimers in your report that they lose effectiveness? The reader’s eyes glaze over.

Have you ever purchased a step-ladder? You spend your first hour of ownership removing warning labels. I recently stayed in a hotel that had this advisory stenciled on the shower tiles: "PLACE SHOWER CURTAIN INSIDE TUB BEFORE TURNING ON THE SHOWER."

In our litigious culture, you have to warn people about everything. So the short answer is "No. You can not have too many disclaimers in your reports."

Say Cheese! Take Plenty of Photos During Home Inspection

A question that comes up frequently at the Law and Disorder seminar is whether or not it is a good idea for home inspectors to take photos during the inspection. When I first started getting this question, I could not imagine any reason why anyone would ask that question. It turned out that a lot of home inspectors were afraid to take photos because they might later “prove” that the inspector missed something during the inspection, a decidedly counter-intuitive measure apparently based on a "your-word-against-mine" defense strategy.

I always advise home inspectors, though, to take lots of photos during their inspections because they will invariably prove conclusively that they did not miss something. About 50% of all claims against home inspectors are for conditions that were concealed at the time of the inspection. By carpeting, furniture, wall hangings, finished ceilings or other finished work. So having a lot of photos of the home is more likely to “prove” that a subsequently discovered defect was concealed at the time of the inspection.

Some years ago, I got a call from a home inspector in upstate Pennsylvania who wanted some advice on how to respond to a claim that his client was making. The client, a home builder, was contending that the inspector had missed a large crack in the foundation in the basement of the home and he wanted the inspector to pay for the repair.

When the inspector went to look at the crack, it was so prominent that he knew that there was no way in the world that he could have missed it.

I asked the inspector if he had actually been in the basement and he said that he had. I then asked him if he had called anything out in the basement. And he said that he had reported some small inactive moisture stains over by the staircase. Then I asked the key question: “Did you take a picture of the stains?” When he answered “Yes”, I high-fived the air, gave a fist pump and silently mouthed “Yes!!!!”

While the inspector did not have a photo of the area in dispute, he did have a photo that a. proved that he had been in the basement and b. strongly supported the proposition that it was highly unlikely that he would call out some rather minor issue in one area of the basement and yet miss a glaringly obvious major defect across the way.

Of course, it would have been much better had he had a photo of the site of the defect that conclusively demonstrated that there was no defect visible at the time of the inspection.

So make sure that you take a multitude of photographs throughout the house even though the vast majority of them are not going to be put into your report.

Don't Refund Every Complaint...Most Have NO Validity

I am continuingly astonished at the willingness of home inspectors to issue refunds to clients for the slightest complaint that they make. Since these complaints virtually never have any validity, you do not have to be Buckminster Fuller to conclude that refunding fees to every unhappy client is a bad business model. And home inspectors complain to me about insurance companies paying out for bogus claims!

At least once a week, I have to talk a home inspector out of refunding his fee to a client who is making an unreasonable demand. Often all that is necessary to neutralize these complaints is to point out to the client - politely but firmly - that the issue that he is complaining about could not have been discovered by a limited non-invasive visual inspection.

Recently, I spoke with a home inspector client who had performed a home inspection for a client in June. In December, the region had experienced torrential rains accompanied by gale force winds. The client was complaining about water intrusion through the clapboard siding. He wanted to know how to respond to this ridiculous claim.

This is a quite common complaint - some system that was performing satisfactorily at the time of the inspection is “suddenly” not performing six months later. Imagine that!

I advised him to check his report to see if there were any signs of water intrusion at the affected site at the time of the inspection. There are two possible results, right? Either there were signs or there were no signs.

If there were no signs, what does this client want from this inspector? We don’t predict the future. And cannot report what is not there.

If there were signs - even better!! Yo, knucklehead, look at page 24 of the report where it says “Inactive signs of water intrusion - see photo - on north interior wall of living room. Check with seller to see if this defect has been addressed.”

If you are prone to offer refunds at the first sign of dissatisfaction, you should ask yourself this question: Is this client dissatisfied with me or is she dissatisfied with the result? If the result has nothing to do with the quality of your inspection, you need to keep your hands in your pockets and explain that, although you sympathize with their position, you are not responsible for it.

Mediation is Best For Everyone...But You

I recently gave the Law and Disorder seminar at the NACHI Wisconsin state chapter's fall gathering. In the weeks following, a number of the inspectors who had attended the seminar contacted me to review their pre-inspection agreements.

A few of these agreements included a clause that required that all disputes that arose from the inspection be submitted to mediation. It was the first clause that I advised them to strike from their contracts.

Mediation is a terrible venue for disputes arising from a home inspection. Well, let me revise that statement. It is a wonderful place to be if you are the claimant. Not wonderful if you are the inspector.

Why? Because mediators love resolving disputes. And their favorite methodology for achieving this result is to cut the baby in half. Since 99.999 % of all claims against home inspectors have no merit, that is the last thing that a home inspector should want to happen.

Here's a real life case that one of my clients faced. He did a termite inspection for the claimant and found no evidence of termite damage or presence. Some six months after the claimant moved into the house and maybe eight months after the inspection, the claimant was vacuuming a room and bumped the vacuum into the baseboard which shed some material. That prompted him to probe further and some evidence of termite damage was discovered.

The claimant sued in small claims court for $3,000 in damages. I told the inspector that the court would try to resolve the case before trial by cutting the damages in half. And that's exactly what the mediator did.

The methodology works like this: the mediator sequesters the parties and tells the claimant that he could get shut out if the case is tried. The judge could side with the inspector. If the mediator 'can get the inspector to give you $1,500, will you take it?' Of course, the guy says that he will because he knows he has no case.

Then the mediator talks to the inspector and tells him the exact opposite. 'The guy has a great case. You could get stuck for $3,000. Yada, yada. If I can get him to take $1,500, that’s a home run for you."

The inspector told me afterward that, if he had not consulted me, he would have written the guy a check for $1,500 because the mediator was putting enormous pressure on him to settle. "But I stuck to my guns," he told me.

When they went before the judge, the inspector, as I had instructed him, told the judge that the court lacked jurisdiction because the pre-inspection agreement mandated that all disputes be resolved in arbitration.

Result: Case dismissed.

The claimant subsequently filed a complaint with the State Home Inspection Board and the inspector was exonerated there, as well.

Cooling Off a Fradulent Home Inspection Claim

The number one complaint that I receive from home inspectors is that insurance companies simply cave in and pay claimants even when the home inspector has done nothing wrong. I used to think that this was just general professional bellyaching that had no basis in reality but that was before personally squashing scores of claims that were absolutely ridiculous.

A lot of home inspectors have rather large deductibles on their Professional Liability Insurance [E & O] policies, up to $5,000 in some cases. And I can understand why they do that. For one thing, the higher the deductible, the lower the premium. For another, they just don't believe that they are ever going to be called upon to respond to a claim from one of their clients.

This belief is based on the fact that they have a lot of confidence in their professional skills, a belief that is entirely justified in my experience. The problem is that you do not have to conduct a negligent inspection to be accused of having done so. You merely have to have a client who thinks that you did. And unfortunately, those sorts of clients abound.

Recently, a friend who inspects houses in Illinois had this experience. After the client moved into the house, he "discovered" that the air conditioning unit was undersized for the house - had insufficient capacity. It wasn't, but some "professional" told him it was and so the client wanted the inspector to "do something about it."

And the client was relentless, constantly calling the inspector and the real estate agent, and, of course, telling them both that if they did not knuckle under to his unreasonable demands, he was going to sue them both. The real estate agent went into full panic mode and she kept calling the inspector on the client's behalf.

Now the inspector's E & O deductible was $2500, as was the agent's. So the agent asks the client if he'll take $2500 to go away. And, of course, he says that he will. And why wouldn't he since it is $2500 more than he's entitled to?

The agent then asked the inspector if he would put up $2500 to "make the claim go away." And the inspector figures that, if he turns that claim into his insurance company, that's exactly what it is going to do, and he'll have a chargeable claim on his record.

So the inspector tells the agent that he "probably" would. And then the agent went and told the client that the inspector would give him $2500 to settle.

So the inspector sent the client a General Release and asked him to return it in order to receive the $2500. But the client dragged his feet and then filed a complaint with the Better Business Bureau falsely claiming that the inspector had been negligent.

The inspector then asked me to squash the guy. I wrote the guy and told him: a) that there was no negligence because a home inspection does not determine cooling capacity; b) that his unit was not undersized and c) that he had made a spectacularly foolish and, if not immediately withdrawn, potentially financially ruinous decision to defame the inspector's professionalism on a public bulletin board.

When he got my letter, he immediately tried to submit the signed release for payment. Sorry, Charlie, you chose unwisely.

Obviously, paying anything - much less $2500 - to settle a claim that has no merit and is completely defensible is a bad business model. It's a bad business model for insurers and it's a bad business model for inspectors.

Fortunately, for home inspectors, there is a new sheriff in town. And a new insurer that is completely on board with my approach of nipping these meritless claims in the bud. For a quote visit: http://inspectors.locktonaffinity.com/ or call 800-803-9552.

Meritless Home Inspection Claims: The Broken Heat Pump

Since 2007 I have been speaking to home inspectors all over the country about legal issues that impact their practice and the tools and techniques that they can implement in their own businesses to reduce their likelihood of becoming victimized by their ungrateful clientele.

Since I began giving the seminar, I have also been asked by hundreds of home inspectors to respond to claims made by their clients and their clients’ attorneys. As of this writing, I am batting .970 at terminating those claims with prejudice. (Editor's Note: That average may make an All-Star Game or two).

I am not surprised by that statistic because the majority of claims against home inspectors have no merit. And by majority, I mean the overwhelming majority. In my personal experience, meritless claims represent about 99.999 percent of all claims against home inspectors. In other words, virtually all claims against home inspectors have absolutely no merit.

Here's how a typical claim against a home inspector arises. And this is an actual claim that I had to handle for a home inspector in Massachusetts at the end of 2009. He did a home inspection for a client in August of 2009. He reported that the heat pump was functioning normally but that heat pumps need regular service and that the client should have it serviced regularly.

The client moved in around mid-October of 2009. Many will remember that in December of 2009, the northeast was hit by an epic snowstorm that blanketed the east coast from Washington, D. C. to northern New England with over 30 inches of snow. That was the day that the client’s heat pump decided to stop working. (what luck, right?)

So the client took his wife and six-week-old newborn son to his in-laws. The following Monday, after the municipalities had removed the snow and the client could get back to his house, he called in an HVAC contractor to fix the heat pump.

Now at this point, the client is not even thinking that the home inspector has anything to do with this heat pump breakdown. Until the HVAC contractor throws the home inspector under the bus and plants that thought in his mind.

The conversation goes something like this: “How long have you lived here? Three months?!!?? Did you have a home inspection before you bought this house? You did?!?!?! Well, your home inspector should have caught this.”

So now this client, who would never in a million years have considered the inspector as being responsible for this event had this HVAC contractor not mentioned it, is now convinced that the inspector is completely responsible and owes him a new heat pump installed by the friendly HVAC contractor. And he can not get the thought out of his head.

Until I write him a letter and explain to him why he has no claim.