When Inspectors Miss Important Defects – What Happens?

What happens when an inspector misses something during an inspection?

Courtesy of Bob Petersen, Precision Inspection
Many parties to the real estate transaction think that inspectors, like many other professionals, carry some sort of insurance for any oversights made in the course of their work. This was not the case (required) until 2007!

Now, when we renew our license, we must prove we have this coverage. In the usual complaint scenario, the buyer asks the inspector to ‘make good’ and if he doesn’t, the buyer usually files a lawsuit. Rarely do buyers file a complaint with TREC though this is by far cheapest, fastest, and most effective way to get a licensee to act. Of course, the lawyers involved don’t go out of their way to tell the buyer this, or may not know themselves.

If the inspector is smart, he will ‘settle up’ with the buyer quickly. If he doesn’t have the money and missed a cracked slab or other major item, the buyer’s only alternative is to sue the inspector, win, then direct the court to have TREC pay the judgment out of the inspector’s recovery fund. (Maximum for any one transaction is $12,500 including all attorney’s fees, interest, and cost of court). The inspector’s license can be suspended till the fund is repaid (kind of like debtor’s prison isn’t it?). If the defect costs more than $12,500 to fix (which a foundation easily could), the buyer is simply out of luck.

A rarer occurrence, but one which most inspectors are also unprepared to pay for, is damage to a house during the inspection. Probably the two most common are flooding (whoops, forgot that upstairs tub was on) and fire (‘I knew I shouldn’t have lit that 40 year old furnace’). Only general liability would protect the buyer here. If an inspector also has a pest control license he must carry business liability insurance, a min. of $300,000. Of course even this wouldn’t cover the cost of rebuilding a larger home if it burned. I doubt if the majority of home inspectors carry this type of coverage though.

A more interesting aspect of this topic is the following: The inspector is called upon to make good on an item which he didn’t inspect (or whose condition wasn’t discernible during the inspection) or for a verbal statement made during the inspection. Examples of the former are termite activity and septic systems (most home inspectors inspect neither). An example of the latter: ‘you have 30 year roof on your house’ (when, in fact it is a 20 year roof). This poses a much more difficult situation for the licensee as he is forced to retain a lawyer to prove his case (Unless the buyer can be persuaded to accept binding dispute settlement somewhere).

I have been in this situation once and found it cheaper to pay for the alleged transgression than retain counsel. If the inspector doesn’t make good (whether he is culpable or not) he is guaranteed never to hear from either agent (or any agents in their respective offices). Most inspectors now have arbitration clauses in their inspection reports which obligate the buyer to bypass a lawyer and go directly to binding dispute settlement however these are routinely ignored by lawyers.

Best advice for the inspector is: Carry lots of insurance and be very, very careful.

Courtesy of Bob Petersen, Precision Inspection
(512) 282-0455
Since 1983

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