SELLER LAWSUITS – HOW FAR DOES AN INSPECTOR’S DUTY EXTEND?
Since a large part of my law practice involves defending home inspectors in litigation I see many kinds of claims. I’ve defended claims where the plaintiffs’ lawyers were trying to establish a class action suit over the use of limitation of liability clauses in pre-inspection agreements. I’ve defended claims involving deaths and catastrophic bodily injuries. I’ve even defended a home inspector in Pennsylvania against an alleged failure to advise a client that a home was used as a meth lab. And now, I can add defending claims against inspectors by sellers to my list.
The year 2014 brought me four claims involving sellers alleging a home inspector retained by a potential buyer caused damages to the seller in some fashion. The “usual” seller claim involves some allegation that an inspector retained by a buyer caused some physical damage to the property during the inspection process. This year I’ve responded to a claim that an inspector left water running in a vacant property causing thousands of dollars of damages. Thankfully the inspector’s clients attended that inspection and gave statements that they saw the inspector shut off any faucets that were tested. A relatively simple and easy defense. Another seller claim involved an inspector who, perhaps over zealously representing his buyer clients, removed a piece of tile, suspecting asbestos.
Certainly any inspector who causes some damage to property, whether intentional or not, during an inspection is liable to the owners of the property. All of us have a duty under the law to behave reasonably and to make someone we injure whole. This is the basic principle of tort law in America, derived from English law. These claims are not based on some failure to properly perform the inspection.
Usually when we envision a claim involving a failure to properly inspect a property we think of an inspector’s client making the claim. In most instances the inspector has a contract to perform the inspection. The contract, if properly written, sets out the scope of the agreement between the parties and creates a legal relationship. In some states the inspector can also be sued by a client for negligence. Negligence involves a duty from one party to another, an alleged breach of that duty and resulting damages. For example, an inspector’s client alleges that the inspector had a duty to report on defects found during the inspection, the inspector breaches that duty by failing to report a roof leak, and as a result the client buys a house with a leaky roof that requires repair or replacement.
Recently, however, I have seen two claims by sellers alleging the inspector was negligent in performing the inspection or somehow negligently misrepresented the conditions resulting in a cancellation of a transaction. One of them actually became a lawsuit. There, the inspector was retained by the buyers for a typical home inspection. The inspector reported several areas of possible defects involving the foundation, some of which the inspector believed required further analysis by a structural engineer. The inspection report was well written and contained several photos of the conditions the inspector believed were either obviously defective or that required further examination. After reviewing the report the buyers backed out of the sale, leading to a lawsuit by the seller against the buyers and the inspector. The seller contented that the inspector’s assessment of the foundation was in error, or at the least overkill, and that the inspector, being a generalist, lacked the ability to comment on the condition of the foundation. The seller alleged his damages were the loss of that sale, requiring him to carry the property for several more months, ultimately selling the property for about $20,000 less that the contract price from the failed transaction.
We can all certainly recall a time, not too long ago, when it was a seller’s market. Buyers were lining up and were negotiating to secure properties by increasing offers above the list price. Money was easy to obtain from banks more than willing to lend, and appraisals were high. Now, however, buyers are harder to come by, due in large part to the tightening of lending guidelines and the virtual end of “no money down” transactions. I believe the change in the market makes it more likely for a seller to try to retain any buyer willing to pay the contract price; for fear that another will be hard to find. That is exactly what happened in my example above. The seller, instead of obtaining an estimate to make the needed repairs to the foundation, contended that the conditions were exaggerated by the inspector and that the inspector failed to adhere to the standards of practice for home inspectors by commenting on the condition of the foundation which was outside of the inspector’s expertise.
The legal question was relatively straightforward: does a home inspector have a legal duty to a non-client seller relative to an alleged error or omission in performing the home inspection? As with most legal issues involving inspectors there was no case law available where a court had previously addressed this issue and created precedent. My job was to use existing law to show that under these circumstances there was no legal duty to the seller. Here, the inspector had a contract that specified that the clients were the buyers and that the inspection was being performed solely for their benefit. The state having jurisdiction over the lawsuit is a regulated state, and defines a home inspection as being for the benefit of the client. The state’s standards of practice also made it incumbent upon the inspector to perform the inspection to those standards so that the client could obtain sufficient information about the condition of the property prior to a sale. These were all factors to be considered, but the real hammer used to build the argument that there was no legal duty came from a prior case involving a real estate appraisal. In a prior ruling, that state’s appellate court held that a real estate appraiser had no legal duty to a buyer of property because the contract for the appraisal was between the lender and the appraiser, and the appraisal was done for the benefit of the bank, not the buyer. They buyer did not rely on the appraisal in deciding to purchase the property, and therefore had no legal recourse against the appraiser for an allegedly negligent appraisal.
Using these arguments I moved to dismiss the case against my client inspector for the same reasons. The buyers, not the seller, commissioned the inspection. The inspection was for the sole benefit of the buyers, not the seller. The seller did not rely on the inspection report in any fashion, and in discovery admitted he may not have even seen the report. Finally, despite his contention, the seller was not an intended beneficiary of the pre-inspection agreement and in fact was, by nature of the inspection process, in an adversarial position to the inspector as the inspector was essentially there to give the buyers an impetus to demand credits or that repairs be made prior to closing.
The seller’s argument in opposition to our motion to dismiss was artful, if ineffective. He argued that because the agreement of sale for the transaction contained an inspection contingency clause, the inspection was therefore also for his benefit to apprise him of conditions he would be required to make repairs to facilitate the sale. Thankfully the judge assigned to decide the motion had read and understood the arguments. The judge discounted that argument because the inspection contingency clause did not give the seller the power to dispute the findings of the home inspector there was no legal relation between the home inspector and the seller created by that clause and, given the prior cases involving the appraiser, there was not any legal duty owed by inspector to the seller. The judge dismissed the case, thereby paving the way for dismissal of these claims in the future.
Despite this promising result, I do not anticipate that this decision will chill other sellers from making similar claims. Given the current state of the real estate market cancelled transactions can have substantial financial impact, and suits against buyers who cancel deals similar to the one in my example are not as appealing to a disgruntled seller when they realize that buyers generally do not have insurance or assets that can satisfy a judgment that a deal was wrongfully terminated. In most states home inspectors must carry insurance, thereby making them a target. Unless and until the law begins to provide defendants with a means of recovering losses caused by questionable lawsuits that are ultimately found to be without merit, they will not stop.