Elevating the Standards of Home Inspectors and Reducing the Exposure of Real Estate Brokers

By K.P. Dean Harper

I. The Importance of a Home Inspection

You or one of your Realtor colleagues has most likely been sued for allegedly failing to disclose some "defect" which a disgruntled buyer discovered months or years after purchasing a home. In almost every such lawsuit filed against Realtors, if the buyer did not obtain a home inspection, the Realtors pay something to settle the case.

In fact, insuring that your buyer hires a competent, insured home inspector in a residential sale may be the single most important factor in reducing your future liability to a buyer. A well qualified, competent home inspector should discover the types of defective conditions that, if not disclosed, could lead to potential litigation. If the inspector misses something that is within his area of expertise, and is insured, the litigious buyer will most likely look first to the home inspector to pay for the problem.

II. A Summary of the New Home Inspection Statutes

As most of you are aware, last year the state legislature took the first step towards regulating the home inspection industry by passing Senate Bill 258. Although the bill is a positive step towards insuring that inspectors meet minimum standards, it does not provide for any regulatory enforcement body, such as the Department of Real Estate for Realtors. The bill also creates another potential area of liability for Realtors that do not know its provisions.

All Realtors should be aware of the provisions of this new legislation, which has been codified into Business & Professions Code Sections 7195 through 7199. The new statutes establish a standard of care, delineate certain acts that constitute "unfair business practices", establish a four year statute of limitations, and prohibit an inspector from limiting liability to the cost of the report for errors or omissions.

III. Regulatory History of SB 258

The legislature passed Senate Bill 258 after two previous failed attempts at home inspection industry legislation. One of the failed bills would have regulated home inspectors through licensing procedures governed by the State Contractor's License Board. The other bill, apparently sponsored by C.A.R., would have established a new regulatory agency to oversee the licensed inspectors. Both bills were defeated. As a compromise to the previous legislation, C.A.R. sponsored SB 258. This bill was designed to have no local fiscal impact, which may have been the reason it passed, while previous efforts failed.

IV. To Whom Do the Home Inspection Statutes Apply?

The new statutes define a home inspector as "any individual who performs a home inspection." A home inspection is defined as a "non-invasive, physical examination, performed for a fee in connection with a transfer" that involves mechanical, electrical and plumbing, structural and other essential components of the residence. The statute provides that the inspection is designed to identify "material defects" in those systems, structures and components. The legislation specifically exempts "registered engineers, licensed land surveyors and licensed architects" acting pursuant to their professional registration or license.

V. SB 258 Establishes Minimum Standard of Care

The new legislation establishes a minimum standard of care for a home inspector. Business & Professions Code Section 7196 states "it is the duty of a home inspector who is not licensed as a general contractor, structural pest control operator, or architect, or registered as a professional engineer, to conduct a home inspection with a degree of care that a reasonably prudent home inspector would exercise."

Thus, anyone who performs a home inspection must meet this minimum standard. Interestingly, unlike engineers, surveyors and architects, general contractors are not expressly exempt from the legislation. They are, however, excluded from the standard of care provision. Whether general contractors must meet some higher, undefined standard when conducting a home inspection is unclear. However, as noted below, a contractor that is a member of CREIA or ASHI must at least meet the minimum standards of those organizations.

Although the statute itself does not more specifically define "minimum standard of care", the "Legislative Comment" refers to the standards of practice and code of ethics of the California Real Estate Inspection Association (CREIA) and the American Society of Home Inspectors (ASHI).

Because both of these organizations promulgate strict written standards for their members, a residential real estate buyer should have an inspection performed by a member of one or both of these organizations. In fact, a Realtor that recommends an inspector that is not a member of one of these organizations may breach the standard of care.

Standards of California Real Estate Inspection Association (CREIA)

The California Real Estate Inspection Association (CREIA) was founded in 1976 and "provides education, training, and support services to the public and real estate inspection profession." Its mission statement includes providing "leadership through education by maintaining ethical and technical standards" and enhancing "consumer protection and promoting public awareness of the association." Members of CREIA must successfully complete entrance examinations, adhere to a strict code of ethics and standards of practice, and maintain thirty hours of continuing education each year.

Each inspection by a CREIA member, to meet their own standards, must identify and report "significant observable" conditions in the following "accessible" areas: 1) foundation, crawl space and basement; 2) grading and drainage; 3) exterior features; 4) roof coverings; 5) attic and roof framing; 6) plumbing; 7) water heating systems; 8) electrical systems; 9) heating system; 10) central cooling system; 11) fireplace and chimneys; 12) building interior.

Any CREIA inspector that fails to comply with the mandatory provisions may be disciplined by having his membership suspended or terminated. If you wish to know whether an inspector you recommend to your buyer is a member of CREIA, you may contact the organization at the following address and telephone numbers: CREIA, 450 "A" Street, Second Floor, San Diego, California 92101; (800) 848-7342 and (619) 233-4507. Their Web site is http:\\www.creia.com.

Standards of the American Society of Home Inspectors (ASHI)

The American Society of Home Inspectors (ASHI) similarly has promulgated "standards of practice" which include all of the home's major systems and components. The standards also describe the required components of a home inspection. To obtain membership in ASHI a home inspector must first enter the Society as a Candidate. During their Candidacy (a minimum of six months), an ASHI candidate must pass ASHI's two written technical exams and provide valid proof of performance of at least two hundred and fifty fee paid home inspections that meet or exceed the ASHI standards of practice. Once these requirements are met, and their application is approved, inspectors may become members of ASHI.

ASHI members must abide by the Society's code of ethics. This code forbids members from being active in the brokerage or sale of real estate, doing any repairs or recommending any contractors on homes they inspect. They also have continuing education requirements which must be satisfied. You may reach ASHI at the following number: (800) 743-2744. You can also obtain a general information packet for $35.00 by mailing your address and phone number to ASHI G.I. Packet, P.O. Box 95588, Palletine, Illinois 60095-0580. Fax: (847) 290-1920.

VI. SB 258 Establishes Unfair Business Practices

SB 258 also states that it is an unfair business practice for a home inspector, a company that employs the home inspector, or the company that is controlled by the company that also has a financial interest in a company employing a home inspector to do any of the following: a) inspect and perform repairs; b) have a financial interest in the sale; c) accept a referral fee; and/or d) agree to make an inspection fee contingent upon the conclusions in a report.

Although no enforcement body regulates the home inspection industry, the Unfair Business Practice Act provides that unfair business practices can be restrained by the district attorney, attorney general "or by any person acting for the interests of itself, its members or the general public". Bus. & Prof. Code § 17204. Thus, a private citizen may move to restrain illegal business practices. However, a private litigant cannot bring an action for damages under the Unfair Business Practices Act. Industrial Indemnity co. v. Santa Cruz Superior Court (1989) 209 Cal.App.3d 1093, 257 Cal.Rptr. 655.

VII. Cannot Limit Liability To Cost of Report

In the past, many home inspectors have attempted to limit their liability by inserting a provision in their report limiting their liability to the amount paid for the report. Business & Professions Code Section 7198 specifically states that a home inspector may not limit the liability to the cost of the home inspection report.

Unfortunately, the statute does not expressly prohibit an inspector from limiting liability to, for example, twice the cost of the inspection. Many inspectors attempt to limit their liability to a small dollar amount which is greater than the amount of the inspection, but much less than the amount necessary to cover a buyer's losses if the inspector negligently fails to uncover a significant problem.

Generally, California courts have upheld such "exculpatory" clauses or "limitation of liability" provisions if the beneficiary of the clause is involved in a "high risk, low-compensation service". H.S. Perlin Co. v. Morse Signal Devices (1989) 209 Cal.App.3d 1289, 1297, 258 Cal.Rptr. 1. Most home inspectors would argue that they are involved in a "high risk, low compensation service."

However, there is also case law that suggests that if a provision is "unconscionable or otherwise contrary to public policy", it is unenforceable. Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, 98-101, 32 Cal.Rptr. 33. Thus, a buyer could argue that a limitation of liability clause is unenforceable as a violation of public policy.

If the buyer loses the public policy argument and a court upholds the limitation of liability provision, and a buyer has a significant problem with his house, who do you think the buyer's attorney will come after next? Perhaps local Realtor boards could request that local CREIA and ASHI inspectors eliminate the limitation of liability provision, or at least significantly raise the dollar amount of the limitation. Both you and your buyer would be better served by using a qualified, insured inspector who does not insert a limitation of liability clause in his contract.

VIII. The Statute of Limitations Is Four Years

The new statutes expressly provide that the statute of limitations for breach of a duty "arising from a home inspection report" is four years from the date of the inspection. The statute of limitations for a Realtor's breach of the duty to make a reasonably competent and diligent inspection is two years, generally from the date escrow closes. Thus, a claim could conceivably arise at a time that a buyer would be precluded from pursuing the Realtor, but not the home inspector.

IX. Conclusion

The new legislation is a first step towards recognizing and regulating a growing, and increasingly important, profession. The home inspection industry estimates that home inspections are performed on only forty percent of resales nationwide. There is no good reason why the figure should not be one hundred percent. Every buyer should be advised and counseled that if they want protection, they should get an inspection.

About the Authors/Editor:

K.P. Dean Harper is a graduate of Hastings College of the Law and is a partner in the twenty-two lawyer firm of Bowles & Verna, 2121 N. California Blvd., Suite 875, Walnut Creek, California 94596. (510) 935-3300.

Please note: This publication is intended to provide accurate information. However, the authors do not intend this bulletin to constitute, or be a substitute for, legal advice or assistance from a real estate attorney. If legal assistance is necessary, please consult your real estate attorney.

Final Note: The author wishes to express thanks to Bhupen Amin for his research on many of the issues addressed in this Bulletin.

K.P. Dean Harper has tried and arbitrated over forty cases. He specializes in real estate and broker liability litigation and edits the Bowles & Verna Real Estate Bulletin, a periodic newsletter for real estate brokers. To contact Mr. Harper by email, click here.