Corporations and Personal Liability

Many of the home inspectors who attend my home inspector training with the Law and Disorder Seminar are shocked, shocked to hear me say that their corporate entities, be they Subchapter S or Limited Liability Corporations, do not insulate them from personal liability for conducting a negligent home inspection.

For my part, I am shocked, shocked that they could possibly believe that. And to an individual, they absolutely swear to me that that is exactly what their attorneys told them when they formed their corporate entities. And even if that is not what their attorneys told them, it most definitely is what they heard.

Corporations do protect their shareholders from personal liability for obligations of the corporation, for example business loans or credit obligations to a supplier or a landlord. Thus, if the corporation defaults on a bank loan or a lease, the creditor can not look to the shareholders for payment. That is the reason that banks, suppliers and landlords, if they are even half-way sophisticated, always require loans, credit lines and leases to corporations to be personally guaranteed by the corporation’s owners. That is often true even for closely held corporations that have high credit ratings and substantial retained earnings on their balance sheets.

Even when creditors do not require personal guarantees, the protection from liability is not absolute. An inspector whose business is organized as a corporation can be held personally liable for errors and omissions that he personally makes in the conduct of an inspection or if he injures someone while driving a company vehicle or if he defrauds someone.

Owners of multi-inspector firms that are organized as corporations are, however, insulated from personal liability for the negligent inspections conducted by their inspector employees. The corporation, however, would not be and would be subject to liability based upon the legal doctrine of respondeat superior.

Respondeat superior is a common law doctrine under which employers can be held liable for the negligent actions of their employees; and principals for the actions of their agents.

Thus, a client who believes that he has sustained damages as a result of a negligently conducted inspection can look not only to the inspector but to his corporation, as well, for redress. This is a valuable piece of home inspector training.