“But I Only Referred Them!”

Realtors are starting seeing an increase to their liability in an area known as “negligent referral”.  This can be especially true with Home Inspectors. According to recent studies, the most frequent causes of litigation in the real estate industry are that of disclosure and property condition. With an increase in the number transactions involving home inspections, cases involving claims of negligent referral to a home inspector are continuing to rise.

This increase has motivated brokers and agents to invent new and creative ways in which to place a client in contact with a home inspector. Some of these ways can be effective in reducing liability; others have had the opposite effect.

Some of the ways which, contrary to some old “conventional wisdom”, have had a negative effect on liability, include:

Do not refer anyone or have your clients look in the phone book. This has caused clients to feel slighted by an agent’s lack of knowledge. “What do you mean you don’t know anyone, isn’t that what you supposed to do?”  Courts are also unsympathetic to this philosophy; most feel a broker does have responsibility to provide direction to their clients.

Refer only licensed contractors. A contractor license indicates basic knowledge of construction or experience in a trade specialty. However, it does not indicate any knowledge of home inspection. Specialized training is necessary to provide a thorough and diligent home inspection. A contractor license also provides a false sense of security that a consumer has some form of recourse against a contractor for a poor inspection. The Contractors State License Board will not investigate complaints, or take disciplinary action against a contractor for the performance of a home inspection.

Refer three companies and let your client decide. This only works if you have done your own due diligence on the three inspection companies. There was an arbitration case a few years ago involving a prominent brokerage in the Los Angeles area in which the agent got three brochures from the many stands in the office, gave them to their client and instructed them to choose one. The inspection failed to report significant conditions within the property. In cross-examination of the agent, they were asked, “What steps did you take to qualify the three companies you provided to your client?”  The response was “I heard they were good.” Given that the agent did little or no investigation of the three companies, the arbitrator ruled in favor of the plaintiff.

In order to reduce your risk in referring home inspectors, Realtors should ask routine questions, and follow recognized procedures, including:

Does the inspector have formal training as a home inspector?  Experience in contracting, architecture or engineering is a good background, but it is not a substitute for professional training as a home inspector. The state’s largest inspector association, the California Real Estate Inspection Association (CREIA) provides numerous seminars and conferences where inspectors can access specialized training.

Is the inspector a member of a professional association? Legislation chaptered in January 1997 – now sections §7195 through §7199 of the Business and Professions Code – recognizes the standard of care for a home inspection, specifically, those standards of CREIA and other nationally recognized professional home inspection associations. Although an inspector may follow the standards without being a member, membership status indicates that the individual has passed a competency examination in the field of home inspection, requires that they follow the recognized standards of practice and code of ethics, and requires each member to maintain a minimum level of continuing education hours each year. Active membership in CREIA can be verified by calling 800-848-7342, or online at www.CREIA.com.

Is the inspector properly insured? This can be important. Look for a cover or declaration page showing proof that the inspector is a named insured, not only for professional liability (Errors & Omissions), but general liability as well. Some companies will advertise as “Licensed, Bonded & Insured”. There is no home inspector license, so whatever license they have is not for performing home inspections. Bonded is for claims of theft. Professional liability will compensate for items the inspector fails to properly report, but will not cover items damaged, such as a ladder falling through a plate glass window, by the inspector. General liability will cover the damaged items, but not the items omitted from the report, so it is important that the inspector carry both types of coverage.

Will the home inspector provide you with a list of references? Any good service provider should be able to supply a list of satisfied customers. Ask for names and phone numbers of several past users, including Realtorsâ and consumers. Make sure the list includes recent and aged inspections.

Does the inspector offer to repair noted conditions? Performing repairs to inspected properties is a conflict of interest. In fact, it is a violation of Business and Professions Code §7197, which prohibits an inspector from performing repairs or improvements on inspected properties for one year from the date of inspection.

Taking these simple steps to qualify the individuals you are recommending can go a long way to reducing the potential for litigation, and more importantly, will allow you to provide quality service to your clients.