PROTECTING YOUR COMPANY FROM LIABILITY

1. PROTECTING YOUR COMPANY FROM LIABILITY Jeffrey A. Walker Walker & Mann 10832 Laurel Steet, Suite 204, Rancho Cucamonga, CA. 91730 Phone: 909.989.3200 Fax: 909.697.2182 wwww.walkermann.com

2. I. INSPECTION AGREEMENT

3. A. Contract • Offer: Commitment communicated to identified offeree & containing definite terms • Acceptance: Manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer • Consideration: Bargained for exchanges. It is bargained for if it is sought by promisor in exchange for his promise and is given by the promisee in exchange for that promise. • 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 of a promise gives rise to damages. • Damages: When a legally enforceable promise is breached, the court typicallyawards money damages to compensate for non breaching party. • Should you use boiler plate form contracts? - Probably not

4. B. Four Issues With All Contracts • What does it say? • What are the terms? • What does it mean? • What does each party have to do? • What does each party get? • Is it enforceable? • Can one party sue another and prevail for breach of contract? • Is there a way around it? • Are the terms unconscionable? Is performance impossible or frustrated by an event that occurred subsequent to the agreement? Was there a mistake made by both parties?

5. C. What Happens When There Is A Breach Of Contract? • What were the terms? • Who breached? • Material breach? • What are the damages? • What is a mediation clause? • A Mediation clause is a term in the agreement that states that the parties will aim to come to an agreement by a process of assisted negotiations. • What is an arbitration clause? • An arbitration clause is also a legal technique for a resolution of dispute outside of the court system. • Why do people sue despite certain terms in a contract? • Depends on the cause of action, it could be a tort cause of action. Also, contract terms may not be enforceable. • Litigious society • Just because you sue, doesn't mean you will win. • Do contract terms matter? • Of course - important to define each party's rights and responsibilities, important during litigation

6. II. WRITTEN REPORTS

7. A. What Must Be Included In A Written Report? • Business and Professions Code § 7195 • A home inspection report is a written report, prepared and issued after a home inspection, that describes the inspected items, identifies material defects, and makes appropriate recommendations. • What is a material defect? A condition, other than one of style or aesthetics, that significantly affects the value, desirability, habitability, or safety of the dwelling • For example: roof defect that causes leakage every time it rains • CREIA Standards • A real estate inspection report provides written documentation of material defects discovered in the inspected building's systems and components 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 report may include the inspectors recommendations for correction or further evaluation. CREIA Part I, Definitions and Scope • CREIA Code of Ethics • Good Faith

8. B. Inspection Photographs • Including them in your written report is discretionary • You may also take them for your own reference without including them in your written report • DO NOT use photographs in lieu of written documentation • If you want to be reimbursed for the photos, make sure it is in your original agreement • Right to use • CREIA Code of Ethics § II(b) • Inspectors shall not disclose inspection results to anyone other than the client or the client's agent without approval of the client • If you want to use photographs get clear consent from the homeowner • Right of privacy • CREIA Code of Ethics § II(b) • Inspectors shall not disclose inspection results to anyone other than the client or the client's agent without approval of the client

9. C. Building Code References • A professional home inspection is an examination of the current condition of a house. It is not an appraisal. It is not a municipal inspection, which verifies local building code compliance. A home inspector, therefore, will not pass or fail a house, but rather describe its physical condition and indicate what components and systems may need a major repair or replacement. • Building code references in written reports - may be helpful in determining potential defects

10. III. PROTECTING YOUR BUSINESS

11. What can you be sued for? • Breach of contract • Torts • A tort is a civil wrong, recognized by law as grounds for a law suit. • Fraud • A civil fraud typically involves the act of intentionally making a false representation of a material fact, with the intent to deceive, which is reasonably relied upon by another person to that person's detriment. • Misrepresentation • Both contract law and tort • Misrepresentation occurs when one makes a representation with the intent to deceive and with the knowledge that it is false. • Can be both fraudulent and negligent • Negligence • Duty • Breach • Causation • Damages

12. A. Negligence • Duty of care • What duty do you owe and who do you owe a duty to? • Legislative intent • The legislation states: "[I]n ascertaining the degree of care that would be exercised by a reasonably prudent home inspector…, the court may consider the standards of practice and code of ethics of the California Real Estate Inspection Association, the American Society of Home Inspectors, and other nationally recognized professional home inspection association" Stat.s 1996 Ch. 338, § 1. • Case law • " A home inspector who is not a licensed contractor, structural pest control operator, architect or registered engineer has a duty "to conduct a home inspection with a degree of care that a reasonably prudent home inspector would exercise"" B&P § 7196, Moreno v. Sanchez (2003) 106 CA4th 1415. • CREIA Standards of Practice

13. Negligence • "A real estate inspection includes the readily accessible systems and components of a representative number or multiple similar components listed in Sections 1 through 9 subject to limitations, exceptions, and exclusions in Part III" Introduction • What you are required to inspect - duty of care • What you aren't required to inspect, unless your contract calls for it • CREIA Code of Ethics • "Inspectors shall act in good faith toward each client" Section II • Honest Conviction • Objective • No disclosure of personal information about client, seller, tenant, or others involved in the inspection without approval • No disclosure of inspection results to anyone other than client or clients agent without approval of client.

14. B. Liability • Home Inspector • Statute • A home inspection company that negligently fails to discover or disclose defects in real property may be liable to a client who purchases that property. B & P Code §7196 • Case law • 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 clients who purchase the property for breach of the common law or statutory duty to exercise due care in inspecting the property and preparing a home inspection report. Moreno v. Sanchez (2003) 106 CA4th 1415. • 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. • According to Leko, an inspector may be liable in tort despite a written contract. Leko v. Cornerstone building inspection service, (2001) 86 CA4th 1109 at 1116, 1119.

15. Liability • What happened in the Leko case? • Facts: Home purchasers brought negligence and fraud claims against real estate brokers, alleging failure to discover and disclose defects. Purchasers alleged that sellers and realtors failed to disclose defects in the property and had actively concealed major structural damage caused by the Northridge Earthquake in 1994. Agents cross complained against inspectors for equitable indemnification. The court stated that public policy does not preclude a realtor from seeking equitable indemnity against a home inspection company. • Isn't it the broker's duty to inspect and disclose? • Statute • California Civil Code § 2079.3 states that "It is the duty of a real estate broker or salesperson, to a prospective purchaser to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or • desirability of the property that an investigation would reveal…"

16. Liability • Case law • Under Easton v. Strassburger, the court held that a sellers broker has a duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal. 152 Cal.App.3d 90. • Under Leko, "To the extent the home inspectors breach of duty overlaps 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 report to avoid it's own statutory duty to conduct a reasonable inspection • Joint and several liability • Can’t I just put a clause in the contract to protect myself? • Depends on the type of clause • Waiver Clause? NO. Contractual provisions purporting to waive the B&PCode re: duty, or to limit a home inspectors liability to the cost of the home inspection report, are invalid as contrary to public policy.

17. IV. ADDITIONAL CONCERN: 3RD PARTY LIABILITY • You can be liable to subsequent purchasers (non-clients) • Leko, "A home inspector who negligently prepares an inspection report directly for a broker and/or buyer, knowing with "substantial certainty" that the report may also be provided to future purchasers, can be held liable to those future purchasers who rely on the report to their detriment. 86 CA4th at 1120-1121. • Also, a real estate agent who is sued for negligent nondisclosure of defects in real property may seek equitable indemnity from you, the home inspector under this rule. • What is substantial certainty? • Issue of fact

18. V. WHAT IS THE TIME LIMIT FOR SOMEONE TO SUE ME? • Statute of limitations - • What is a statute of limitations? • Business and Professions Code §7199 • On an action for breach of duty arising from a home inspection report is normally four years from date of inspection • However, beware of the "delayed discovery" rule. • Cause of action accrues - • Not on the date of the inspection, but when the homeowner discovers, or with the exercise of reasonable diligence should have discovered the breach (called the "accrual period") • Can I put a clause in my contract to change that? No • The court in Moreno states, " the written contract may provide for a shorter limitations period, but cannot shorten the accrual period. The contract tried to substitute the straight one year statute of limitations for delayed discovery accrual unenforceable.

19. VI. ETHICAL CONSIDERATIONS • My Company performs multiple inspections for the same agent or office • B & P Code § 7197 • An inspector maynot offer or deliver compensation to the property's owner, or to the broker or agent, for referring business to the inspector or the inspector's company • CREIA Code of Ethics • Be careful of conflicts of interest • Inspectors shall avoid conflicts of interest or activities that compromise, professional independence, objectivity, or inspection integrity. • Agency • Plaintiff may try to claim that you are an agent of the real estate company • Clearly define that you are a separate entity