Managing Risk with E&O Insurance for Home Inspectors

A home inspector in Texas recently asked me via email what I thought “about the efforts to have the Texas Inspector E & O mandate rescinded” which was my first notice that such an effort was afoot. Evidently the Texas Professional Real Estate Inspection Association (“TPREIA”) had succeeded in having a bill to do just that introduced into the Texas Legislature.

Anyone who has been “stalking me,” as one HI who recently connected with me on LinkedIn put it, for any length of time surely knows that I am no fan of government mandates. In general. So, bully for TPREIA for taking the laboring oar on an issue that is a major concern to its membership.

Should home inspectors protect themselves from their nutty clients? Of course. And only those who are nuttier than their clients do not take some protective measures: tightening their pre-inspection agreements, contractually limiting their maximum monetary exposure [where permitted, of course, as many jurisdictions do not allow this], issuing short-term warranties, friending the Home Inspector Lawyer, and purchasing errors and omissions insurance for home inspectors.

Any businessman with a professional liability exposure as severe as that faced by home inspectors – see multiple horror stories, infra – who needs to be government-mandated into a scheme for managing that risk should seriously consider working for “the Man”, instead.

The major problem with government insurance mandates is that they are unrivaled in their capacity for gumming up the American free market system. Florida, for example, has recently mandated that mold assessors must carry $1,000,000 in errors and omissions insurance. One imagines the smug legislators clinking martini glasses after this surpassingly stupid law was passed and congratulating themselves for this major step forward in consumer protection. Meanwhile, insurance companies are staying away in droves from this newly created “market.”

Many home inspectors, of course, do carry home inspector errors and omissions insurance irrespective of whether or not it is a statutory requirement in their jurisdiction. Others are dead-set against it. I have clients in both communities.

I know a home inspector who manages his professional liability risk thus: He puts aside the premium that an insurance company would charge for E&O insurance into an escrow account each year and he has a $30,000 line of credit against his house. He figures that, between the two, that should cover him if he has a claim and, if he doesn’t, break out the champagne!

I told him, “Paul, if that were the only way to hedge your professional liability exposure and, tomorrow, someone invented E&O insurance, he would win the Nobel Prize.”

Most HIs who do carry E&O insurance, however, are not leveraging it into higher inspection fees.

How to do that, next time.