BUSINESS – LESSON 1: SECTION 1 – Fundamental Legal Concepts (Content)

Introduction:  Operating any business comes with risk. This is true for home inspection as well. A claim against a home inspector begins with a dissatisfied client. The client may have legitimate reasons for being dissatisfied; however, many claims are without merit. These meritless claims often result from the client’s misunderstanding about the scope and objective of a home inspection. From a practical perspective, however, it does not matter whether the claim has merit. The home inspector must defend both legitimate and meritless claims and the cost to do so can be similar. The difference occurs at the end. The home inspector may have to pay a judgment in addition to legal costs for a legitimate claim, or no judgment for a meritless claim.

While uncommon, the first notice the home inspector may receive about a dissatisfied client is a monetary demand letter from an attorney. Home inspectors who carry Errors and Omissions (E&O) insurance should notify their E&O insurance company immediately and turn the matter over to the company to defend. Home inspectors who do not carry E&O insurance should turn the matter over to their attorney immediately to defend. Home inspectors should not attempt to deal with claims themselves after attorneys become involved.

Resolving an Incident The more common first notice of a dissatisfied client is when the client contacts the home inspector to discuss the client’s concerns. Home inspectors who carry E&O insurance should report this contact to their insurance company. Doing so is called reporting an incident and is usually required by the terms of the insurance policy. Failure to report an incident could result in denial of coverage if the incident escalates into a claim. Reporting an incident usually does not affect policy cost or renewal.

Attempting to resolve an incident with the client involves a risk that the home inspector could do or say something that makes the situation worse. If the home inspector elects to risk attempting to resolve the issue, the following tactics have proven useful. Listen to the client without getting defensive. Gather as much information as possible about the client’s perspective, and about the client’s issues. Take pictures to document the issues. Do not admit fault or apologize. An apology could be construed as admitting fault. Attempt to reach a settlement, even if you may not be at fault. Consider the settlement a cost of doing business. If you reach a settlement, obtain a full release from all claims regarding the home inspection. A release is a legal document that your attorney should draft. Your E&O insurance company may have a model release form for you to use.

The E&O Claim Process Each E&O insurance company has its own claims process. The following process is a summary of a typical claim. When a claim is received, a claim file is opened. At this time the home inspector’s policy deductible is usually payable. Any part of the deductible that is not spent processing and investigating the claim should be refunded to the home inspector; however, do not expect a refund.

The claim may be assigned to an investigator who investigates the claim in order to determine if the insurance policy covers the claim, and if home inspector complied with the applicable standard of care. This investigation may involve reviewing the claim and any supporting documentation provided by the claimant (usually the home inspector’s client), interviewing the home inspector, reviewing the home inspection report, and conducting an onsite investigation. The investigator issues an opinion to the insurance company regarding whether the home inspector complied with the applicable standard of care.

The insurance company will, in many cases, attempt to settle the claim regardless of whether the home inspector appears to be at fault. This is a business decision to avoid the expense and uncertainty of litigation. If a settlement is reached, the insurance company obtains on behalf of the company and the home inspector a full release regarding all claims that may result from the home inspection. If a settlement is not reached, the company turns the claim over to a local attorney to defend the claim. The company pays all costs to investigate, defend, and pay any settlement or judgment above the home inspector’s deductible.

The Litigation Process Civil litigation involves a dispute between two or more parties. Most civil litigation is handled in state courts; each state has its own rules and procedures for dealing with civil litigation. Litigation involving a home inspector would rarely, if ever, be tried in federal court. The amount involved in home inspector litigation is usually below the $75,000 threshold to qualify for federal court jurisdiction, and the dispute usually does not involve a matter that falls within federal court jurisdiction.

The following is a brief summary of the civil litigation process. It assumes that the home inspector (defendant) and the client (plaintiff) are the only parties. In reality, there may be other defendants such as the seller and the real estate agents.

Parties in litigation may file additional claims against each other. The defendants may file cross-claims against each other. A cross-claim is litigation between defendants (or plaintiffs) that relates to and is carried on within the litigation between the defendant and the plaintiff. One common purpose of a cross-claim is to shift any potential liability among the defendants.

The defendant may file a counterclaim against the plaintiff. A counterclaim may or may not relate to the underlying action. A counterclaim is litigation initiated by a defendant carried on within the original litigation. Purposes of a counterclaim may include to help mitigate the client’s claims, and to litigate any claims the defendant might have against the plaintiff. Clearly, counterclaims and cross-claims can add significant complexity.

Civil litigation begins with a complaint filed with the court. The complaint is the beginning of a process called the pleadings. Complaints in Federal Court and many state courts identify the parties and contain a short and plain statement of the claim that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests. Complaints in other states identify the parties, describe the basic facts of the case, describe the legal reasons supporting the plaintiff’s case, and request the relief (damages) sought by the plaintiff.

Upon receipt of a properly filed complaint, the court issues a summons to the defendant notifying the defendant of the complaint and requiring the defendant to provide an answer. Failure to provide an answer or a motion to dismiss can result in a default judgment against the defendant. A summons, therefore, should never be ignored.

The defendant should file an answer to the complaint with the court within the time stated in the summons. Timely filing of all pleadings and motions is essential. Failure to make timely filings can be used against the failing party. The answer will usually admit, deny, or plead insufficient information to admit or deny the plaintiff’s alleged facts. The answer may contain affirmative defenses that deny the defendant’s liability. The answer may also contain a motion to dismiss the complaint.

Discovery is the next step. Discovery is the compulsory disclosure of information relevant to the litigation. The purpose of discovery is to make each side aware of information held by the other side so that there are no surprises at trial. Interrogatories are written questions from one party that are answered in writing by the other party. Document production is the request for documents that are relevant to the case. Documents can be paper and electronic and can include emails and text messages. Depositions are verbal answers to questions posed by the opposing attorney. Depositions are conducted under oath, are recorded by a court reporter, and may be recorded using audio or video.

Litigation often ends in one of several ways before a trial. The parties may reach a settlement. The parties may voluntarily enter arbitration or mediation, or the court may order mediation before trial. The court may grant a motion by the defendant to dismiss the case. Dismissal may occur when the plaintiff’s complaint is legally defective. A defective complaint would be one in which the plaintiff failed to plead facts, law, or both that would support the plaintiff’s request for relief, or one in which the complaint was defective in form. The court may grant a motion by either side for summary judgment. Summary judgment occurs when there is no significant disagreement about the facts and when the moving party is entitled to win as a matter of law.

A trial may be a bench trial or a jury trial. A judge hears the case in a bench trial, decides which facts seem to be most accurate, applies the law, and renders a decision. A jury performs these functions in a jury trial under the direction of a judge. The judge or the jury are said to be the trier of fact.

Prevailing in a civil trial does not mean that the judgment you receive will be paid. A judgment is an opportunity to collect money from the defendant. Defendants can make it difficult and costly to collect a judgment, up to and including bankruptcy, which can make the judgment worthless. For this and many other reasons, civil litigation should be avoided.

Small Claims Court Most jurisdictions have a court system that deals with civil disputes in which there is not enough money in dispute to warrant hiring (and paying) a lawyer. Typical disputes include breach of contract, return of personal property, and tenant evictions. The maximum amount in dispute varies between jurisdictions and is usually between $5,000 and $10,000 dollars.

The procedures in small claims court are less formal than in other courts. Lawyers are not required and may not be allowed in some jurisdictions. A judge hears from both sides and renders a decision. The losing party may appeal to the next higher court in that jurisdiction. The losing party may attempt to avoid collection of the judgment as previously described.

If you sue or are sued in small claims court it is important to find out about all forms and filing requirements. It is also important to prepare a brief (a written summary of your case) and provide a copy to the clerk of the court when you arrive, for the judge or commissioner to read. Most of the time they do read it.

Types of Home Inspector Liability

Introduction Many home inspectors perform ancillary services in addition to home inspections. Examples of ancillary services include radon measurement, mold sampling, water quality sampling, pool and spa inspections, wood destroying organisms inspections, and new construction inspections. Each ancillary service subjects the home inspector to potential liability similar to a home inspection. The following liability discussion focuses on home inspections. Liability types are the same for ancillary services.

Breach of Contract A breach of contract occurs when a party to the contract fails to perform the party’s promises. Consider the following situation. The home inspection contract cites the ASHI Standard of Practice (SoP) as the standard under which the home inspection will be performed. The home inspector’s promise is, therefore, to perform the home inspection using the ASHI SoP. The client alleges that the home inspector failed to properly report a defect that should have been reported using the SoP. The home inspector may be liable for breach of contract if the client can prove the allegation, and if the client can prove damages as a result of the breach.

The usual remedy for a breach of contract is monetary damages, the amount of which the party alleging the breach must prove. There are many types of damages. Actual (compensatory) damages usually include the cost to repair or replace the improperly reported system or component but should not include the cost of upgrades or improvements. Actual damages may include other damages such as loss of use of the house during the repairs. “Benefit of the bargain” damages attempt to compensate for the reduction in the value of the property due to the alleged defects, which the plaintiff did not know about when making the deal to purchase. Nearly every claim against a home inspector will include: “I would not have bought the house had I known about the alleged defects.”

Most claims against home inspectors involve monetary damages; therefore, breach of contract should be the typical basis of a complaint against a home inspector. Compensation for personal injury is usually not recoverable under breach of contract; personal injury claims are usually brought as a negligence claim.

Negligence Negligence, as usually alleged against home inspectors, is divided into two classes. The most common is ordinary/simple negligence. Ordinary negligence is the failure to exercise the standard of care that a reasonably prudent person (home inspector) would have exercised in a similar situation. Less common is gross negligence, which some define as the failure to exercise slight care and others define as a conscious act or omission in reckless disregard of a legal duty.

The classic elements of negligence are: (1) the defendant (home inspector) had a duty toward the plaintiff (usually the client), (2) the home inspector breached the duty (failed to perform a competent home inspection), (3) the home inspector’s breach was the cause of the plaintiff’s damages, and (4) the plaintiff suffered physical injury. The plaintiff is usually responsible for proving these elements by a preponderance of the evidence.

The duty of the home inspector toward the client is derived from two concepts. One concept is the fiduciary relationship between the home inspector and the client. A fiduciary relationship arises when someone has a duty to act for the benefit of another on matters that are relevant to the relationship; specifically, the home inspector has a duty provide accurate information for the client’s benefit. The other concept is the home inspector’s duty to exercise due diligence when conducting the home inspection and reporting the results. Diligence is the attention and care required from a person in a given situation. Due diligence is the diligence that a reasonable person would undertake to satisfy a legally required duty.

It is interesting to note that all parties on the purchase side of a real estate transaction have a duty to exercise due diligence. This includes the real estate agents and the buyer. The extent of the due diligence varies as does the knowledge that the party is expected to bring to bear on the situation. It is possible that a client’s failure to exercise due diligence could reduce or even bar recovery from a home inspector if the client alleges negligence.

The definition of negligence contains the potentially troubling concept of the standard of care (SoC). The SoC for a home inspection is usually the applicable SoP that should be stated in the home inspection contract; however, exceptions are possible. If the plaintiff can establish that a different SoC is practiced by home inspectors in the area, then it is possible that the home inspector could be held to that SoC regardless of whether the SoP sets a different standard. For example, the SoC in some markets is to use a combustible gas detector to detect gas leaks. Use of a combustible gas detector is considered a technically exhaustive procedure in most SoPs and would not usually be required. If the plaintiff can establish that the SoC is to use a combustible gas detector, then the plaintiff might prevail if the client suffered damage as a result of the home inspector’s failure to properly use a combustible gas detector.

The tort of negligence was originally developed as a means for the plaintiff to recover damages for personal injury, not for damages that are solely monetary in nature. The Economic Loss Rule may bar negligence claims for which damages are solely monetary, as are many claims against home inspectors. This rule may not apply in all jurisdictions and may be interpreted differently depending on the facts of a case.

The typical remedy awarded in negligence claims is actual damages incurred by the plaintiff, the amount of which the plaintiff must prove. Punitive damages and attorney’s fees may be awarded in gross negligence cases.

Fraud There are many types of fraud. The two types most likely to be alleged against a home inspector are common law (tort) fraud and what might be called statutory fraud. Common law fraud is the knowing misrepresentation of the truth or the concealment of a material fact to induce another to act to his/her detriment. Statutory fraud is defined by legislation, often as part of a consumer protection law.

Statutory fraud may have different elements, different remedies, and may have other differences compared to common law fraud. While many states have consumer protection laws, their applicability to home inspectors varies by state.

Common law fraud has similar elements in many jurisdictions. The usual elements of common law fraud are: (1) a past or present material fact was not accurate, (2) the defendant knew the fact was not accurate or stated the fact with a reckless disregard for accuracy, (3) the defendant intended for the plaintiff to act on the inaccurate fact, (4) the plaintiff did not know the fact was not accurate, (5) the plaintiff reasonably relied upon and acted upon the inaccurate fact, (6) the plaintiff suffered damage that was caused by the inaccurate fact.

Common law fraud is different from other civil litigation in at least two respects. Courts usually require pleadings that describe the specific fraudulent conduct. Many jurisdictions require a clear and convincing evidence burden of proof rather than the preponderance of evidence burden of proof applicable in most civil litigation. These differences make common law fraud more difficult to allege and to prove.

The typical remedy awarded in fraud claims is monetary damages incurred by the plaintiff, the amount of which the plaintiff must prove. Punitive damages and attorney’s fees may be awarded. Rescission of the real estate purchase contract is possible, though unlikely, if the fraud induced the buyer to purchase the property.

Negligent Misrepresentation Negligent misrepresentation is a relatively new tort. It attempts to bridge the gap between negligence and fraud by creating a duty among those in the business of providing information to take reasonable care to provide accurate information. As stated in the Restatement (Second) of Torts ยง522: “One who, in the course of his business, profession or employment or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”

The elements of negligent misrepresentation are identical to those of fraud with one important exception. The defendant may have believed the inaccurate information to be true but had no reasonable basis for believing that it was true. There is little case law applying negligent misrepresentation to home inspectors; however, this tort would seem to apply directly to home inspectors. Home inspectors should, therefore, take care when making statements and reporting about the lack of defects in a system or component. Such statements should be made based on reasonable information to support the statements.

The typical remedy awarded in negligent misrepresentation claims is monetary damages incurred by the plaintiff, the amount of which the plaintiff must prove. Punitive damages and attorney’s fees are usually not awarded.