November, 2016
Feature
Inspection News and Views from the American Society of Home Inspectors



Inspecting Your Pre-inspection Agreement

JOE FERRY





H
ome inspectors who have attended one of my seminars know that having a strong, tight, well-crafted Pre-Inspection Agreement is one of the six key elements of a professional liability complete risk management solution. Unfortunately, I have read a disturbingly large number of inspection agreements that are inadequate to the task. 

Many of them are simply unreadable by anyone with a reasonable complement of patience—the font size is too tiny, paragraphs are too long, margins are too narrow. Many are riddled with typos and misspellings. Some are self-contradictory—a provision on Page 2 contradicts a provision on Page 1. Many have grammatical errors and/ or syntactical errors. And far too many of them are simply too long. The most important attribute of a strong, tight, inspection agreement is readability. If it is not readable, it is very unlikely to be enforced. 

How to Make Your Agreement Readable 
Use a font size that is at least 11 points. Have margins that are one-inch wide on the left, right, top and bottom. Have numbered paragraphs. Use headings. Limit the paragraphs to one thought. Limit paragraphs to three sentences or less. Capitalize, bold or underline important provisions. 

How to Make Your Agreement Tight 
Include only necessary provisions. Limit length to two pages or less. 

What Belongs in Your Agreement 
1. Identify the parties to the agreement, your client(s) and you. 

2. Establish the consideration for the agreement. “For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:” 

3. Identify the Standard of Practice under which you will conduct the inspection. “The inspection will be conducted under Standard of Practice (“SOP”) promulgated by the American Society of Home Inspectors (“ASHI”). A copy of the ASHI SOP can be found at www. ashi.org.” 

That is all you have to say. I see far too many Inspection Agreements that essentially recapitulate the Standard of Practice in the agreement. That is not only unnecessary, but it takes up an enormous amount of real estate that is better left for provisions that narrow your exposure. 

I think it is also a good idea to include a copy of the SOP in the Inspection Report. 

Here are some key additional provisions that every Inspection Agreement should have. 

LIMITATION OF LIABILITY PROVISION 
Most of the Inspection Agreements that I see contain a provision that limits the inspector’s liability for anything arising out of the home inspection to the amount of the inspection fee, a multiple of the inspection fee or some other number. 

Where they are enforced, there is no other provision that takes the wind out of a claimant’s or an attorney’s sails more effectively than a limitation of liability provision. Unfortunately, a handful of states will not enforce limitation of liability provisions: Massachusetts and Wisconsin by statute, and West Virginia and New Jersey by Supreme Court decisions. 

Please keep in mind that they are not get-out-of-jail-free cards, however. Nor are they a substitute for Errors and Omissions Insurance. 

For one thing, they will not stop a determined claimant from suing. Since most home inspection lawsuits are multi-defendant affairs, it is a very small calorie burn for an attorney to throw you into the mix, notwithstanding that you have a limitation of liability clause. For another, they are ineffective against your co-defendants’ claims against you for contribution and indemnification. 

Also, courts in jurisdictions that currently enforce them can suddenly decide that they are not going to enforce them because they are unconscionable or against public policy or some other questionable reason. This happened a few years ago in West Virginia to the dismay of many home inspectors who were relying solely on their limitation of liability clauses for risk management. 

ARBITRATION PROVISION 
Most inspection claims that reach litigation are multi-defendant affairs—seller, real estate agent, inspector. The seller and real estate agent will not have arbitration provisions. Attorneys generally do not want to litigate in two separate forums. So, it is much easier to extract you if your client is contractually prevented from suing in a state court. 

Also, if the client sues you in small claims court, you can get yourself out by telling the judge that the dispute is contractually required to be resolved in arbitration. small claims court judges absolutely love it when they can clear a case from their dockets because the court lacks jurisdiction over the subject matter. 

ATTORNEY’S FEES PROVISION 
In the United States, litigants are responsible for their own attorney’s fees. This is known as the American Rule. In the United Kingdom, the prevailing party in a lawsuit is entitled to an award of attorney’s fees by the losing party. This is the British Rule. 

Home inspection cases almost never have any validity. In my experience, unmeritorious claims outnumber meritorious ones by greater than 99 to 1. Notwithstanding that imbalance, the sheer cost of defending a case they are sure to win tends to put even the most righteous defendants into a settling frame of mind. 

This provision changes that calculus and provides an incentive to defend such claims and a disincentive to pursue them. 

WAIVER OF STATUTE OF LIMITATIONS 
In most jurisdictions in the United States, the statute of limitations for negligence is two years, and for contracts it is four years. The judicially created “discovery rule,” which tolls the running of the statute of limitation until a claimant either “discovers” or in the exercise of reasonable diligence “should have discovered” that he or she has suffered harm, can extend this limit indefinitely. 

It is ridiculous to hold a home inspector liable for conditions discovered more than a year subsequent to the inspection. If a claimant has not discovered an issue after a year of living in a house, it is ludicrous to claim that a home inspector should have discovered it during a two-hour inspection. 

Sixty percent of all home inspection claims arise within one year of the date of the inspection, Ninety percent within two years. The remaining 10 percent come in after two years. You can imagine how valid a claim is that is not reported until more than two years after the inspection. My personal record is 12 years. By having a statute of limitation waiver of one year from the date of the inspection, you have eliminated 40 percent of all potential claims. That is a pretty good return on your money. 

Caveat: Some inspectors try to shorten this period to an unrealistic six months. I have even seen an inspection agreement that purported to impose a 90-day limit. A limitation period of less than one year is very unlikely to be enforced. 

NOTICE AND WAIVER PROVISION 
Most claims have no validity because they fall into one of the five following categories: 

1. Outside of the SOP 

2. Concealed 

3. Disclaimed 

4. Discovered and reported 

5. Working at the time of the inspection 

You can oftentimes extinguish a claim just by pointing out these facts after having been given notice of a problem. 

SEVERABILITY PROVISION 
This prevents a court from invalidating your entire agreement—a draconian remedy that courts have exercised in the past—in the event that it finds a single provision invalid. 

INTEGRATION PROVISION 
Sometimes called a merger provision, it prevents a party to the contract from alleging contrary oral agreements. 

NO WARRANTIES PROVISION 
This prevents a party from claiming that the inspection was a warranty of some sort. 

BINDING ON OTHERS PROVISION 
This provision binds any party claiming through the signatory of the inspection agreement from claiming that he or she is not bound by it because he or she did not sign it. 

NO RULE OF CONSTRUCTION 
This clause prevents a court or arbitration panel from saying that, since this is your agreement, it will construe any ambiguities therein against you. 

NON-WAIVER PROVISION 
If you want to cut your client some slack on, say, the notice requirement on one potential claim, it does not prevent you from requiring strict adherence to that requirement on a subsequent claim. 

THIRD-PARTY PROVIDERS
A lot of home inspectors have agreements with third-party service providers who provide services to their clients. If you are referring third-party providers to your client, you should (a) require those parties to indemnify you and/or your firm for their negligence and (b) name you and/or your firm as an additional insured on their liability insurance policies. 

This is very important. If the third-party service provider performs the service negligently, the referrer is almost certainly going to be included in any lawsuit. By having both a contractual indemnification agreement with the third-party service provider and additional insured status on his or her insurance policy, you will have additional protection beyond your own professional liability insurance. 

A FINAL WORD 
While it is important to have a strong, tight, well-crafted Inspection Agreement, it is of even greater importance to make certain that the contract is signed before you begin the inspection. If you have Professional Liability insurance, this is a condition precedent to coverage. If you fail to secure a signed agreement before you begin the inspection, you will have invalidated your coverage. 

If you have not done so recently, or ever, now would be a good time to review your service procedures to see if you and your firm are complying with this little-known insurance coverage requirement. 

In closing, your inspection agreement is but one of the elements of a complete risk management solution. You also need to follow your Standard of Practice, perform the inspection in a professional manner, disclaim appropriately and establish the killer defense. 

If you consistently implement that strategy, it is exceedingly unlikely that anyone will ever make a successful claim against you.

Joseph Ferry has specialized in protecting home inspectors against meritless claims for over 12 years. He has squashed 1,200+ claims made against home inspectors. His ClaimIntercept membership program and Pre-Inspection Agreement Audit services are ASHI-endorsed. Learn more at www.joeferry.com/ashi