Mountain Law: Can property inspectors be liable for not disclosing problems to the buyer?
September 10, 2013
I wrote recently that a seller of real property is generally not liable for failing to disclose problems with the property to the buyer unless the problems are hidden or not easily discoverable. In other words, the buyer is usually deemed to purchase property "as is." So, what happens if a buyer obtains a property inspection report before closing seeking to make an informed decision about the property, but then later discovers a problem that was not disclosed in the report? If the seller is not liable, can the buyer successfully sue the property inspector?
Preliminarily, buyers should realize that home inspection is unregulated in Colorado. In this state, you're a home inspector if you say you are. While many inspectors have experience in construction and/or obtain various credentials, the true competence of an inspector is often difficult for a buyer to determine beforehand. This leaves many buyers with little choice but to select property inspectors based on referrals.
For many buyers, home inspection creates a false sense of security. They wrongly assume that all possible problems with a home will be listed in the inspection report. However, a home inspection should not be confused with a warranty. Most inspection contracts have a narrowly defined "scope of work," which includes only a visual inspection of the property and basic operational tests of some of the equipment. This type of inspection will likely not reveal a hidden structural flaw or the fact that the boiler will die the day after closing. It may also not identify issues that only manifest themselves at different times of year.
But, even recognizing the limited scope of inspection, there are times that property inspectors do fail to identify or disclose problems that are within the scope of the inspection. A buyer seeking to hold an inspector liable for damages in this circumstance will often have to confront "exculpatory" language in the inspection contract that purports to limit the inspector's liability. Fortunately for buyers, property inspectors have had mixed success enforcing such provisions in the courts.
For instance, many inspection contracts state that the inspector's liability is limited to the cost of the inspection, or the buyer's actual damages, whichever is less. Some courts have refused to enforce this type of limitation because the agreed amount of damages bears no relation to the actual damages that could be incurred by the buyer. It is, therefore, in legal speak, an illegal "liquidation" of damages. Other courts have simply found such provisions unenforceable as contrary to the public interest. Still other courts have focused on the timing and refused to enforce such provisions if they are only introduced in the report itself (after the work is done) and not disclosed conspicuously beforehand. In egregious cases, courts often disregard the contract entirely and find that no contract will protect an inspector whose behavior falls so far below reasonable standards as to be "grossly negligent."
In one Colorado case, a buyer sued an engineer who was hired by the buyer's lender to inspect the property and failed to discover a termite problem. It was found that the engineer could be liable to the buyer, even though there was no direct contract between them, because the engineer should have expected the buyer to rely on the inspection.
In sum, obtaining a property inspection is useful, but buyers should understand the limitations of what such an inspection can reveal about a property. In those cases where inspections are truly deficient, buyers have sometimes been able to hold inspectors liable (even in the face of exculpatory contract language or where there is no contractual relationship at all). Of course, every case will depend on its own facts and circumstances.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado, emphasizing real estate, business, and litigation. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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