or Are You Really Getting Something for Your Money?
Purchasing insurance can be stressful. Recently, an inspector told me he called his agent after receiving his company’s insurance policy to ask if a specific situation would be covered under the policy. The inspector was told by his agent that such questions would be better answered by an insurance attorney — of course, at the inspector’s cost. How stressful is that? What exactly is the inspector paying his agent for if not to advise him about his policy coverages?
Recent insurance scams directed against home inspectors have also raised stress levels. Inspectors have been duped into purchasing policies that provide less than full disclosure of policy exclusions, have no financial backing or are so restrictive via exclusions that they provide little, if any, coverage.
This article is offered to assist home inspectors in three areas: (1) understanding the basics of home inspector insurance; (2) outlining the questions you must ask when shopping for insurance, and (3) learning why there can be large differences in the cost of insurance policies. All the examples used are from our files.
1. UNDERSTANDING THE BASICS
We recommend two types of coverage for home inspectors:
• Errors & Omissions Insurance (E&O)
E&O comes in two policy types: Claims Made and Occurrence. Although there are variables, in brief a Claims Made policy obligates the insurance company to pay for claims that are reported while the policy is in effect, while an Occurrence policy obligates the insurance company to pay for events that occurred while the policy was in effect, regardless of when the event is reported. Claims Made is the traditional type of coverage and is the most popular form for home inspectors due to its lower price. Occurrence policies are available, but more expensive than Claims Made policies.
• General Liability Insurance (commonly called GL)
Two types of exposures (or reasons that a claim is covered under each type of insurance).
– Bodily Injury – Your actions or alleged errors in your inspection report result in someone being physically harmed.
– Property Damage – Your actions or alleged errors in your inspection report result in damage to the property or loss of use of the property.
Both Bodily Injury and Property Damage are key coverage considerations when purchasing insurance; therefore, they are referred to many times in this article.
What you need to know about GL
GL provides coverage while you are at the job site. It covers unintended “accidents” on your part that were not a part of the inspection process.
Examples might include a ladder blowing over and scratching an agent’s new BMW or you knocking over a curio case filled with expensive vases. Both of these are Property Damage claims. If that same ladder blows over and hits the homeowner on the head, that would be a Bodily Injury claim.
General Liability claims are relatively infrequent and are usually of a low-dollar amount. General Liability policies are moderately priced, but are more restrictive in their coverage, usually containing a “Professional Liability” exclusion that reads “This policy will not cover claims arising out of the rendering or failure to render professional services.”
That may seem pretty straightforward, but what if a bathtub overflows during a functional drainage test or it is alleged that somehow your flushing of a toilet caused the toilet to slowly run and overflow? Both seem to be accidents and certainly were not intended by the inspector, nor are overflowing fixtures a part of the inspection process for most inspectors! However, that is NOT how some insurance companies view it. In one specific case, the insurance company stated that overflows are the result of the “rendering of professional services” and denied the claims. Remember, insurance coverage is not black and white, but is gray, something to be discussed in greater detail later.
What you need to know about E&O
Most big-dollar claims are the result of an alleged failure in the rendering of professional services. In other words, Errors & Omissions (E&O) claims. Again, there are the same two exposures — Bodily Injury and Property Damage.
An example of an E&O Bodily Injury claim: An inspector’s report stated an elevator is functional. (I don’t know why he did this, but he did.) Later, a child is crushed to death in the elevator, resulting in a high-dollar Bodily Injury claim. If the inspector’s E&O policy excluded Bodily Injury coverage, the claim, in other words the insurance company’s obligation to pay, would be limited to the cost of repairing the elevator (sure to be minor, relatively speaking). The inspector would not have been covered for the death of the child.
A second example of an E&O Bodily Injury claim: The inspector failed to report that the kitchen’s freestanding center island is not fastened to the floor. While the new homeowners are moving in, their children begin playing around the island — one swinging from the front extension intended for stools, while another climbs on top sliding over to the extension edge — thus destabilizing the island. It tips over, crushing the child to death. If the home inspector’s policy excluded Bodily Injury, he would have been totally alone to cover any court judgment that might be awarded to the family. Also, it’s possible the insurance company might not provide him with a defense.
An example of an E&O Property Damage claim: It is alleged the inspector should have reported on “obvious poor chimney flashing.” Due to his “complete incompetence” as an inspector, water entered the structure and caused considerable damage to the interior of the home. If his policy excluded Property Damage, an insurance company would cover the cost to repair the chimney flashing (the error) but, again, the inspector would have been on his own if a judgment against him was awarded for the damage to the interior of the home.
Tying the components together
With a basic understanding of home inspector insurance, it’s possible to tie all the components together.
To be fully protected by insurance, a home inspector needs both General Liability and Errors & Omissions coverage, and both polices should include coverage for Bodily Injury and Property Damage exposures. But, because there are gray areas in insurance coverage, you’ll need to know more than this to understand what you’re purchasing.
2. QUESTIONS YOU MUST ASK
To ensure you have the proper coverage and will not be left standing alone in the event of an unforeseen occurrence, ask the following questions:
Am I covered for Property Damage? For example, what if I miss a leak in a roof and repairs must be made to the roof – is this covered? What if the sheetrock, wallpaper or carpet in the living room below the leak need to be replaced – is this covered?
Does my policy cover the cost of the temporary use of the home? For example, what if I miss a structural issue, get sued, lose the suit, and the court award includes a dollar amount for the cost of the homeowner to stay at a hotel while repairs are made – is this covered?
Am I covered for Bodily Injury? For example, I inspect a home and six months later a deck collapses, injuring the homeowner – does the policy cover the cost of the homeowner’s injuries?
The answers to the above questions will tell you a lot about the policy. For obvious reasons, always ask for the answers in writing.
3. THE DIFFERENCES IN THE COST OF INSURANCE BETWEEN INSURANCE COMPANIES
Why are there differences in the cost of insurance under various insurance policies? Let me quote a basic economic principle: The Law of Business, by John Ruskin ~ 1819-1900:
“There is hardly anything in the world
that someone cannot make a little worse and
sell a little cheaper, and the people who
consider price alone are that person’s lawful prey.
It’s unwise to pay too much, but it is
also unwise to pay too little.
When you pay too much, you lose a
little money, that is all.
When you pay too little, you sometimes
lose everything because the thing
you bought is incapable of doing the
thing you bought it to do.
The common law of business balance
prohibits paying a little and getting a lot …
It can’t be done.
If you deal with the lowest bidder,
it is well to add something
for the risk you run.
And if you do that you will have
enough to pay for something better.”
I have seen this quote on several different home inspectors’ Web sites. I borrowed and used it for many years because I like the point it makes.
The main reason for differences in the cost of insurance is usually due to coverage. Basically, all policies start out the same — covering, or in other words, paying for claims made against you.
Then the “except fors” are added; these are known as exclusions. They are often a long list of what the policy excludes and will not cover.
An insurance company controls what is covered and, thus, the cost of the policy. The more excluded, the lower the cost.
Often, exclusions are not disclosed in the insurance purchasing procedure and a buyer must read the full policy to see what is covered and what is excluded. Some policies exclude both Bodily Injury and Property Damage. Of course, these policies are less expensive. Some exclude components or systems such as pools and spas.
The key is to ask questions of your insurance provider before purchasing your policy to make sure you know what you are purchasing. I recommend having your questions answered in writing – so you have a record.
Another reason for variables in the cost of insurance policies could be outright fraud. If an insurance company is providing coverage for what seems to be everything under the sun at less than half the cost of another policy, you must consider that it is probably too good to be true.
Several years ago, insurance was being offered via the Internet that covered everything at a very inexpensive rate. Supposedly, this policy was being offered by an insurance company we represent. We called that company, directed them to the Web site, only to find that they were not providing ANY coverage to home inspectors whatsoever. We reported this to the state Insurance Commissioner. The person offering the insurance fled the United States.
If you see this type of offering, don’t hesitate to contact your state’s Insurance Commissioner’s office and ask them to check into the matter. Or, call one of us who have been in the insurance business. The example above is only one of three scams we are aware of that occurred in the past few years.
Other times, an insurance company will decide to write home inspector insurance, and, not fully aware of the exposure, offer it for a low rate. Once claims begin to appear, the company will stop writing coverage. When that happens, inspectors have to begin the entire insurance shopping process all over again with a new company.
In closing, these are tough times for home inspectors. Every penny always counts, but especially now. There is the temptation to buy coverage that is less expensive than what you have been paying. I hope this article will outline some of the possible reasons some
policies cost less and will help you in your decision-making process.