Growth, change and liability in inspection business

Q: As an insurance agent for more than 40 years, I've watched with interest the rapid growth of the home inspection business. Back in the 1980s, I didn't know what home inspections were. Today they seem to be center stage in every home purchase. Why has the demand for home inspections increased so strongly among homebuyers? Why has the number of liability claims against home inspectors also increased? And what role, if any, do mortgage lenders play in selecting home inspectors?

A: The growing influence of home inspections on residential real estate sales took off during the 1990s. A few home inspectors were around in the 1970s and '80s, but the profession was relatively unknown to most people during those years.

There were two primary reasons why home inspections suddenly emerged as a significant presence in most real estate transactions.

1.) Rising numbers of disclosure-related lawsuits led to the enactment of real estate disclosure laws in most states. Real estate agents and brokers were particularly affected by these new laws, causing many to become advocates for defect disclosure in general and home inspections in particular. The majority of today's agents routinely encourage homebuyers to hire home inspectors. Some of the old-time "buyer beware" agents have resisted this trend, but the general movement toward home inspection advocacy has been accepted by most members of the real estate profession.

2.) Home prices in major real estate markets have increased dramatically, raising the level of financial commitment made by homebuyers. By disclosing unseen defects, home inspections provide buyers a way of avoiding unexpected costs after the close of escrow.

Accompanying the growth of home inspection services has been a parallel increase in liability claims against inspectors. Two circumstances stand out as primary causes for these claims:

1.) Some claims are due to inspector negligence. A contributing cause has been the rapid growth of the industry, prompting an influx of inexperienced and unqualified inspectors. The result has been incomplete or incorrect reporting of property conditions; hence, claims.

2.) Many claims, on the other hand, are frivolous, owing again to the litigious nature of the business environment. While unqualified inspectors are subject to claims due to incompetence, the best inspectors may be targeted, regardless of whether they are truly at fault. For example, an inspector might be named in a lawsuit against a negligent termite inspector. In such cases, it might be cheaper for the home inspector to settle the claim than to fight it in court. Many home inspectors carry errors and omissions insurance to avoid such costs, but the deep pockets of an insurance company can sometimes be the very magnet that attracts frivolous claims.

Finally, there is the question of mortgage lenders in relation to home inspections. Surprisingly, most lenders show very little interest in home inspection findings. Whereas banks and mortgage companies typically require a termite report before issuing a mortgage loan, they seldom ask for a home inspection. Ironically, this means lenders regard termite damage as more significant than foundation settlement, roof leakage or the safety of electrical wiring and gas-burning fixtures. This imbalance may eventually change, but so far, change has been slow in coming.

• Email Barry Stone at barry@housedetective.com.

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