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Sharpening Your Pre-Inspection Agreement

by Isaac Peck, Editor

As a professional home inspector doing your best to manage your risk, limit liability and avoid lawsuits, your pre-inspection agreement is unquestionably your first line of defense. Here are a few ideas on how yours may be improved.

First, realize how vital your pre-inspection agreement is to your business: it is your opportunity to clearly set expectations and outline exactly what your home inspection is, and what it is not. As I probably don’t need to explain, most of your clients will have unrealistic expectations about what a home inspection is and what it covers. Many confuse a home inspection, which is a snapshot in time, with a home warranty, which is designed to “fix” covered items that turnout to be broken.

Homebuyers sometimes see a home inspection as an “insurance policy” or “guarantee” for the home they are buying, when in reality, it is neither. A home inspection is a non-invasive visual observation of a home’s condition at the time of the inspection. It’s not a guarantee nor a prediction of the future.

The old adage that a home inspector “can’t see through walls,” is often said in jest by those of us in the inspection community, but it needs to be said—in writing!  Your pre-inspection agreement is your opportunity to do so. It should clearly define the purpose, scope, and limitations of the services you are providing to your client.

Here are some things to know about pre-inspection agreements.

Scope of Work and SOP
It’s important to identify the scope of work of your home inspection as well as which Standards of Practice (SOP) you are inspecting to. If you are conducting your inspection according to the American Society of Home Inspectors (ASHI) standards, you must say so. You don’t need to list all of ASHI’s SOPs in your inspection agreement, but you could include a link to it in your agreement. In a world where most reports are digital, you might consider including whichever SOP you follow as an appendix in your inspection report.

Just as important as having a clear scope of work outlining what you are inspecting and what you are responsible for, it is equally vital to state which home systems are not included in the inspection report. If you are not doing sewer scoping or inspecting for mold, then that should be clearly stated in your agreement. All of this adds to your protection. Having a separate line item where the client initials and affirms their understanding of each of these points is recommended. Wording that the home inspection is not a “guaranty” or a “warranty” also is advisable.

Consider an Arbitration Provision
There are pros and cons to including a binding arbitration clause in your pre-inspection agreement. (Find the story Binding Arbitration: What’s the Deal? at WorkingRE.com, search “Binding Arbitration.”) One of the benefits of having an arbitration clause is that it can help get you dismissed from a “catch all” multi-party lawsuit, in which anyone involved in the transaction is dragged in—whether they have liability or not.

Many inspection claims involve multiple parties, with the homebuyer filing suit against everyone involved. In these cases, if you have an arbitration clause, it can force the claimants’ attorneys to either remove you from the lawsuit or litigate the case in two separate forums (court and arbitration). Sometimes where the home inspector is dragged in without any legitimate liability, the attorneys may find it wiser to dismiss them rather than go to the additional expense of arbitrating.

A sample home inspector arbitration clause from California reads: Any dispute concerning the interpretation or enforcement of this Agreement, the inspection, the inspection report, or any other dispute arising out of this relationship, shall be resolved between the parties by binding arbitration conducted in accordance with California Law, except that the parties shall select an arbitrator who is familiar with the real estate profession. The parties agree that they shall be entitled to discovery procedures within the discretion of the arbitrator. The arbitrator shall manage and hear the case applying the laws of the State of California to all issues submitted in the arbitration proceeding. The award of the arbitrator shall be final, and a judgment may be entered on it by any court having jurisdiction.

One of the downsides of arbitration is that it can be very costly. So if you decided on this route, be sure you screen the arbitration provider in advance and weigh the costs. Some arbitrators charge several thousand dollars just to open up a case. A claims adjuster from OREP’s primary insurance program advises inspectors: “If you require mediation/arbitration make certain the provider is in business and is cost effective. Some of the contracts I have seen require AAA arbitration and it costs two or three grand just to get the process rolling.”

Statute of Limitations
Including a provision that limits the statute of limitations to 12 months is another approach to help reduce claims. For example, in California the default time period is four years—within which a client would have to bring a claim against a home inspector. By contractually limiting the statute of limitations to 12 months, your client is agreeing that they have no grounds to bring a claim against you after 12 months from the date of the inspection. You want to be careful to make sure your wording is compliant with your state law, so do your research or consult with attorney beforehand.

While the majority of claims occur within the first year of the home inspection, a fair number are later than that, with some even arising many years later. Having a clearly defined limit or waiver of the statute of limitations is a good way to reduce these late-blooming claims.

Get It Signed
It should go without saying that it is vital to get the agreement signed! We know it is not always easy, but this is a discipline that should be adhered to if you want to decrease your chances of trouble. A rushed home inspector often will perform an inspection and deliver the report before and without getting a signed pre-inspection agreement from the client. But because your pre-inspection agreement defines the purpose, scope, and limitations of your home inspection, it is a vital part of your defense, should your client bring a claim down the road. This is why getting a signed agreement for every inspection should be routine. With many insurers, having a signed agreement is a condition of the E&O policy. So failing to get your agreement signed might jeopardize your coverage. If you can get it signed before the inspection, that is even better, in terms of your defense, because it shows that your client knew and agreed to the limits of your report before engaging you. Don’t you want to know what you’re buying before you buy it?

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Limitation of Liability
If you live in a state where a limitation of liability clause is enforceable, it is potentially one of the most important aspects of the pre-inspection agreement. Typically, this section of your pre-inspection agreement seeks to limit the amount of damages to the inspection fee or some other nominal amount.

One example of a limitation of liability is the following:
The Inspector’s total liability in the event of any breach of this Contract or of its obligations imposed by law or for any losses, damages, claims or demands arising out of the work and services performed under this contract, SHALL BE LIMITED TO THE AMOUNT OF THE FEE CHARGED FOR THE INSPECTION.

Some agreements limit the liability to the inspection fee, others to 1.5 times the fee, and still others use an arbitrary number, such as $2,000, or $5,000. In any case, the goal is the same: limiting the amount the home inspector is liable for in the event of a dispute with the client later on.

These clauses are not a substitute for E&O insurance, nor are they a fool-proof way to get out of trouble, but when they are enforceable, there is often no better way to put an end to a lawsuit

Enforceable—Maybe
For those home inspectors who live in a state where a limitation of liability (LOL) has been upheld in court, or at least is arguably enforceable, the LOL is an excellent defense against potential claimants. The presence of this clause in your agreement can not only discourage disgruntled clients from bringing a claim in the first place, but it can also mean the difference between the successful defense of a claim and a large claim payout.

In states where LOLs are permissible, they are enforceable unless they are found by the court to be (1) against public policy or (2) unconscionable. Ultimately this comes down to state law and the state court’s particular interpretation of the law. And while precedent is typically followed in these types of rulings, the enforceability of these provisions is subject to change under a different set of circumstances.

Some states, like Wisconsin, have restrictions on the use of LOLs in inspection agreements, while others like Massachusetts and California, prohibit them altogether. California law says that “contractual provisions that limit the liability of the home inspector to the cost of the home inspection report, are contrary to public policy and invalid.”

Precedent already exists in most states about how these clauses are handled. State courts have different interpretations of what makes a contract “unconscionable,” but it’s widely understood in the legal community to refer to terms that are substantially unfair and one-sided. For example, South Carolina defines unconscionability as the “absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.”

In the New Jersey case of Lucier v. Williams (366 N.J. Super. 485, 841 A.2d 907), for example, the court held that the LOL was “unconscionable, in contravention of public policy, and is therefore unenforceable.” The New Jersey court explained why such clauses are unenforceable in that state: “To be enforceable, the amount of the cap on a party’s liability must be sufficient to provide a realistic incentive to act diligently… We can assume that the contract price here, a little under $400, is typical of fees charged for this service. If, upon the occasional dereliction, the home inspector’s only consequence is the obligation to refund a few hundred dollars… there is no meaningful incentive to act diligently in the performance of home inspection contracts.”

Header, Bold, and Initial
For an LOL or any other vital clause to stand up in court, it helps that it be in a larger, bolder heading, and that an additional initial next to the line item be required. Even better is to put it in a separate box, with an extra-large, bold header, and require an initial next to it, according to the OREP risk management team.

This may seem trivial and over-the-top but the importance can’t be overstated. Lawyers frequently attack vital contract clauses, especially ones between a “trained professional,” such as a home inspector, and the consumer-public, as being concealed or “hidden amongst unrelated clauses,” when the text for such clauses is not highlighted and distinct from the rest of the contract.

For example, courts in Texas require that any provision in a contract “used to exculpate a party from the consequences of its own negligence” must be “conspicuous,” which under Texas law, means that “something must appear on the face of the contract to attract the attention of a reasonable person when they look at it.”

In many cases, it is relatively easy for home inspectors to modify their pre-inspection agreements to make the vital clauses conspicuous, including the LOL. In so doing, you may greatly improve your liability defense. The importance of this point should not be underestimated. Here at OREP we have seen several cases where this was a critical factor in an inspector’s defense.

OREP includes risk management services and pre-claim advice with its broad-coverage policy, specifically written for the unique needs of home inspectors. For more, call OREP toll free with expanded hours of 8 a.m. – 8 p.m. EST at (888) 347–5273 or visit OREP.org for a quote in under five minutes (most insureds).

About the Author
Isaac Peck is the Editor of Working RE magazine and the Vice President of Marketing and Operations at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He received his master’s degree in accounting at San Diego State University. He can be contacted at isaac@orep.org or (888) 347-5273.<

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