Home Inspection -- Liability and the Courts

Lawyers did not create the home inspection business, but they were there at the birth.

There are those who say that today’s billion-dollar home inspection industry owes its origins to a California Supreme Court decision handed down in 1984 that had nothing to do with home inspectors and little to do with home defects. The people who say that are not entirely right—but they’re not entirely wrong either.

What Easton v. Strassburger (152 Cal.App.3d90, 1984) did was strike fear into the hearts of real estate brokers everywhere, and— like releasing the spring-loaded shooter on a pinball machine—it set into motion an issue that is still careening around the home sales industry today.

Look at it this way: In the pinball game of life, the rapid growth of the modern home inspection industry came about because the ball bounced off the brokerage-liability bumper.

Or if you’d like, you can look at it this way: Two-thirds of all litigation between homebuyers and home sellers involves property defects that weren’t discovered until after the home was purchased. The vast majority of lawsuits also name the real estate agents involved, and they want to be able to pin the blame on someone else.

Where Did You Come From?

A little history...

If Easton represented the blossoming of the home inspection business, then certainly the seeds of that bloom had been planted some 20 years earlier in the consumer activist movements of the 1960s and 1970s—the same movements that brought seat belts to cars, warning labels to cigarettes, and nutrition labels to processed foods.

Consumers were becoming distrustful of Big Business—distrustful that monolithic corporations actually had the best interest of their consumers at heart, and distrustful even that manufacturers would keep unsafe products off the market. It was the dawn of “product liability.” Consumers were beginning to try to rebalance the playing field.

According to legal scholars, as early as the mid-1960s the legal premise of “caveat emptor” (let the buyer beware) was being challenged by a new legal notion, “the consumer’s right to know.” That is, the consumers’ right to know what they were getting into before they actually bought something.

In real estate, the 1963 case of Lingsch v. Savage (213 Cal.App.2d 729, 735, 1963) established the legal precedent that home listing agents were required to tell buyers about any defects known to them. (Keep in mind that in 1963, the idea that a real estate agent could represent the interest of a buyer was completely foreign. At the time, all agents in the transaction represented the seller’s interest because that’s who paid them. The listing agent worked for the seller, and the agent with the buyer was a “subagent” of the listing agent.)

Gradually, to accommodate buyers who were skeptical of home conditions, sellers began allowing knowledgeable third parties to make independent evaluations. Over the next decade, those third- party home inspectors would coalesce into a national information- sharing network—the American Society of Home Inspectors.

Still, however, by 1984 the actual number of home inspections being conducted was relatively small, and resistance to inspections by the brokerage community was comparatively large. Real estate agents already were seeing inspectors as “deal killers” who would find problems, exaggerate them, and inform buyers that they weren’t getting nearly as good a deal as they should.

Plus, it was worth noting, some inspectors seemed to be working more for themselves than the homebuyer—finding problems and fixing them for a fee. More on that later.

Along Comes Easton

So the idea that brokers had some responsibilities to buyers already was established by the time Easton came along. Given the times and the anti—big business attitudes of consumers and legislatures, in many ways Easton was a decision waiting to happen—and a fairly straightforward one at that. Let’s look at what happened:

The Strassburgers owned a home and an adjacent lot in a hilly upscale community in Contra Costa County outside San Francisco. Mudslides were a recurring hazard in the area.

When the home was built, construction workers had to move a large amount of dirt to create a surface flat enough on which to build. The workers, however, did not take care to stabilize the extra dirt that was piled against a hill on the adjacent lot during construction.

As early as 1973, rains had triggered minor mudslides that hit the house. In 1975, a major slide hit the house, resulting in dam age. The Strassburgers repaired the damage and also made an effort to re-pile the dirt against the hill. The following year, 1976, the Strassburgers sold the property to the Eastons.

They never mentioned the mudslides in any documents, nor their efforts to restore the hill.

In 1978, a major mudslide hit the home and virtually destroyed the house. The Eastons sued the Strassburgers, the builders, and the real estate agents, claiming they had the right to know before they bought the house that the hill was dangerous. The trial court found in favor of the Eastons and apportioned 65 percent of the penalties to the Strassburgers for not revealing the truth and 5 percent to the real estate brokers. The real estate brokers appealed, claiming they were deceived by the Strassburgers just as much as the Eastons.

What the high court ruled, however, stunned the industry.

The appeals court held that because real estate agents are licensed professionals, not only did they have a duty to disclose what they knew, they also had a duty “as professionals” to “use their knowledge, skills, and experience” to identify potential defects.

The court said the agents ignored the presence of the dirt pile and the erosion netting that had been placed on the slopes of the hill, as well as the uneven floors in the home that suggested the ground was shifting under the house. The court held that the agents had “an affirmative duty to further investigate such obvious signs of distress,” regardless of what the seller disclosed.

In other words, not only were agents obligated to make buyers aware of known defects, they also were obligated to investigate possible problems and disclose those unknown defects.

After Easton

Needless to say, the brokerage community reacted in the extreme. How could agents know about defects that weren’t disclosed to them? They didn’t live in the house, nor were they experts in home construction. If they weren’t told of defects by the sellers, how would an agent know the truth?

The brokerage community also realized that the courts had bestowed on sales agents a level of “professionalism” that didn’t exist. It knew its agent workforce was not nearly well enough educated to recognize defects, even if they saw them.

Suddenly, company broker/owners could see an endless line of lawsuits stretching out before them. The court, the brokerage industry maintained, had gone way too far. Something had to be done.

So in the aftermath of Easton, the real estate brokerage industry exercised its considerable clout in state legislatures nation wide to pass laws to get brokers out from under the liability umbrella. The attack was multi-pronged, and in many ways continues today.

Companies wanted state legislators to:

• limit the broker’s liability in cases where a homeowner had not identified defects;

• establish by law exactly what kind of problems must be disclosed, thus excusing both seller and agent from all other defects (and thus ushering in the era of check-off forms);

• raise the level of education required of agents to stay in the business; and,

• most important, try to shift liability from themselves to other professionals. Those “other professionals” were home inspectors.

By and large, those lobbying efforts have met with success. Also, a number of cases since Easton have softened its impact considerably.

Today, while most states still charge listing agents with the obligation to disclose observable defects, in most cases they are no longer obligated to second-guess a seller when a seller says there are no problems.

But the courts also appear to be handling those questions on a case-by-case basis.

Shifting Opinions

At the same time that real estate brokerages were trying to get out from under the liability imposed by Easton, more consumers and even real estate agents were seeing the need for someone to

represent the buyer in the transaction to thwart deceptive sellers.

Even as consumers began seeing the need for home inspectors, they also began seeing the need for “buyer agents.”

Inside the industry, home inspectors and buyer agents were both considered nuisances. Their purpose seemed to be little more than to nickel and dime deals to death.

Over the years, however, those opinions have changed.

Listing agents (and the courts) have come to see that if home- buyers are represented by their own real estate agents, then the listing agent has fewer legal responsibilities to those buyers. If there are professionals on both sides of the transaction, then each can be an advocate for their own client’s best interest.

Also, to be blunt, some brokers, listing agents, and sellers came to see home inspectors as scapegoats. Instead of revealing anything about a home, sellers and agents began listing proper ties “as is”—essentially claiming they are unaware of any problems. The logic went: Why not just let a buyer have the home inspected and take the chance that the inspector will find all the defects? Theoretically, if the inspector missed something, it would be the inspector’s fault, not the seller’s fault, and certainly not the listing agent’s fault.

Fortunately, however, the courts have seen through that ploy. Most states continue to require sellers to reveal “known defects,” even if they are selling a home “as is.” In the modern day, the phrase “as is” is interpreted to mean the seller won’t pay to repair any defects—but known defects must still be revealed.

Shifting Liability to Inspectors

Clearly, as the industry moved through the 1990s, home inspectors were carrying more weight in terms of liability—and the home inspection industry, growing in both numbers and strength, began to respond. More insurance companies came for ward offering Errors and Omissions (E&O) insurance, meaning that in most cases inspectors could be covered if they were sued for damages because they missed something in the inspection.

However, as Alan Carson of Carson Dunlop in Toronto says, the decision whether or not to carry E&O is not an easy one.

“Many home inspectors these days carry E&O insurance, but they won’t admit it. They feel like it’s an invitation to be sued. Some [ won’t feel like they’re suing the inspector, just the insurance company.”

On the other hand, “Some [ will only hire someone who has E&O,” adds Carson, “because they look on the home inspector with E&O as being more professional than those who don’t.”

E&O is mandatory in some places, but is available everywhere. “Most inspectors don’t feel like they need it, but they also know that if they get hit by a lawsuit they could be put out of business,” Carson says.

Even worse, inspectors could be put out of business whether or not they’ve done anything wrong because the cost of fighting a lawsuit is so high.

Additionally, it is important to note that it is often cheaper to settle a lawsuit out of court—even if you’ve done nothing wrong— than to fight the case. The problem with that, of course, is that many real estate agents see a “settlement out of court” as mean ing “he must have been guilty.” Your business could suffer accordingly.

Inspectors who decide not to carry E&O essentially are hoping that once a consumer’s attorney sees they have no deep-pocket insurance company behind them, they will lose interest in the case.

The best defense against legal action, of course, is to avoid it altogether. More states have begun regulating the inspection industry, requiring more classroom education and on-site train ing before allowing individuals to inspect homes.

And, of course, in an effort to raise the image of the entire industry, various inspector trade organizations have toughened membership requirements. Organizations also began lobbying to ease inspector liability by narrowing the definition of “home inspection,” what is included, and what consumers are entitled to if the inspector makes a mistake.

In the recent past, some inspection companies have attempted to limit the extent of their liability to the price of the home inspection. The courts, however, have been inconsistent in upholding those contracts. Some judges have agreed that if a written and signed contract limits recourse to the price of the inspection, then those contracts should be upheld. Other judges have ruled, however, that many consumers don’t understand the contracts they are signing and that it is unfair to allow an inspector to simply return his fee if he or she’s failed to notice a problem that could cost the client thousands of dollars.

What’s Fair

The legal counsel for the American Society of Home Inspectors, believes even now many consumers and real estate agents do not understand what a home inspection truly is: an observation on the condition of the property on the day it was inspected.

“A lot of people believe that since they’ve had an inspection, the inspector has warranted the property against defects. That’s not the case,” he says. “All an inspector is giving his client is a general description. That doesn’t mean that something won’t break tomorrow.

“I’ve always believed that inspectors accept a huge amount of liability (potentially tens of thousands of dollars) for the fee that they charge (usually only a few hundred dollars). That doesn’t make sense. Inspectors are awfully underpaid for the risks they take.”

The Need to Get Better

In some ways, the home inspection industry still is recovering from its earliest days when anyone who said he was a home inspector, and could hang up a sign saying he was a home inspector, essentially was a home inspector.

The industry was both unlicensed and unruly. Many of those early participants were unskilled in modern inspector practices, and abuses were rampant. As was mentioned before, it was not unusual for an inspector to discover a problem and at the same time offer to fix it—for a fee. Clearly, the more “problems” an inspector found, the more fix-it fees he could charge. Scams developed rapidly.

As the need to regulate the industry took hold, however, more states began embracing the standards of practice adopted by reputable home inspector organizations that prohibited or delayed inspectors from doing repair jobs. By most accounts, the number of abuses has diminished substantially.

“There is a shakeout going on now,” says ASHI’s Rosenthal. “There is going to be even more legislation in the future that will continue to force bad inspectors out of the business.

“More state are going to require E&O insurance, and inspectors who can’t meet the standards of their carriers are going to be forced out. At the same time, inspections are going to be more uniform, more standard. Consumers will have a better under standing of what a home inspection is.

“The real estate brokers are coming around too. Many are starting to see that a good home inspection keeps them out of trouble. Yes, inspections complicate a lot of deals—but ultimately it’s in their own best interest.”

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