PROTECTING YOUR PROTECTING YOUR COMPANY FROM COMPANY FROM

LIABILITYLIABILITY

Jeffrey A. WalkerJeffrey A. Walker

Walker & MannWalker & Mann10832 Laurel Steet, Suite 204, Rancho Cucamonga, CA. 9173010832 Laurel Steet, Suite 204, Rancho Cucamonga, CA. 91730

Phone: 909.989.3200 Fax: 909.697.2182Phone: 909.989.3200 Fax: 909.697.2182

wwww.walkermann.com wwww.walkermann.com

I.I. INSPECTION AGREEMENTINSPECTION AGREEMENT

A.A. ContractContract Offer: Commitment communicated to identified offeree & Offer: Commitment communicated to identified offeree &

containing definite termscontaining definite terms Acceptance: Manifestation of assent to the terms thereof made by Acceptance: Manifestation of assent to the terms thereof made by

the offeree in a manner invited or required by the offerthe offeree in a manner invited or required by the offer Consideration: Bargained for exchanges. It is bargained for if it is Consideration: Bargained for exchanges. It is bargained for if it is

sought by promisor in exchange for his promise and is given by sought by promisor in exchange for his promise and is given by

the promisee in exchange for that promise.the promisee in exchange for that promise. Performance: A K demands that each party do what is promised. If Performance: A K demands that each party do what is promised. If

a party fails to do what is promised its failure is a breach. A breach a party fails to do what is promised its failure is a breach. A breach

of a promise gives rise to damages.of a promise gives rise to damages. Damages: When a legally enforceable promise is breached, the Damages: When a legally enforceable promise is breached, the

court typicallycourt typically awards money damages to compensate for non awards money damages to compensate for non

breaching party.breaching party. Should you use boiler plate form contracts? - Probably notShould you use boiler plate form contracts? - Probably not

B.B. Four Issues With All Four Issues With All ContractsContracts

What does it say?What does it say? What are the terms?What are the terms? What does it mean?What does it mean? What does each party have to do?What does each party have to do? What does each party get?What does each party get? Is it enforceable?Is it enforceable? Can one party sue another and prevail for breach of Can one party sue another and prevail for breach of

contract?contract? Is there a way around it?Is there a way around it? Are the terms unconscionable? Is performance impossible Are the terms unconscionable? Is performance impossible

or frustrated by an event that occurred subsequent to the or frustrated by an event that occurred subsequent to the

agreement? Was there a mistake made by both parties?agreement? Was there a mistake made by both parties?

C.C. What Happens When What Happens When There Is A Breach Of Contract?There Is A Breach Of Contract?

What were the terms?What were the terms? Who breached?Who breached? Material breach?Material breach? What are the damages?What are the damages? What is a mediation clause?What is a mediation clause? A Mediation clause is A Mediation clause is a term in the agreement that states that a term in the agreement that states that

the parties will aim to come to an agreement by a process of the parties will aim to come to an agreement by a process of assisted negotiations.assisted negotiations.

What is an arbitration clause?What is an arbitration clause? An arbitration clause is also a legal technique for a resolution of An arbitration clause is also a legal technique for a resolution of

dispute outside of the court system.dispute outside of the court system. Why do people sue despite certain terms in a contract? Why do people sue despite certain terms in a contract? Depends on the cause of action, it could be a tort cause of action. Depends on the cause of action, it could be a tort cause of action.

Also, contract terms may not be enforceable.Also, contract terms may not be enforceable. Litigious societyLitigious society Just because you sue, doesn't mean you will win.Just because you sue, doesn't mean you will win. Do contract terms matter?Do contract terms matter? Of course - important to define each party's rights and Of course - important to define each party's rights and

responsibilities, important during litigation responsibilities, important during litigation

II.II. WRITTEN REPORTSWRITTEN REPORTS

A.A. What Must Be Included In A What Must Be Included In A Written Report?Written Report?

Business and Professions CodeBusiness and Professions Code § 7195 § 7195 A home inspection report is a written report, prepared and issued after a A home inspection report is a written report, prepared and issued after a

home inspection, that describes the inspected items, identifies material home inspection, that describes the inspected items, identifies material

defects, and makes appropriate recommendations.defects, and makes appropriate recommendations. What is a material defect? A condition, other than one of style or What is a material defect? A condition, other than one of style or

aesthetics, that significantly affects the value, desirability, habitability, or aesthetics, that significantly affects the value, desirability, habitability, or

safety of the dwellingsafety of the dwelling For example: roof defect that causes leakage every time it rainsFor example: roof defect that causes leakage every time it rains CREIA StandardsCREIA Standards A real estate inspection report provides written documentation of material A real estate inspection report provides written documentation of material

defects discovered in the inspected building's systems and components defects discovered in the inspected building's systems and components

which, in the opinion of the inspector, are safety hazards, are not which, in the opinion of the inspector, are safety hazards, are not

functioning properly, or appear to be at the end of their service lives. The functioning properly, or appear to be at the end of their service lives. The

report may include the inspectors recommendations for correction or report may include the inspectors recommendations for correction or

further evaluation. CREIA Part I, Definitions and Scopefurther evaluation. CREIA Part I, Definitions and Scope CREIA Code of EthicsCREIA Code of Ethics Good FaithGood Faith

B.B. Inspection PhotographsInspection Photographs Including them in your written report is discretionaryIncluding them in your written report is discretionary You may also take them for your own reference without including You may also take them for your own reference without including

them in your written reportthem in your written report DO NOT use photographs in lieu of written documentationDO NOT use photographs in lieu of written documentation If you want to be reimbursed for the photos, make sure it is in If you want to be reimbursed for the photos, make sure it is in

your original agreementyour original agreement Right to useRight to use CREIA Code of Ethics § II(b)CREIA Code of Ethics § II(b) Inspectors shall not disclose inspection results to anyone other Inspectors shall not disclose inspection results to anyone other

than the client or the client's agent without approval of the clientthan the client or the client's agent without approval of the client If you want to use photographs get clear consent from the If you want to use photographs get clear consent from the

homeownerhomeowner Right of privacyRight of privacy CREIA Code of Ethics § II(b)CREIA Code of Ethics § II(b) Inspectors shall not disclose inspection results to anyone other Inspectors shall not disclose inspection results to anyone other

than the client or the client's agent without approval of the clientthan the client or the client's agent without approval of the client

C.C. Building Code ReferencesBuilding Code References

A professional home inspection is an examination A professional home inspection is an examination

of the current condition of a house. It is not an of the current condition of a house. It is not an

appraisal. It is not a municipal inspection, which appraisal. It is not a municipal inspection, which

verifies local building code compliance. A home verifies local building code compliance. A home

inspector, therefore, will not pass or fail a house, inspector, therefore, will not pass or fail a house,

but rather describe its physical condition and but rather describe its physical condition and

indicate what components and systems may need indicate what components and systems may need

a major repair or replacement.a major repair or replacement. Building code references in written reports - may Building code references in written reports - may

be helpful in determining potential defectsbe helpful in determining potential defects

III. PROTECTING YOUR III. PROTECTING YOUR BUSINESSBUSINESS

What can you be sued for?What can you be sued for?

Breach of contractBreach of contract TortsTorts A tort is a civil wrong, recognized by law as grounds for a law suit.A tort is a civil wrong, recognized by law as grounds for a law suit. FraudFraud A civil fraud typically involves the act of intentionally making a A civil fraud typically involves the act of intentionally making a

false representation of a material fact, with the intent to deceive, false representation of a material fact, with the intent to deceive, which is reasonably relied upon by another person to that person's which is reasonably relied upon by another person to that person's detriment.detriment.

MisrepresentationMisrepresentation Both contract law and tortBoth contract law and tort Misrepresentation occurs when one makes a representation with Misrepresentation occurs when one makes a representation with

the intent to deceive and with the knowledge that it is false.the intent to deceive and with the knowledge that it is false. Can be both fraudulent and negligentCan be both fraudulent and negligent NegligenceNegligence DutyDuty BreachBreach CausationCausation DamagesDamages

A.A. NegligenceNegligence Duty of careDuty of care What duty do you owe and who do you owe a duty to?What duty do you owe and who do you owe a duty to? Legislative intentLegislative intent The legislation states: "[I]n ascertaining the degree of care that would be The legislation states: "[I]n ascertaining the degree of care that would be

exercised by a reasonably prudent home inspector…, the court may exercised by a reasonably prudent home inspector…, the court may

consider the standards of practice and code of ethics of the California Real consider the standards of practice and code of ethics of the California Real

Estate Inspection Association, the American Society of Home Inspectors, Estate Inspection Association, the American Society of Home Inspectors,

and other nationally recognized professional home inspection association" and other nationally recognized professional home inspection association"

Stat.s 1996 Ch. 338, § 1.Stat.s 1996 Ch. 338, § 1. Case lawCase law " A home inspector who is not a licensed contractor, structural pest control " A home inspector who is not a licensed contractor, structural pest control

operator, architect or registered engineer has a duty "to conduct a home operator, architect or registered engineer has a duty "to conduct a home

inspection with a degree of care that a reasonably prudent home inspector inspection with a degree of care that a reasonably prudent home inspector

would exercise"" would exercise"" B&PB&P § 7196, § 7196, Moreno v. SanchezMoreno v. Sanchez (2003) 106 CA4th 1415. (2003) 106 CA4th 1415. CREIA Standards of PracticeCREIA Standards of Practice

Negligence Negligence "A real estate inspection includes the readily accessible systems "A real estate inspection includes the readily accessible systems

and components of a representative number or multiple similar and components of a representative number or multiple similar

components listed in Sections 1 through 9 subject to limitations, components listed in Sections 1 through 9 subject to limitations,

exceptions, and exclusions in Part III" Introductionexceptions, and exclusions in Part III" Introduction What you are required to inspect - duty of careWhat you are required to inspect - duty of care What you aren't required to inspect, unless your contract calls for What you aren't required to inspect, unless your contract calls for

itit CREIA Code of EthicsCREIA Code of Ethics "Inspectors shall act in good faith toward each client" Section II"Inspectors shall act in good faith toward each client" Section II Honest ConvictionHonest Conviction ObjectiveObjective No disclosure of personal information about client, seller, tenant, No disclosure of personal information about client, seller, tenant,

or others involved in the inspection without approvalor others involved in the inspection without approval No disclosure of inspection results to anyone other than client or No disclosure of inspection results to anyone other than client or

clients agent without approval of clients agent without approval of clientclient..

B.B. LiabilityLiability Home Inspector Home Inspector Statute Statute A home inspection company that negligently fails to discover or disclose A home inspection company that negligently fails to discover or disclose

defects in real property may be liable to a client who purchases that defects in real property may be liable to a client who purchases that

property. property. B & PB & P Code §7196 Code §7196 Case lawCase law A home inspector or home inspection company that negligently fails to A home inspector or home inspection company that negligently fails to

discover and/or disclose defects in real property it inspects may be liable to discover and/or disclose defects in real property it inspects may be liable to

clients who purchase the property for breach of the common law or clients who purchase the property for breach of the common law or

statutory duty to exercise due care in inspecting the property and statutory duty to exercise due care in inspecting the property and

preparing a home inspection report. preparing a home inspection report. Moreno v. SanchezMoreno v. Sanchez (2003) 106 CA4th (2003) 106 CA4th

1415.1415. What about your contract? Can they only sue on the K or can they sue you What about your contract? Can they only sue on the K or can they sue you

for Torts? Yes, they can sue you on a tort cause of action.for Torts? Yes, they can sue you on a tort cause of action. According to According to LekoLeko, an inspector may be liable in tort despite a written , an inspector may be liable in tort despite a written

contract. contract. Leko v. Cornerstone building inspection serviceLeko v. Cornerstone building inspection service, (2001) 86 CA4th , (2001) 86 CA4th

1109 at 1116, 1119.1109 at 1116, 1119.

LiabilityLiability What happened in the What happened in the LekoLeko case? case? Facts: Home purchasers brought negligence and fraud claims against real Facts: Home purchasers brought negligence and fraud claims against real

estate brokers, alleging failure to discover and disclose defects. estate brokers, alleging failure to discover and disclose defects.

Purchasers alleged that sellers and realtors failed to disclose defects in the Purchasers alleged that sellers and realtors failed to disclose defects in the

property and had actively concealed major structural damage caused by property and had actively concealed major structural damage caused by

the Northridge Earthquake in 1994. Agents cross complained against the Northridge Earthquake in 1994. Agents cross complained against

inspectors for equitable indemnification. The court stated that public inspectors for equitable indemnification. The court stated that public

policy does not preclude a realtor from seeking equitable indemnity policy does not preclude a realtor from seeking equitable indemnity

against a home inspection company.against a home inspection company. Isn't it the broker's duty to inspect and disclose?Isn't it the broker's duty to inspect and disclose? Statute Statute California Civil CodeCalifornia Civil Code § 2079.3 states that "It is the duty of a real estate § 2079.3 states that "It is the duty of a real estate

broker or salesperson, to a prospective purchaser to conduct a reasonably broker or salesperson, to a prospective purchaser to conduct a reasonably

competent and diligent visual inspection of the property offered for sale competent and diligent visual inspection of the property offered for sale

and to disclose to that prospective purchaser all facts materially affecting and to disclose to that prospective purchaser all facts materially affecting

the value orthe value or desirability of the property that an investigation would reveal…"desirability of the property that an investigation would reveal…"

LiabilityLiability Case lawCase law Under Under Easton v. StrassburgerEaston v. Strassburger, the court held that a sellers broker has a , the court held that a sellers broker has a

duty to conduct a reasonably competent and diligent inspection of the duty to conduct a reasonably competent and diligent inspection of the

residential property listed for sale and to disclose to prospective residential property listed for sale and to disclose to prospective

purchasers all facts materially affecting the value or desirability of the purchasers all facts materially affecting the value or desirability of the

property that such an investigation would reveal. 152 Cal.App.3d 90. property that such an investigation would reveal. 152 Cal.App.3d 90. Under Under LekoLeko, "To the extent the home inspectors breach of duty overlaps , "To the extent the home inspectors breach of duty overlaps

with a broker's duty to inspect and disclose, the liability is joint and with a broker's duty to inspect and disclose, the liability is joint and

several." However, a real estate agent may not rely on a home inspection several." However, a real estate agent may not rely on a home inspection

report to avoid it's own statutory duty to conduct a reasonable inspectionreport to avoid it's own statutory duty to conduct a reasonable inspection Joint and several liability Joint and several liability Can’t I just put a clause in the contract to protect myself?Can’t I just put a clause in the contract to protect myself? Depends on the type of clauseDepends on the type of clause Waiver Clause? NO. Contractual provisions purporting to waive the Waiver Clause? NO. Contractual provisions purporting to waive the B&PB&P

CodeCode re: duty, or to limit a home inspectors liability to the cost of the home re: duty, or to limit a home inspectors liability to the cost of the home

inspection report, are invalid as contrary to public policy.inspection report, are invalid as contrary to public policy.

IV.IV. ADDITIONAL CONCERN: ADDITIONAL CONCERN: 3RD PARTY LIABILITY3RD PARTY LIABILITY

You You cancan be liable to subsequent purchasers (non-clients) be liable to subsequent purchasers (non-clients) LekoLeko, "A home inspector who negligently prepares an inspection , "A home inspector who negligently prepares an inspection

report directly for a broker and/or buyer, knowing with report directly for a broker and/or buyer, knowing with

"substantial certainty" that the report may also be provided to "substantial certainty" that the report may also be provided to

future purchasers, can be held liable to those future purchasers future purchasers, can be held liable to those future purchasers

who rely on the report to their detriment. 86 CA4th at 1120-1121.who rely on the report to their detriment. 86 CA4th at 1120-1121. Also, a real estate agent who is sued for negligent nondisclosure Also, a real estate agent who is sued for negligent nondisclosure

of defects in real property may seek equitable indemnity from of defects in real property may seek equitable indemnity from

you, the home inspector under this rule.you, the home inspector under this rule. What is substantial certainty?What is substantial certainty? Issue of factIssue of fact

V.V. WHAT IS THE TIME LIMIT WHAT IS THE TIME LIMIT FOR SOMEONE TO SUE ME?FOR SOMEONE TO SUE ME?

Statute of limitations - Statute of limitations - What is a statute of limitations?What is a statute of limitations? Business and Professions CodeBusiness and Professions Code §7199 §7199 On an action for breach of duty arising from a home inspection On an action for breach of duty arising from a home inspection

report is normally four years from date of inspection report is normally four years from date of inspection However, beware of the "delayed discovery" rule.However, beware of the "delayed discovery" rule. Cause of action accrues - Cause of action accrues - Not on the date of the inspection, but when the homeowner Not on the date of the inspection, but when the homeowner

discovers, or with the exercise of reasonable diligence should discovers, or with the exercise of reasonable diligence should have discovered the breach (called the "accrual period")have discovered the breach (called the "accrual period")

Can I put a clause in my contract to change that? NoCan I put a clause in my contract to change that? No The court in The court in MorenoMoreno states, " the written contract may provide for states, " the written contract may provide for

a shorter limitations period, but cannot shorten the accrual period. a shorter limitations period, but cannot shorten the accrual period.

The contract tried to substitute the straight one year statute of The contract tried to substitute the straight one year statute of

limitations for delayed discovery accrual unenforceable.limitations for delayed discovery accrual unenforceable.

VI.VI. ETHICAL CONSIDERATIONSETHICAL CONSIDERATIONS

My Company performs multiple inspections for the same agent or officeMy Company performs multiple inspections for the same agent or office B & P CodeB & P Code § 7197 § 7197 An inspector An inspector maymay notnot offer or deliver compensation to the property's offer or deliver compensation to the property's

owner, or to the broker or agent, for referring business to the inspector or owner, or to the broker or agent, for referring business to the inspector or

the inspector's companythe inspector's company CREIA Code of EthicsCREIA Code of Ethics Be careful of conflicts of interestBe careful of conflicts of interest Inspectors shall avoid conflicts of interest or activities that compromise, Inspectors shall avoid conflicts of interest or activities that compromise,

professional independence, objectivity, or inspection integrity. professional independence, objectivity, or inspection integrity. AgencyAgency Plaintiff may try to claim that you are an agent of the real estate companyPlaintiff may try to claim that you are an agent of the real estate company Clearly define that you are a separate entityClearly define that you are a separate entity