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Inspecting the Issues Involving Inspectors

In today’s litigious environment, inspectors are an integral part of every real estate transaction.  These individuals can provide essential information which will assist your clients’ proper evaluation of whether they should purchase a particular property.  In addition, to the extent you are entitled to rely on their expertise, you are provided with a layer of insulation against a potential claim.

As you approach each transaction, especially if you represent the buyers, you will be faced with questions as to which types of inspections are appropriate.  As always, there are conflicting factors in examining this issue.  On the one hand, there is the issue of how much it would cost to have every conceivable type of inspection.  On the other hand, inspections, if properly performed, should provide you and the buyers with expert information concerning the condition of the property.  This, in turn, reduces the risk the buyers will make an imprudent acquisition.  In addition, it will reduce the risk you will face a claim with respect to that transaction.

While there is a delicate balance, it is critical to recognize your fiduciary duty to advise your clients of the importance to have all appropriate inspections.  To some extent this warning is provided in the purchase agreements, addendums and related transaction documents.  Nonetheless, if you fail to recommend an inspection in a given area, and a defect arises, you could face a lawsuit for breach of fiduciary duty.  It is for this reason, you should carefully evaluate the circumstances related to each transaction and strongly encourage inspections which have even a remote possibility of being necessary.

More specifically, in each transaction you should recommend a home inspection.  In most transactions, you should also suggest a geological inspection.  This is particularly true with respect to hillside and rural properties.  If there is evidence of any structural problems, you should encourage the retention of a structural engineer.  Similarly, if there are issues related to any particular system at the property (such as plumbing, electrical, septic tank, pool, etc.), then you should urge your clients to have that system inspected by a qualified specialist.

A second, but equally important, issue is to what extent do you involve yourself in the selection of the particular inspectors.  From a purely risk management standpoint, the preference would be for you to not participate in this decision-making process.  The reason for this position is you are vulnerable to a claim for negligent referral should the particular inspector fail to perform a satisfactory inspection.

As a practical matter, however, it is unrealistic to think you can avoid participation in this process.  Your clients look to you for guidance in identifying which types of inspections are appropriate.  Similarly, they seek your guidance in the selection of the specific inspectors.  The key in this regard is to balance the need to fulfill your clients’ expectations with the need to protect yourself from a claim for negligent referral.

In an effort to strike this balance, a common practice is to provide buyers with a list of at least three possible inspectors for each type of inspection.  This will help to defeat a claim that the buyers were steered to a particular inspector.  In addition, it will shift some of the responsibility to the buyers to evaluate and choose from among the options provided.  In this regard, it is helpful to include, with each list of potential inspectors, a disclaimer that states: 1) the names are provided as a courtesy; 2) you make no representations concerning the quality of services provided by any of the inspectors on the list; 3) your client is solely responsible for the decision-making process of selecting any particular inspector; 4) your client agrees to hold you and your company harmless from any claims related to the services provided by the inspectors.

In compiling your list of inspectors, there are a number of considerations.  First, you should be sure the people on your list are qualified.  In this regard, you should make sure they have sufficient experience, all applicable licenses, and are members of all appropriate trade association (by way of example, home inspectors should be members of ASHI).

You should try to limit yourself to inspectors who are entrenched in the community, as it tends to reflect that they are qualified and will be accountable for their errors.  If possible, the inspectors on your list should be individuals with whom you have personal experience and knowledge.  It is also valuable to have a file of references for each of these inspectors.

Among the most important, and often overlooked, considerations is whether the inspectors have an Errors and Omissions Insurance Policy.  Quite often, realtors are sued for the errors of inspectors because the realtors have insurance and the inspectors do not.  As such, the claimant is going to pursue the “deep-pocket” of the realtor.  Where the inspector does have insurance, however, we have had success convincing claimants not to pursue the realtors.  For this reason, you should require evidence of a current Errors and Omissions Insurance Policy from any inspector who wants to be on your referral list.  You should also monitor to make sure the insurance policy is current at all times.

All of the foregoing applies to the participation of the buyers’ agent in the inspection process.  With respect to listing agents, they should fully encourage, support, and even request that the buyers have all possible inspections.  They should not involve themselves, in any manner, in the selection of inspectors.  Any involvement by the listing agents in this process is susceptible to a claim that it was for self-serving purposes.  If a problem arises, the buyers will likely claim the listing agent manipulated the process to increase the probability the inspection would not disclose any defects so the transaction would close.

In conclusion, there is no doubt inspectors provide valuable functions.  In fact, you should certainly encourage every possible inspection the parties are willing to consider.  At the same time, you should exercise great care and judgment with respect to your involvement in the process of selecting specific inspectors.

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