Over the past few years, more and more E&O insurance carriers offering coverage to home inspectors are asking a question about pre-inspection agreement use on an application for new/renewal coverage. The question reads slightly differently from carrier to carrier, but the essence of the question is whether you obtain a signed pre-inspection agreement from all of your customers. The carrier wants to know this because the lack of a pre-inspection agreement can make it more difficult, if not close to impossible, to defend you against any claim, but especially a frivolous one. You may wonder why this matters and the simplest explanation is that when you face a claim and do not have a signed pre-inspection agreement, it gives the claimant pretty much full control over arguing what the inspection was supposed to cover.
For example, if you are an inspector in California where there is no licensing and/or state standards, you probably use a pre-inspection agreement that incorporates inspection standards from one of several independent sources (CREIA, NAHI, InterNACHI, or ASHI) and then you follow that set of standards when conducting the inspection and writing the report. However, if you do not get the pre-inspection agreement signed, the claimant is free to argue that an entirely different set of standards should apply and the standards the claimant chooses will almost always reinforce the claim rather than protecting you. Obviously, this can make it very difficult for your insurance carrier to defeat or minimize the cost of the claim. In addition, some insurance carriers give premium discounts based on what state you live in, what license you have, what standards you use, and what association(s) you belong to. When you fail to get a pre-inspection agreement signed that could protect you based on the standards you said you use then any claim becomes more difficult and costly to defend. Plus, the carrier that gave you a premium discount for having a signed agreement using those standards is now covering a risk they did not get paid to cover.
Recently, one insurance carrier declined coverage for a claim because the inspector checked a box on the E&O insurance application stating he/she always got a signed pre-inspection agreement from every customer. The problem was that in this case, the pre-inspection agreement never got signed and now the inspector has to deal with this potentially costly claim personally. At this point, many of you are probably thinking that it isn’t always possible to get the agreement signed before the inspection happens. However, there is nothing that says you cannot get the pre-inspection agreement signed later. Just be sure the agreement is made effective as of or before the date of the inspection, no matter when it actually gets signed. Perhaps the best way to accomplish this is to hold the report until the agreement gets signed. There is no requirement that you hand over your work product (the inspection report) before the agreement is signed.
So, please remember to get your pre-inspection agreements signed…or you may find yourself up that creek without the proverbial paddle.
Author: Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.