BUSINESS – LESSON 2: SECTION 2 – Elements of a Pre-inspection Agreement (Content)

Pre-inspection Agreement (Contract) Contents (Required)

Introduction Contract contents, like all other aspects of a contract, are governed by state law. The following are contents usually required in inspection contracts. Some of these contents may be required by state home inspector regulations.

Inspection Company Name The inspection contract should state the full legal name of the home inspection company. This is extremely important when the home inspection company is operating as a corporation or LLC. Failure to use the company name could subject the home inspector to personal liability for damages. Some states require the name and license number of the home inspector performing the inspection be on the inspection contract.

Client Names The inspection contract should state the names of all parties who are purchasing the property, or who will have a financial interest in the property. This is to ensure that another party is less able to claim after the fact that the party was not bound by the contract. In practice, inspection contracts often contain only the name of the party scheduling the inspection. This is acceptable, if not ideal. Adding a clause stating that the signature of one party binds all parties might help in cases where all parties are not known.

Inspection Location The inspection contract should state the full address of the property to be inspected. The legal description is not necessary.

Inspection Date The inspection contract should state the inspection date. Some jurisdictions require including the inspection time.

Inspection Fee The inspection contract should state the inspection fee. If the fee consists of multiple services (for example a radon test and a water quality test) then the fee for each service should be listed separately.

Inspection Objective/Purpose The inspection contract should contain a statement of the inspection objective/purpose. An objective/purpose statement might read: “The objective of this inspection is to identify major deficiencies requiring immediate major repair that may exist on the property at the time of the inspection.” The inspection contract may contain statements that define terms such as major deficiency and immediate major repair. Doing so helps remove uncertainty about how these important terms could be defined.

Standard of Practice (SoP) The inspection contract should identify one SoP under which the inspection will be performed. The SoP should be incorporated by reference into the contract. This makes the SoP part of the contract as though it were actually printed in full in the contract.

Exclusions and Limitations The inspection contract should contain a comprehensive list of the important exclusions and limitations of the inspection. The list can be a summary of the exclusions and limitations in the SoP identified in the contract.

Signatures The inspection contract should contain the signatures of all parties named in the contract. Home inspectors operating as a corporation or LLC should sign the contract as a representative of the company by placing their title after their name. For example, John Smith, Member (for an LLC), or John Smith, President (for a corporation). This is extremely important when the home inspection company is operating as a corporation or LLC. Failure to sign as a company representative could subject the home inspector to personal liability for damages.

Pre-inspection Agreement (Contract) Contents (Optional)

Introduction The following are terms that may be contained in an inspection contract. Some of these terms may not be allowed or may be restricted by state law.

Client Responsibilities Making the client contractually responsible for certain tasks may help reduce the client’s ability to substantiate some common claims against home inspectors. Client responsibilities might include: (1) making the home inspector aware of concerns contained in the seller’s disclosure, (2) reading the full inspection report and acting on all recommendations during the due diligence period, (3) initiating a telephone call with the home inspector if the client does not attend the inspection, (4) conducting a walkthrough of the property after the seller’s belongings have been removed, (5) ensuring that permission has been secured for the home inspector to enter and inspect the house.

Disclosure of Inspection Findings Home inspectors are restricted by codes of ethics and sometimes by state home inspector regulations from distributing the inspection report and discussing inspection findings with anyone except the client. This includes real estate agents. Including a release from this restriction in the inspection contract allows the home inspector to use good judgment about report distribution and discussing findings with other parties who have a legitimate need for the information. The client should be able to delete the release if he/she wishes.

Report Redistribution It is common for inspection reports to be used by subsequent purchasers when the home inspector’s clients do not purchase the property. Reports are also used by third parties. The inspection contract should contain a clause that prohibits transfer of the report to third parties. A similar statement should be placed in the inspection report. The inspection contract may contain an indemnification clause that obligates the client to defend the home inspector against third party claims and to pay judgments against the home inspector that result from third party claims.

Recovery of Legal Fees and Expenses As a general rule, each party in a dispute is responsible for its own costs incurred during the dispute. The inspection contract may contain a clause that allows the prevailing party to recover costs from the losing party. The clause should apply equally to both parties. This clause can help discourage frivolous claims; however, this can be a double-edge sword because the home inspector could be responsible for the client’s costs if the home inspector loses.

Right to Observe Claims The inspection contract should contain a clause that gives the home inspector the right to observe alleged errors and omissions before the alleged errors and omissions are repaired. The clause should bar claims based on alleged errors and omissions that the home inspector was not allowed to observe prior to repair. The clause should allow emergency repairs.

Time Limitation on Filing Claims The inspection contract should contain a clause that limits the time during which a client can file a claim based on alleged errors and omissions. The time limitation should be reasonable. One year is a common limit. Time limitation may be set by law in some jurisdictions. The time should begin on the inspection date regardless of when the alleged error or omission is discovered, if allowed by state law. This prevents the home inspector from being liable, perhaps in perpetuity, for errors and omissions discovered long after the inspection.

Inspection Scope Expansion Home inspectors often report about out-of-scope deficiencies and out-of-scope systems and components. Doing so could be interpreted as expanding the inspection scope to include other out-of-scope deficiencies, systems, and components. The inspection contract may contain a clause stating that reporting out-of-scope deficiencies does not change the inspection scope.

Alternative Dispute Resolution Disputes processed through the courts are often very costly and time consuming. Alternative dispute resolution venues, such as arbitration and mediation, can be a more cost-effective way to resolve disputes involving the relatively small amounts that are typical in-home inspection related claims.

Mediation and arbitration share some similarities, but the results are different. Both are voluntary, although mediation can be court-ordered prior to litigation. Mediation is a facilitated negotiation between the parties. The mediator attempts to help the parties reach a voluntary settlement. Mediation ends if the parties cannot reach a settlement. Arbitration is a quasi-judicial process in which the arbitrator considers the evidence presented by both parties and renders a decision. The arbitrator’s decision is binding and can be enforced by court order.

It is important to note that an agreement to use alternative dispute resolution, especially arbitration, restricts or eliminates the right to litigate disputes. Enforcing an alternative dispute resolution clause on a client may be more difficult in some situations, including adhesion contracts. The following procedures may not be necessary, but they may help in some situations. Make the clause conspicuous by means such as a larger type font or placing the clause inside a box. Have the client initial the clause.

It is important to note that alternative dispute resolution, while less expensive than litigation, is not free. The client may be required to pay a fee up front to begin the process. This fee may be greater than the limitation of remedies recovery potential. It is important that the combination of an alternative dispute resolution clause and a limitation of remedies clause not work together to effectively limit the client’s alternatives for pursuing claims against the home inspector. This combination could cause both the alternative dispute resolution and the limitation of remedies to be severed as unconscionable and deemed unenforceable.

Most states have laws regarding alternative dispute resolution such as the Uniform Arbitration Act. The home inspector should consult with a local attorney about how to craft an enforceable alternative dispute resolution clause. Some insurance companies offer a reduction in the premium paid for errors and omissions insurance for specifying a specific arbitration company they desire in the pre-inspection agreement.

Limitation of Remedies (Liability) Home inspection is a risky business. For a fee of a few hundred dollars, home inspectors assume thousands of dollars of potential liability. This potential liability exists even when the home inspector performs the service exactly as specified by the SoP. Many home inspectors attempt to limit this liability by including a limitation of remedies clause in the inspection contract. A limitation of remedies clause attempts to limit the amount that the client can collect for a claim against the home inspector. A limitation of remedies clause does not prevent a client from initiating a claim or action against the home inspector. A limitation of remedies clause does not limit the remedies of parties who are not named in the contract. An example of such a party is the real estate agent who is sued along with the home inspector and everyone else involved in a house sale gone bad.

Enforcing a limitation of remedies clause against a client may be difficult and may not be allowed in some jurisdictions. The following may improve the likelihood of successful clause enforcement.

• Make the clause conspicuous.

• Have the client initial the clause.

• Make the limitation amount more than the inspection fee. This might help convince the court that the clause is fair.

• Provide the client with an opportunity to negotiate the limitation clause by including an offer to negotiate within the clause, or by offering to remove the clause for an additional fee.

• Explain the reason for the clause in terms of allocating risk between the home inspector and the client so that the inspection may be performed for the agreed-upon fee.

• Include all legal causes of action in the clause such as negligence.

A limitation of remedies clause definitely needs to be reviewed by a local attorney to determine if one is allowed and enforceable in a particular state.

Disclaimer of Warranties Some clients believe, or at least try to allege, that a home inspection creates or provides a guarantee or insurance policy against problems that may occur in the home. This may be caused in part because some home inspectors offer limited warranties as part of their inspection service, and because some home inspectors use the term “insurance” in their marketing materials. Home inspectors should refrain from using terms such as guarantee and insurance in their marketing materials unless they provide such services.

Limited home warranties are available from third parties. The home inspector may elect to purchase such a warranty, and to provide it to the client as part of the inspection service. The home inspector may, as an alternative to purchasing a third-party warranty, provide a self-insured limited warranty. The home inspector who elects to provide a warranty as part of the inspection service should take great care to define the terms of the warranty in an agreement that is separate from the inspection agreement.

The inspection contract of a home inspector who does not provide a warranty should contain a clause that disclaims all warranties regarding the condition of the property and disclaims that the inspection provides insurance coverage against problems that may exist or may occur at the property.