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How to Turn The Tables on a Frivolous Lawsuit


hausdok
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By Mike O'Handley - TIJ Editor

Sometimes, contrary to the old maxim, nice guys don't finish last. Take the case of an inspection company owner that I know whose company was sued not too long ago by an unhappy former client.

A while back one of his employees did an inspection on a 100-year old home and noticed that, among other things, there were some significant grading and drainage issues around the home. The inspector warned the buyer verbally at the inspection and in the written report that, unless those conditions were addressed, there was a very good chance that heavy rains could undermine the foundation and erode soil from below the footing and result in structural damage. The buyer, as they often do, opted to purchase the home anyway and completely ignored the inspector's recommendation to correct the exterior grading.

Want to guess what happened next? That's right, about 6 months later the inspector's prediction came true during the rainy season; and the buyer, now the owner, thinking that they would pick up the tab, reported the damage to her homeowners insurance company. She must have been really shocked when the insurance company, because the settling wasn't the result of a plumbing leak and had been caused by uncontrolled roof and ground water, refused to cover the cost of the repair.

Now, most folks in those circumstances, realizing that they'd screwed up by not immediately following the home inspector's advice, would have kicked themselves, bitten the bullet, and gone on with their lives; not so this buyer. The buyer's next step was to contact a local attorney who has found that suing home inspectors who carry errors and omissions insurance is actually pretty lucrative. It wasn't long before the inspection company owner received notice that his company was being sued for $55,000.

The inspection company owner wasn't happy because his E & O policy has a $5,000 deductible. He knew that, regardless of what happened next, he'd be out $5,000. However, since he'd been paying for E & O, he dutifully reported the lawsuit to his insurance company and the carrier promised to deal with it.

The attorneys began their legal dance with expert witnesses and depositions that went on for about 2-1/2 years; until, one week before the scheduled trial date, things really began to get interesting. On Tuesday the insurance company offered the homeowner $15,000 to settle out of court and the homeowner refused. On Wednesday, they offered her $25,000 and on Thursday, they offered her $35,000 and she refused both times.

By this time, the owner of the inspection company was about to go ballistic. He couldn't understand why the insurance company was throwing so much money at her; when his inspector had clearly stated in their written report that the settling and damage might happen. From the inspection company owner's point of view, he had a defensible case. When he asked the attorney for the insurance company for an explanation, the attorney responded that they were concerned because they'd already spent about $28,000 in legal expenses and they felt that, if they put this single woman in front of a jury, they'd risk losing another $55,000 plus court costs and attorneys' fees.

On Friday morning, the owner of the inspection company called the attorney for the insurance company and asked whether they intended to offer her a final settlement of $45,000. When the attorney confirmed that they did indeed intend to do that, the inspector said "I'll make you a deal. If you offer her $45,000, I'll throw in an additional $65,000 to make it $110,000; however, my offer is conditional on my receiving title to the house; she has to take all or nothing, or we go to trial on Monday."

When the insurance company made her this offer, the homeowners attorney responded that she wanted to take the final offer; however, she didn't want the inspection company owner to have the house. The inspector responded to the attorneys that, unless her claim was frivolous, he couldn't make money on the house because he would be paying $65,000 plus $55,000 in repairs.

The homeowner, who'd long ago decided that she wasn't happy with the house and wanted out of her mortgage, suddenly found herself between a rock and a hard place. She didn't have any equity in the home; so, if she took his offer, she'd have to give up the home and walk away with nothing. On the other hand, the homeowner realized that if she stuck to her guns; and refused the deal because she didn't want the inspector to get the house, he'd withdraw his offer. If that happened, she might get a little bit of cash out of the lawsuit, but she'd still have to pay her lawyer and pay for repairs to the foundation and would still be stuck living in a home that she didn't want. Worst of all, she'd still have to pay off the balance of a mortgage on a home she didn't want.

The chance to get free of the mortgage was too enticing; she went for the deal, the bank got paid off and the inspection company owner received title to the house free and clear for $65,000. The insurance company was now out of the picture.

Is that the end of the story? Heck no, remember when I said that good things can happen to nice people? Well, as soon as our hero got title to the house, he brought in a contractor to repair the foundation and correct the exterior drainage issues. That work cost him $7,500; then he made an additional $3,500 worth of improvements to the home, to make it more marketable and prepare it for sale. Sixty days later, he sold the home for $120,000 and walked away with a profit of $32,000. After selling costs and paying a 15% capital gains tax, he made a final profit of approximately $27,000.

How's that for turning lemons into lemonade?

Oh yeah, I almost forgot: the best part of this story - the lawyer that makes a hobby out of suing home inspectors for pocket change? He didn't make a dime.

How's that for poetic justice?

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I don't know how much time you spend on something like this, Mike, but it's very well written--just in case no one else tells you.

I was surprised that the insurance company's attorney would allow a client to dictate the terms of the settlement, especially since they're taking the hit minus the 5K deductible.

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I think I would also be fascinated with what the HI wrote in his report. Furthermore, I am curious if he had an inspection agreement signed, because I know alot of HI's have a clause to future issues with the home, and on top of that if the HI indicated to the homeowner that there were potential issues both verbally and in the report it seems odd that you couldnt fight the issue and in my opinion quite easily win; especially with a well written inspection agreement.

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Originally posted by Chris Bernhardt

E&O insurance is lawyer bait. My lawyer warned me, don't advertise the fact you have it.

Chris, Oregon

Mine told me not to get it. Only real threat of a lawsuit in 15+ years went away, immediately, when they found out I didn't have insurance. (And no, I didn't screw-up, leaving my client in the lurch...they ignored me & my report.)

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Mine told me not to get it. Only real threat of a lawsuit in 15+ years went away, immediately, when they found out I didn't have insurance. (And no, I didn't screw-up, leaving my client in the lurch...they ignored me & my report.)

Same here. Once had a client dislodge some tiles on a basement shower threshold when they were doing the move in cleaning. They talked to the realtor who told them that inspectors have insurance to cover such things and to contact me about filing a claim to have their tile shower replaced.

Chris, Oregon

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Hi,

I can guaranty you that there was a pre-inspection agreement signed and that the inspector's report covered all bases; however, I don't think that's going to stop a determined lawyer when he knows there's an E & O carrier with deep pockets standing by ready to cave in, settle out of court, and raise its clients fees rather than risk going to court and relying on the fickle mood of a jury.

I've sent the fellow an email and asked him whether he'd be interested in posting portions of the report transcript here with the identifying information removed.

Don't hold your breath, I'm sure that he probably wants to see this whole thing behind him.

Thanks John. He told me the story in passing at about 1:00 pm on Wednesday. I was blown away and asked him to repeat the basic elements while I jotted down a few lines to key my memory on an envelope. I drove home, sat down to the computer and wrote the initial draft in about 30 minutes and then fired a copy of the draft to him to clean up the details. I called him Thursday night to confirm that he'd gotten it and to see whether he'd had time to look at it; he hadn't. He promised to do so as soon as possible. He sent the edits back to me yesterday afternoon, about 50 hours after the telling. Once I sat down to work on it, took me about 10 minutes to edit the draft and post it.

ONE TEAM - ONE FIGHT!!!

Mike

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Originally posted by hausdok

Hi,

I can guaranty you that there was a pre-inspection agreement signed and that the inspector's report covered all bases; however, I don't think that's going to stop a determined lawyer when he knows there's an E & O carrier with deep pockets standing by ready to cave in, settle out of court, and raise its clients fees rather than risk going to court and relying on the fickle mood of a jury.

Well, for what it's worth: It ain't so much the lawyer. In my humble experience, it's the experts -- who are usually savvy HIs, engineers or architects -- who explain all the tech stuff to the lawyer(s). Unless the lawyer is a building expert (like my lawyer), the lawyers only know what the experts tell them.

So far, I've mostly seen cases in which the HI did damage to himself -- cases like Herner vs. HouseMaster. I'd love to see a case in which the HI really did do everything right and had good experts on his side, but still got hammered. Just for my edification, y'know...

WJ

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  • 4 weeks later...

When will our industry give a serious look at E & O from the "self insured" perspective?

1000 home inspectors each contributing $2,000 per year into our own fund would pay to fight a lot of frivolous claims.

Add to this the reputation we would quickly earn among these ambulance chasing attorneys and … wala …. we would each be paying in only $1,000 per year before you would know it.

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Originally posted by a46geo

When will our industry give a serious look at E & O from the "self insured" perspective?

1000 home inspectors each contributing $2,000 per year into our own fund would pay to fight a lot of frivolous claims.

Add to this the reputation we would quickly earn among these ambulance chasing attorneys and … wala …. we would each be paying in only $1,000 per year before you would know it.

I made a pitch to ASHI to develop a self insurance program, but the Board could not grasp the concept, except to worry about the exposure. $2,000,000. is a nice kitty. It

would generage $100k per year or more which would probably be enough to cover the admin costs. But then there would be problems over who would run it and how much they would get paid and all that stuff, then another inspector would say well, I can do that for $1500 and so on and so on. We have that lower price mentality built in to our profession. But if you get a serious bunch of guys interested I can put you in touch with the folks that can make it happen.

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icon_speech_sigh.gif

I have had two such experiences with E&O insurance and both have left me wondering why we pay the high premiums when the insurance companies settle without a fight. My first experience was a $5000 deductible with a claim for $7000. Even though my report covered the issue, the insurance quickly determined that they would settle and would I please send them a check for $5000.. I refused and said I will fight them with my own attorney. It took 2 1/2 years but finally settled with a check for $750. The attorney fees were only $1200 which I was thankful to settle for less.

I switched insurance companies and went with a $1000 deductible this time. After 4 more years, I had a claim which was again fully documented in my written report( as pointed out by their adjuster. It took three days for someone in the main office to call for the $1000 check.

I have been without E&O insurance since then and have not missed it.

It is unfortunate that E&O puts the inspector at risk of lawsuits but that is the reality.

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Hi,

I think that the issue that you run into with a self insurance program is that you could run afoul of insurance laws in some states with a self-insurance program. Maybe the way to approach it is to go directly to a regular insurance carrier with X number of potential clients and demand a customized program. I dunno, this stuff is for guys waaay brainyer than I am to figure out.

OT - OF!!!

M.

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In British Columbia, we have run a "legal Benefits Prorgam" for a number of years. It is "insurance" with a different name. Unless it is an absolute disaster, our lawyer fights everything...and we win!!!! No bailing because the costs applied to the case are to high. And we now are establishing precidents in BC that are being used across Canada.

It is not cheap to start but you know who you are dealing with. One of the biggest difficulties is fighting off the negative BS of the Insurance Companies. If we all start "self insuring" there will be a few less inflated Christams Bonuses!

If you would like info about our program, go to www.cahpi.bc.ca

Owen Dickie

CAHPI(BC) President

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Hi,

Well, it if were "self" insurance I don't think there'd be an issue. However, when talking about pooling funds for a real "insurance" policy I don't know if that's even legal in my state without a license to sell insurance policies.

In 12-1/2 years, I've had only one incident where I called my E & O carrier. I made a mistake 'cuz I called them before I'd checked the issue out. After I'd checked it out, I discovered that I shouldn't have called them at all and she was making a totally bogus claim. They agreed but charged me the deductible anyway 'cuz I'd made that call. I thought that kind of sucked; I called them and they charged me $1k (back when deductibles were less) and then they agreed with me and refused to pay her?!

Think about real self insurance; if you put $3600 a year into your bank into a special callback contingency account that you never touch, in just a couple of years you'd have $7200 put away, in 10 years you'd have $36,000 plus the interest. If you did that for 12 years you'd have $43,200 and so forth. If you did that, and had the one call in 12 years, realized that you were right all along and the person was making a frivolous claim, you could probably just pay a lawyer enough to make the claimant back down.

However, when the other side knows that there's an E & O carrier or a self insurance fund, aren't they liable to simply hang in there for years until they can force you into a settlement, like was done with the situation that began this thread? Wouldn't it make sense that without an E & O carrier or a pool they're liable to back off, unless they really do have a basis for a good claim?

It seems to me that one would be smarter to just go without E & O and tuck away that cash where nobody's lawyer can find it. Then, if the day ever does come when someone tries to wring you out without good cause, pay a smarty pants lawyer just enough to make them go away. At least that way you've kept some of that money and you are the one earning interest on it; not the insurance company that would piss it away on you and settle anyway.

I dunno, like I said, I'm not smart enough to figure this stuff out; maybe there is a way to do it.

ONE TEAM - ONE FIGHT!!!

Mike

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  • 2 weeks later...

After reading this story, my BS meter was redlining over into the NEVER EXCEED zone.

I absolutely guarantee you that this story never happened as described. I will give "John" $500 if he can document the "facts" as written. In fact, I'll even do the legwork. Just give me the caption of the lawsuit and the names of the attorneys involved.

The major indices of BS are as follows:

A. The suit is highly defensible, as described, and is the very kind of claim that I routinely get rid of with a go-away letter.

B. Paying $45,000 on top of $28,000 for a defensible lawsuit is a bad business model that no insurance company that wants to remain in business will adopt. In for a penny, in for a pound.

C. No plaintiff's attorney who wants to remain in business will take on a contingent fee basis a case that is worth, at most, $55,000 and that will require 2 1/2 years of litigation and involve the expense of expert witnesses, depositions and the like. And no plaintiff will pay an hourly rate plus expenses to prosecute a case that is "highly defensible" as this was.

D. No insurer is going to "contribute" $45,000 so the inspection company can profit from the sale of the house. Ever hear of subrogation?

E. The claimant doesn't have $55,000 in damages, if "John" was able to effect the repair for $7500. She has $7500 in damages, at most, a fact that makes B, C and D even less likely.

So, while it is a feel good story, and one that resonates with this constituency, it never happened!

I don't expect to hear from "John".

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Hi,

All I can tell you is that the inspector involved has been in this business for a long time, is very well regarded by his contemporaries and considered by those of us in the business to be very credible. He is still grinning from ear to ear over this. He agreed to allow me to print this story on the basis that he remain unnamed. That's fine with me; I believe him or I wouldn't have printed the story. Mr. Ferry is also free to believe whatever he wishes.

ONE TEAM - ONE FIGHT!!!

Mike

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Originally posted by hausdok

Hi,

All I can tell you is that the inspector involved has been in this business for a long time, is very well regarded by his contemporaries and considered by those of us in the business to be very credible. He is still grinning from ear to ear over this. He agreed to allow me to print this story on the basis that he remain unnamed. That's fine with me; I believe him or I wouldn't have printed the story. Mr. Ferry is also free to believe whatever he wishes.

ONE TEAM - ONE FIGHT!!!

Mike

It is interesting how well you accepted the compliments for "writing" this story...until it's accuracy was challenged. Now, you simply "printed" someone else's story.

Very smooth.

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Originally posted by hausdok

Hi,

All I can tell you is that the inspector involved has been in this business for a long time, is very well regarded by his contemporaries and considered by those of us in the business to be very credible. He is still grinning from ear to ear over this. He agreed to allow me to print this story on the basis that he remain unnamed. That's fine with me; I believe him or I wouldn't have printed the story. Mr. Ferry is also free to believe whatever he wishes.

ONE TEAM - ONE FIGHT!!!

Mike

Perhaps, his "contemporaries" will need to re-evaluate the loftiness of their regard.
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Gee,

What a coincidence, two of Nick's acolytes show up to heckle me on the same day - what're the odds? What's the matter Jimmy Boy, tired of nagging folks over on the soap opera so you've come over here for a change of pace?

I guess my reading comprehension is going to hell, 'cuz I'm not sure how I was "smooth." Post #9 above tells you exactly how I got the story, explains the circumstances of how I came to write it, and that he checked the facts for accuracy before I posted it. That's the absolute truth of how I came by the story and If you and Ferry, or anyone else, choose not to believe it, that's your prerogative; I really couldn't care less.

Mr. Ferry, you can ballyhoo it as much as you want; you're not going to goad me into telling you the man's identity. He reads this site; if he chooses to come on here and answer your challenge that's up to him. For my part, I have no problem with anyone calling me stupid for believing someone that I think is a very credible person.

ONE TEAM - ONE FIGHT!!!

Mike

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