Is Your E & O Insurance Company Stuck on Stupid?

One of my home inspector clients in California recently wrote to me about a home inspection claim that was being brought by a client for whom he had performed an inspection about three months earlier. The client was experiencing some leaks due to recent heavy rains. The leaks were discovered only after removing baseboard and flooring to do some remodeling. After opening the walls they found that the leaks were due to the fact that the vapor barrier had been torn in several areas.

A review of the inspection report demonstrated that the inspector had noted that “stains were observed at baseboard, dry at time of inspection, unable to determine cause, advise review with seller.” Photos of the area taken at the time of the inspection completely support the inspector’s position.

The clients were quite upset and were unwilling to grasp the fact that, since the defect was not visible during the inspection, the inspector was not liable. They subsequently threatened to file suit if the inspector did not refund the fee.

Since he was clearly not responsible for the clients’ problem, he refused to refund the fee and the client followed through on the threat and filed a claim in small claims court.

In addition to being an extremely capable professional, the inspector is also a sophisticated businessman who carries E&O insurance for this very contingency and he reported the home inspection claim, as required, to his insurer.

Unfortunately for this inspector, his insurance company – a major player in the home inspection professional liability insurance market – is both brain-dead and stuck on stupid.

The inspector understandably wants to defend the claim because a. the claim is completely defensible and b. he doesn’t want to lose his deductible which is substantial.

The clients are demanding $6500 and the insurer has offered $1500 – easy for it to do, since that is well within the insured’s deductible.

The inspector wants to defend the claim himself and the insurer has taken this position: The inspector can withdraw the claim and handle it himself. However, if he wins and the plaintiffs appeal to a higher court and he then seeks coverage from the insurer, the insurer will treat it as a late report and deny coverage under the policy.

The inspector forwarded to me the insurer’s response for my information. I wrote back to the inspector:

“Why [this insurer] would even consider offering $1500 to settle a claim that has absolutely NO merit whatsoever is a locus classicus of the very thing that is wrong with the home inspector professional liability insurance marketplace, to wit, a facile willingness to throw money at bogus claimants as long as it is within the insured’s deductible and a pathological unwillingness to take meritless cases to verdict, if doing so would cost more than knuckling under to meritless claims.

“For [this insurer] to present you with the Hobson’s choice of a. personally defending a completely meritless claim in order to save your deductible and, thereby, ensuring that, if the claimant appeals the verdict, [the insurer] will deny coverage or b. allow [the insurer] to dangle your deductible in front of these meritless claimants to rid itself on any responsibility is the quintessence of bad faith.”

Fortunately, home inspectors no longer have to find themselves in this situation. In August of 2009, program administrator Lockton Affinity, an affiliate of Lockton Companies, LLC, the largest independently-owned commercial insurance broker in the world, approached me about developing a professional liability program exclusively for Home Inspectors. The program launched in April of 2010 and the insurer, whose financial strength is rated A+ XV by A. M. Best, completely supports the bogus claim preemption techniques that I have perfected over the last seven years.

If you are enrolled under the Lockton Affinity program for Errors & Omissions Insurance, you are assured that I will be the one responding in the first instance to any claim filed against you. For a quote visit: http://inspectors.locktonaffinity.com or call 800-803-9552. It’s a valuable piece of home inspector training – and great peace of mind for every home inspector.