Why Doesn’t My E&O Cover Construction or Remodeling Inspections?

Friday, November 1, 2013

 

Home inspectors are by nature a very industrious bunch and as a profession have become quite adept at selling additional services as well as breaking ground into new markets. One of the new markets inspectors have long dabbled in is commonly referred to as a construction inspection. This kind of inspection gives E&O insurance carriers fits and here are just a few of the reasons why.

  1. By definition, in both standards of practice and in E&O policies, a home inspection service is generally defined as a non-invasive, visual examination of the condition of a dwelling. Before a house is completed and a certificate of occupancy is issued, it is not really a dwelling. Until a CO is issued, it basically is just a bunch of framing sitting on a foundation. This means a construction “inspection” really isn’t an inspection as generally defined by the E&O industry.

  2. E&O insurance sets premiums based on risk assessment and the premium for a home inspector is based on the assumption a home inspection involves a single visit to a dwelling for a period of 2 to 4 hours. The risk profile is thrown off by stretching the “inspection” out over multiple visits over many weeks. More visits equals more chances of something going wrong. This is why consulting architects or engineers who handle draw meetings for a lender get paid for every meeting and have to pay a lot more for their E&O coverage.

  3. A typical claim for a home inspector involves a dispute with their client who most often is the buyer of a home. Even in the worst inspection dispute the other parties at the table may be the seller and the realtor(s). However, in a construction setting any dispute resulting in a claim or litigation introduces a new, bigger set of players to the game. You get the general contractor, the subcontractors, the lender, the architect, the buyer, the realtor(s), and maybe even an engineer or two. Plus while the dispute is ongoing there may be a mechanics lien dispute running on a parallel track. Having this many parties (and their attorneys) involved makes it unlikely the issues can be resolved quickly and efficiently. In other words, expect it to take a long time to sort out and lots of legal fees to prove who did or didn’t do what.

  4. Last, but not least, is the risk of the inspector making a mistake and missing something. If you miss issues with an electrical panel in a typical, single visit inspection, it may cost a few thousand to repair or replace the panel. On the other hand, if you miss something during your review of the electrical system in a home under construction and the mistake isn’t discovered until the home is complete and occupied, the cost involved could be to replace all of the wiring, outlets, light switches, electrical panel, etc. After all, it’s hard to deny being able to see through walls when you were looking at the electrical system before the walls were up.

Another way to look at this is to consider your auto insurance. If your insurance company covers you for driving a 10 year old Chevy Nova and you have an accident driving a brand new Ferrari, the claim probably won’t get paid. So, get back into the Nova and be safe. Keep both hands on the wheel at 10 and 2.  Ferraris are fun, but very dangerous.

PS – If a lender asks you to handle draw inspections, run the other way. It means they are too cheap to hire an architect or engineer, but just as likely to sue if something goes wrong. 

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