Caution: Clause Interactions May Be Hazardous To a Home Inspector’s Wealth

Over the past five years, I have probably reviewed the pre-inspection agreements of about 400 home inspectors, either because I was responding to a claim that was being made against them or because they wanted me to review their agreements for strength, comprehensiveness and enforceability.

As a result, I make frequent research excursions via online legal databases to which I subscribe to ascertain a particular state’s relative friendliness or hostility to the sort of contract clauses that so frequently appear in home inspectors’ pre-inspection agreements.

For example, some nanny states are hostile to Limitation of Liability clauses on the grounds that they are anti-consumer and/or tend to vitiate the benefit of the bargained-for service while others routinely enforce such clauses on freedom of contract grounds.

On the other hand, clauses that require disputes to be adjudicated in Arbitration are universally upheld.

However, just as individual prescription drugs that are otherwise beneficial can have undesirable side effects when taken together, the same can be true of individual contract clauses. For example, there is at least one state – and probably others – that will invalidate an otherwise enforceable – but overly ambitious – contractual Limitation of Liability when it is paired with an Arbitration Clause.

Regular readers know that I favor Arbitration Clauses and firmly believe that Limitation of Liability Clauses in home inspector pre-inspection agreements are not only unnecessary but that inspectors should use their competitors’ over-enthusiasm for such clauses against them competitively.

There are many advantages that accrue to a home inspector who has an Arbitration Clause in his pre-inspection agreement. Most suits involving a residential real estate transaction are multi-defendant affairs. If the home inspector is one of the defendants, he can easily be extracted pursuant to the Arbitration Clause in his contract, a result that I have effected multiple times.

If the inspector is sued in Small Claims Court, local justices love disposing of cases because parties have agreed to litigate in another forum. And that is normally the end of the line for an unhappy client because the cost of filing a claim in Arbitration is several hundred dollars, not the nominal sum that Small Claims Courts impose.

And that was the issue that prompted the invalidation of the “overly ambitious” Limitation of Liability clause cited above. The cost of filing the Arbitration claim in that case exceeded the potential recovery under the Limitation of Liability clause. So the court simply declared the Limitation of Liability clause null and void, thus exposing the inspector to unlimited liability.

And of course, the irony is that an inspector with an unenforceable Limitation of Liability clause has the same liability exposure – but is being paid far less – as the inspector who charges his clients a premium because he does not limit his liability.

Something to think about.