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Pre-Inspections for Relocation Companies

A home inspector recently emailed me with a question about doing pre-inspections for relocation companies. I referred him to a prior post that I wrote on the subject which answered his question. But it reminded me of several cases that I have had involving inspection companies that subcontract out inspections on behalf of relocation companies.

Based on the experience of those cases, if I were a home inspector, I would steer well clear of doing inspections for one of those outfits. For several reasons.

First, in order to get the business from relo companies, they drop their pants on pricing precipitously. So the inspector who actually does the inspection is very likely losing money on the proposition.

Second, their loyalty is to the relo company, not the inspector. So the minute that there is an “issue”, they are all too willing, ready and able to adopt a customer-is-always-right attitude despite the mountain of empirical evidence that I have assembled that, when it comes to dissatisfied home inspection clients, the customer is invariably wrong.

In one case that is typical of the genre, the client for whom the inspection had been performed was complaining about alleged damage to the property “discovered” months after the original inspection by a subsequent inspection after “destructive probing of exterior stucco.” You can’t make this sh*t up.

So the geniuses who run this inspection company, which gets thousands of inspections - maybe, tens of thousands - from this relo company, sided with the client and paid the claim, notwithstanding that the original inspector’s report clearly pointed out not only that the portion of the property that was implicated in the claim had not been inspected due to weather and safety concerns but also recommended “Further evaluation . . . to identify potential issues.”

Now I can understand that these guys wanted to mollify a big client that gives them tens of thousands of dollars in business but then they wanted the inspector to reimburse them for their generosity. It’s like going to dinner with an ostentatious check-grabber who then hits you up for gas money to get home.

So when I got involved in the matter, I had to advise these folks that they were volunteers and that, in law, volunteers get squat!

Under the well-established Voluntary Payment Doctrine, of course, which states that there can be no recovery for a voluntary payment of the obligation of another without request and with no promise of repayment by the party whose debt is paid.

Bonds are NOT a Form of E&O Insurance

Reader Martin Greenberg brought up a good point in a comment on my recent post “The Importance of E & O Insurance.”

“In the state of Arizona,” he wrote, “the licensing bureau offers a choice. E&O coverage or post a bond. Since few inspectors are successfully sued and plaintiffs rarely win more than a few thousand dollars, bonds make sense. However, the inspector is ultimately responsible for paying the claim in the event a plaintiff is successful.”

A number of states that require a license to perform home inspections also require that Home Inspectors carry Errors and Omissions Insurance in certain minimum amounts as a condition of licensure. The intent is to assure that the inspector will be able to respond financially in the event that her negligence causes harm to one or more of her clients. A handful of states allow Home Inspectors to fulfill their financial responsibility requirement by securing a surety bond.

The most important thing to understand about surety bonds is this: they are not insurance. They are a guarantee that, if the obligor [the Home Inspector] fails to fulfill an obligation that is covered by the bond [pay a judgment], the surety [bond insurer] will pay and then go against the obligor [home inspector] to be reimbursed. Most of us are familiar with the concept of bail bonds. If the defendant fails to appear for trial, the bail bond is forfeited.

The problem with claims against home inspectors that reach the lawsuit stage is not the size of the awards; though, contrary to the writer’s assertion, they can, in fact, be quite sizable. It is the size of the legal costs that, in professional liability cases, where the defendant almost always prevails, ensures that any victory will be a Pyrrhic one.

Another problem with surety bonds is that underwriters require the obligor [home inspector] to have substantial assets, usually 5 times the amount of the bond. Otherwise, the obligor has to collateralize the bond.

Thus, a $50,000 bond would require an obligor to have $250,000 in unencumbered assets in order to qualify. Or to assign collateral to the surety in the amount of the bond. The fees for bonds range from 1% to 3% - depending on the creditworthiness of the obligor - with a minimum premium of about $250. Thus, a $50,000 bond could cost upwards of $1500.00. A million dollar E & O policy would not cost much more than that, provide substantially more protection and not encumber or imperil assets.

Thus, while a bond might satisfy a statutory licensing requirement, the obligor is essentially self-insured. And would still have to hire and pay for her own counsel.

Five Steps To a Good Night's Sleep...and Higher Inspection Fees

The number one complaint that I get from Home Inspectors on the Law and Disorder Tour is about E & O Insurance companies. Their perceived default claim posture of caving in and paying unmeritorious claims - usually with a hefty contribution from the inspector pursuant to the deductible feature of the insurance policy - sends inspectors over the edge. And justifiably so, in my opinion.

Having quashed over 200 claims at the demand-letter stage in the last four-and-a-half years - and several more where the first notice of claim was an actual lawsuit - I am confident that I have solved that problem - at least for those insured under the Lockton Affinity E & O Program described elsewhere on this site.

The second-most common complaint that I get is that it is nearly impossible for home inspectors to charge fees commensurate with their skills and level of experience because the competition is chasing business by quoting absurdly low fees. So inspectors feel that they have to match those fees to protect market share.

A few years ago, well-known Home Inspector Marketing Coach Ken Compton [http://www.staybusyallyear.com] invited me to speak at the Annual Workshop that he conducts for his coaching clients. The Workshops are now conducted in Naples, Florida but this one was in Jasper, Georgia.

The Workshops are intense plenary sessions that go from 8:00 a. m. to 5:00 p. m. for three full days and feature top speakers that teach the coaching clients how to by-pass real estate agents, go directly to the consumer, how to use blogs, video and a whole host of other techniques to outmaneuver your competition. It was fascinating to me because a lot of the techniques are obviously transferable to other enterprises.

At the end of each day, everyone assembles for cocktails and dinner and socializing, including the speakers who are always quite generous with their time and advice. I was scheduled to speak on the second day of the Workshop for an hour and forty minutes and I was turning over in my head what material from the four-hour Law and Disorder Seminar I would present in this truncated session, keeping in mind that this was a Workshop on how to increase your revenue.

I was still thinking about it up until shortly before it was my turn to speak and then it came to me. In a moment of inspiration, I solved the problem of the low-baller.

Almost everywhere that it is allowed - which is pretty much everywhere - home inspectors will contractually limit their liability to the amount of the fee charged for the inspection. So why not eliminate the Limitation of Liability provision and charge more for the inspection?

“Have I lost my mind?” you ask. Absolutely not. ClaimIntercept™, my proprietary method of terminating home inspection claims aborning, is well past its proof-of-concept stage. Virtually all claims - over 99% - against home inspectors are completely defensible as I have conclusively demonstrated time after time over more than 200 cases for reasons explained at length elsewhere on this site.

Here’s how the colloquy would go with a prospect. What’s the first thing out of your prospect’s mouth when you answer the phone? All together now. “How much do you charge for a home inspection?”

You say: “I’m pretty sure that I charge more than anyone whom you have talked to. Would I be correct in saying that you probably already have 3 or 4 quotes of $350 [or whatever it is in your market]?”

The prospect will agree. You say “I will tell you why those inspectors can charge as little as that. They don’t stand behind their inspection reports.”

The prospect: “Hunh?” You: “They limit their liability to the amount of the inspection fee. So, if they miss something major in their inspection, they’ll give you your money back and walk away. Would you go to a doctor who told you “Hey, if you die on the operating table, I’ll give your family back my fee for services?”

The prospect, who cannot fail to see the perils of going with a low-baller at this point, will then ask “So what do you charge?” And now you have him.

If you say “I charge $500 [or whatever $150 above your market is],” the prospect will not be thinking that he’s paying $500 for an inspection that should only cost $350. He will be thinking that he’s paying $150 more than the cost of a worthless inspection.

Which is not to say that the low-baller might not do just as good an inspection or, perhaps, even better than you would. Keep in mind that a lot of very good inspectors are forced into being low-ballers by cut-throat competition. And real estate agents.

Now the caveats: DO NOT DO THIS IF YOU DO NOT HAVE E & O INSURANCE THROUGH LOCKTON AFFINITY and DO NOT SUBSCRIBE TO ClaimIntercept™ and ARE NOT GETTING AT LEAST $150 MORE PER INSPECTION.

Repeat: DO NOT DO THIS IF YOU DO NOT HAVE E & O INSURANCE THROUGH LOCKTON AFFINITY and DO NOT SUBSCRIBE TO ClaimIntercept™ and ARE NOT GETTING AT LEAST $150 MORE PER INSPECTION.

Here are the five steps to a good night’s sleep and higher inspection fees:


One: Get E & O Insurance through Lockton Affinity http://inspectors.locktonaffinity.com or by calling 800-803-9552.

Two: Subscribe to ClaimIntercept™.

Three: Eliminate the Limitation of Liability clause from your Pre-Inspection Agreement.

Four: Demand at least $150 above market for your superior inspection service.

Five: Perform the superior inspection service and write the superior inspection report that you are capable of performing and writing by reason of your training, skill and experience.

The extra $150 per inspection will vastly outstrip the cost of E & O Insurance and ClaimIntercept™.

I have every confidence that only a very small percentage of home inspectors who read this post will implement this strategy, but know this: every inspector who has done it, has become a huge fan of the Home Inspector Lawyer.

Managing Risk with E&O Insurance

A home inspector in Texas recently asked me via email what I thought "about the efforts to have the Texas Inspector E & O mandate rescinded" which was my first notice that such an effort was afoot. Evidently the Texas Professional Real Estate Inspection Association (“TPREIA”) had succeeded in having a bill to do just that introduced into the Texas Legislature.

Anyone who has been “stalking me”, as one HI who recently connected with me on LinkedIn put it, for any length of time surely knows that I am no fan of government mandates. In general. So, bully for TPREIA for taking the laboring oar on an issue that is a major concern to its membership.

Should home inspectors protect themselves from their nutty clients? Of course. And only those who are nuttier than their clients do not take some protective measures: tightening their pre-inspection agreements, contractually limiting their maximum monetary exposure [where permitted, of course, as many jurisdictions do not allow this], issuing short-term warranties, friending the Home Inspector Lawyer, and purchasing errors and omissions insurance.

Any businessman with a professional liability exposure as severe as that faced by home inspectors - see multiple horror stories, infra - who needs to be government-mandated into a scheme for managing that risk should seriously consider working for “the Man”, instead.

The major problem with government insurance mandates is that they are unrivaled in their capacity for gumming up the American free market system. Florida, for example, has recently mandated that mold assessors must carry $1,000,000 in errors and omissions insurance. One imagines the smug legislators clinking martini glasses after this surpassingly stupid law was passed and congratulating themselves for this major step forward in consumer protection. Meanwhile, insurance companies are staying away in droves from this newly created “market.”

Many home inspectors, of course, do carry errors and omissions insurance irrespective of whether or not it is a statutory requirement in their jurisdiction. Others are dead-set against it. I have friends in both communities.

I know a home inspector who manages his professional liability risk thus: He puts aside the premium that an insurance company would charge for E&O insurance into an escrow account each year and he has a $30,000 line of credit against his house. He figures that, between the two, that should cover him if he has a claim and, if he doesn’t, break out the champagne!

I told him, “Paul, if that were the only way to hedge your professional liability exposure and, tomorrow, someone invented E&O insurance, he would win the Nobel Prize.”

Most HIs who do carry E&O insurance, however, are not leveraging it into higher inspection fees.

How to do that, next time.

The Story of ClaimIntercept and How to Receive It

When I first began presenting the Law and Disorder Seminar back in 2007, many of the inspectors in attendance would approach me afterwards and ask if they could retain my claim squashing services on a pre-paid basis - a pre-paid legal of sorts.  While I appreciated the sentiment, I was very wary of providing such a service for a number of reasons.  For one, I did not have any idea of how to price such a service or, indeed, what services to provide.  Or what the inspectors’ expectations might be.  So I simply said that it was not something that I had ever considered doing but would give the matter some thought.

Three years later, after having defeated over 150 claims aborning, I really did begin to give it some very serious thought.  I thought about how truly ridiculous the overwhelming majority of claims against home inspectors are.

When I first started getting asked by home inspectors to respond to negligence claims being made by their former clients and/or their attorneys, every single one of them was dropped after I intervened and sent a responsive letter.  After dispatching the sixteenth or seventeenth claim in succession, I thought that I was probably seeing a skewed sample.  These absurd claims could not possibly represent the universe of home inspection negligence claims.

Later, when the number of consecutive successful claim interventions reached forty, I had a different thought.  I no longer thought that the sample that I was seeing was skewed.  What I was seeing was the sample.  In other words, virtually every claim against home inspectors is without merit.  And eminently defensible.

Now, four years and close to 200 successful interventions later, I am absolutely certain that I have figured it out.  And so, last November, I began to offer my claim intervention services on a pre-paid basis.

At first, I offered it exclusively to those inspectors who had actually had to avail themselves of those services on an ad hoc hourly fee basis and the very enthusiastic response of those inspectors to the offer convinced me that this was definitely a service that home inspectors would support and that I was pricing the service fairly.

Now, I am opening the claim intervention service up to every inspector on a pre-paid basis.  Please email me if you would like further information.

The Importance of E&O Insurance

I am continuously surprised at the number of inspectors who do not carry professional liability insurance or, as it is popularly known, Errors and Omissions Insurance (“E & O”). When I ask inspectors who attend the Law and Disorder seminar whether or not they carry E & O insurance, between 40 and 60 percent of them say that they do not. That number is constantly diminishing, however, as more and more jurisdictions have introduced laws requiring that home inspectors become licensed and have made the carrying of E & O insurance a condition of licensure.

Some inspectors who do not carry E & O would, perhaps, like to carry it but simply do not conduct enough inspections to be able to afford it. Those inspectors generally leave the profession when carrying professional liability insurance becomes a condition of having a license.

Many others do not carry it because they think that it is “too expensive” and/or that it “paints a target on your back” - that is, it makes you more likely to be sued than if you had no insurance.

Whether or not a given product is “too expensive” is something that individual consumers have to determine for themselves after conducting a cost-benefit analysis and considering competing products.

Inspectors who elect to “go bare” should not, however, delude themselves into thinking that their not having professional liability insurance removes “the target” from their back.

In many ways, an uninsured defendant is a much easier “target” for an aggrieved claimant. For one thing, not having insurance, they are less likely to defend a suit and plaintiff can, thus, obtain a judgment against them by default. Even if they have viable defenses to the suit!! If they do defend, they have to make the calculus of whether it is more expensive to defend the suit or simply pay the plaintiff. And having an unpaid judgment on your credit report effectively makes you unbankable, a terrible position for a serious businessman to be in.

About three years after I began practicing law, I had a matter that brought me to small claims court in a neighboring municipality. The court’s docket was very crowded that day and I had to wait my turn behind several other attorneys, one of whom had a number of matters before the court and was taking one default judgment after another against no-show defendants on behalf of several institutional creditors.

In my naivete, I thought that he was on a fool’s errand and asked him afterwards what the point was of obtaining judgments against folks who were not likely to satisfy them. His reply opened my eyes and taught me that very few people are truly judgment-proof.

He told me that he had a file cabinet that was chock full of default judgments that he had obtained and that eventually these folks were going to want to buy a house or a car or refinance and will have to satisfy the judgment in order to do so. Of course, by then the judgment will have swelled with the addition of post-judgment interest.

“Not a day goes by,” he told me, “that I don’t get a call from one or more of these judgment-debtors who wants to satisfy the judgment.”