Is E & O Insurance for Home Inspectors Really Necessary?

A reader recently wrote to me: “One quick question comes to mind in reviewing your E and O insurance for home inspectors blog.  You clearly state a number of times that virtually all claims against home inspectors lack merit and/or can basically be quashed at the point of the initial demand. This being true, why then would one even need to consider E+O when you have made it abundantly clear most if not all E+O claims against inspectors can be successfully defended, likely at a fraction of the cost of insurance?”

In my experience, only three of the over 500 claims that inspectors have asked me to respond to were valid claims. That’s less than one percent. Am I seeing a different segment of claimants than the typical E and O insurer for home inspectors? I very much doubt that I am.

Yet, while my success rate at terminating these claims has been, by any metric, phenomenal, I would still hesitate to counsel inspectors to forgo the back-up protection that an E & O insurance policy with a solid company provides for two very important reasons. One, about 15 % of the time, the first notice of claim is an actual lawsuit. In other words, I will have had no prior opportunity to prevent the suit from being filed in the first place. And while I have successfully persuaded plaintiffs’ counsel to dismiss inspectors from lawsuits multiple times, that is a much more difficult trick with a much lower success rate. Two, my responsive letters are only successful at dissuading claimants 97 % of the time. That means that three knuckleheads out of every hundred cannot be persuaded that they have no claim. In those cases, you will have to hire private counsel and litigation is one of the most expensive undertakings imaginable.

But the real problem with E & O insurance is not its cost. Depending on coverage and limits of liability and deductibles, the plans that Lockton Affinity underwrites can cost as low as $1600. The real problem with E & O Insurance, as far as home inspectors should be concerned, is that I have only been able to convince one company of the efficacy of poleaxing these nitwit claimants ab initio. The rest of the herd follow claim management protocols that are foreordained to result in a paid loss.

Once you report a claim to the typical E & O Insurance company, you surrender all control over that claim and your deductible is seriously imperiled. Job One at the insurer is determining whether or not the claim is covered. Was it “made” and “reported” within the “policy period” and did it “occur” after the “retro date”? Many inspectors have run afoul of those arcane requirements.

If your claim survives that inquiry, the matter will be referred to the claim department. You will be contacted to get your version of events. Then the claim agent will contact the claimant or his attorney. If the claim has no merit – and, please recall, it won’t have any – they should deny it. At that point, the claimant may play the attorney card or the attorney may play the lawsuit card. What happens then makes all the difference.

What they should say to the claimant or attorney is “Go ahead. Make my day.” But they won’t do that, if the experience of the scores of Law and Disorder Seminar graduates who have had claims is any guide. What they will do is try to negotiate a settlement because doing so is far more cost effective than defending the claim. And there goes your deductible. And it’s all perfectly legitimate.

Of course, you would still lose your deductible if they actually did say “Go ahead. Make my day.” But at least, in that case, your position and your professionalism would be vindicated.

And, if the first notice of the claim is an actual lawsuit, your goose is cooked. That suit will have to go to defense counsel who has absolutely no incentive to get rid of the case and every incentive to prolong its resolution. In last Monday’s post, I exposed this deadly ménage à trois that invariably makes the insured the odd man out.

A better way for inspectors to manage their professional liability risk is to secure the best E & O coverage that they can afford from Lockton Affinity and sign up for ClaimIntercept™. That way they can be assured that every effort will be made to neutralize a claim from the very beginning and that, in the highly unlikely event that the claim is not neutralized, the cost of ClaimIntercept™ will be credited toward their deductible. That’s as close as you can get to a zero deductible plan.

Moreover, with that combination in place, inspectors are well-positioned to implement and can be supremely confident in implementing the techniques described in the post entitled 5 Steps to a Good Night’s Sleep and Higher Inspection Fees.