InterNACHI

An ounce of Prevention by Mark Cohen.

 
AN OUNCE OF PREVENTION: HOW TO NOT GET SUED,
AND WHAT TO DO WHEN YOU GET SUED
 
Presented by
 
Mark Cohen, Partner
Cohen Horner, LLP
Boulder, Colorado
Legal Counsel for InterNACHI and INTERNACHI
      
www.cohenhorner.com
________________________________________________________________
 
The First Home Inspection Contract:
 
 
I will inspect your cave;
You will pay me.
Signed: ____X_____
 
________________________________________________________________
 
Biography
 
Mr. Cohen earned his BA in economics at Whitman College in Walla Walla, WA in 1980, and received his law degree from the University of Colorado in 1983.  From 1983 to 1987 he served as a Judge Advocate (JAG) in the U.S. Air Force and as a Special Assistant U.S. Attorney.  In 1986, he won the American Bar Association's Outstanding Young Military Service Lawyer award. 
 
From 1987 to 1995, Mr. Cohen practiced law in Omaha.  During that time he represented a Fortune 500 company in litigation and bankruptcy matters throughout Nebraska.  Mr. Cohen returned to Colorado in 1995.  He served eighteen months as a Municipal Judge for the City of Boulder and served on the Executive Board of the Colorado Municipal League.  In connection with his practice he has appeared on MSNBC, the Today Show, the Jimmy Kimmel Show, and several other national programs. 
 
An accomplished writer, Mr. Cohen published six articles in the American Jurisprudence Proof of Facts series, including one on "Piercing the Corporate Veil."  His non-legal articles have appeared in magazines ranging from Inside Kung-Fu to Camping & RV.  His first mystery, The Fractal Murders, was a Book Sense® top ten mystery pick.  Time/Warner released his second mystery, Bluetick Revenge, in July of 2005.
 
Mr. Cohen’s litigation experience, combined with his experience as InterNACHI counsel, makes him uniquely qualified to draft contracts and to represent parties in litigation arising out of contract disputes.  He has represented homeowners, inspectors, contractors, and subcontractors.  His firm is available to represent home inspectors and to assist or consult with local counsel in litigation involving home inspectors.  The firm also has expertise in the law pertaining to nonprofit organizations and in copyright and trademark disputes.   
 
IT IS SO EASY FOR CLIENTS TO SUE YOU
(yeah, so doggone easy)
 
 
LAWSUITS ARE COSTLY EVEN IF YOU WIN
 
 
GOALS
 
THE 4 WAYS HOME INSPECTORS CAN GET SUED
 
            1. Breach of Contract
 
 
            2. Negligence (failure to meet the standard of care)
 
 
            3. Fraud / Misrepresentation
 
·         Intentional Misrepresentation
·         Negligent Misrepresentation
·         Concealment
·         Deceptive Trade Practices (often allows for 3x damages and attorney’s fees)
·         False Advertising
 
4.      Bonehead (bōn'hĕd') Behavior
 
·         Stealing
·         Hitting on female buyer[2]
 
 
 
“AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE”
               
            This proverb was first recorded in Latin in Henry de Bracton's De Legibus (c. 1240). 
 
            Translation: “A little precaution before a crisis occurs is preferable to a lot of          fixing up afterward.” 
 
 
 
 
 
 
RULE 1:  FORM A CORPORATION OR LLC FOR YOUR INSPECTION BUSINESS
 
 
            Forming a corporation or LLC is not foolproof: courts can disregard the separate entity and “pierce the corporate veil” when equity requires it.  (For an overview of the history of the doctrine of piercing the corporate veil, see, Cohen, Grounds for Disregarding the Corporate Entity and Piercing the Corporate Veil, 45 Am.Jur. POF3d 1.
 
            RULE 1.1: OPEN A SEPARATE BANK ACCOUNT FOR YOUR     CORPORATION OR LLC.
 
 
            RULE 1.2:    IF YOUR BUSINESS ACTS LIKE A SEPARATE ENTITY, IT IS; IF            IT DOES NOT ACT LIKE A SEPARATE ENTITY, IT AIN’T.
 
           
Joe Caveman
 
Caveman inspections
Caveman Inspections, Inc.
 
Joe caveman, pres.
 
 
            HORROR STORY: ABC Home & Real Estate Inspection, Inc. v. Plummer, 500 N.E.2d 1257 (Indiana App. 1987).  Where corporation never issued stock, inspector advertised himself as “owner” of the business, and inspector kept contractor’s license in his name rather than corporation’s name, inspector was personally liable to home buyers.
 
RULE 2:   ALWAYS USE A WRITTEN CONTRACT
 
A verbal agreement isn’t worth the paper it’s written on.
 
                                             Louis B. Mayer
 
            Here again is the first home inspection contract:
 
I will inspect your cave;
You will pay me.
Signed: ____X_____
 
            That worked well for thousands of years, but then a caveman inspector sought to have the document reviewed by the first caveman lawyer.  Here is the first legal review of the first home inspection contract by a caveman lawyer:
 
Legal review
 
1.        Contract not specify what cave you inspect
2.        Contract not specify what you inspect for
3.        Contract not specify how much he pay you
4.        Contract not specify when you inspect cave
5.        Contract not specify when he pay
6.        Contract not specify whether you use clubs or rocks to settle any disputes
 
you owe me six dinosaur steaks for legal services.   
 
            Then other cavemen figured out that it was easier to draft contracts than hunt dinosaurs, and thus began the legal professional.  Fortunately, nobody had invented paper and the necessity to carve contracts in stone kept the contracts down to a manageable size.
 
THE CONTRACT CONTINUUM
 
WORST FOR YOU
 
▲        1. The  Bad Contract.  Nothing in it protects you, but it proves that you had          some type of agreement with the client.
 
            2. No Contract.  Nothing protects you, but nothing hurts you either.
 
            3. The Long Contract.  Lots of protection for you, but 15 pages of Legalese         scares away all potential customers.
 
            4. The Good Contract.  Very clear agreement, but does not scare potential          customers.
 
▼        5. The Perfect Contract.  Does not exist.
 
BEST FOR YOU
 
 
            RULE 2.1:  EVERY CONTRACT CONTAINS AN IMPLIED COVENANT OF        GOOD FAITH.
 
            Even if there is no written contract most states hold that there is an implied covenant of good faith in every contract.
 
            RULE 2.2:  AN ATTORNEY CAN DRAFT A BETTER CONTRACT THAN YOU.
 
            Lawyers do not make money drafting or reviewing contracts. Lawyers make money on the litigation that arises when the inspector was too cheap to pay an attorney to draft or review a contract. 
           
RULE 3:  NEVER SUE A CLIENT TO COLLECT A FEE.
 
Once you file suit, the Defendant can (and will) file a Counterclaim.  It’s like boxing; the only trouble with punching your opponent is that in order to hit him you have to get close to him, thus giving him the opportunity to counterpunch.                                                                                                                     
Don’t risk a $500,000 counterclaim so you can collect a $500 fee.
 
 
 
            RULE 3.1: IF YOU DON’T GET PAID, IT’S YOUR OWN FAULT.
 
 
RULE 4:  COMMUNICATE WITH THE CLIENT IN WRITING OR VIA EMAIL AFTER THE INSPECTION.
 
 
RULE 5:  AN ADVERTISEMENT IS A PROMISE.
 
            An untrue or misleading statement in an advertisement can form the basis for a claim for breach of contract, the existence of an implied warranty, and/or a claim of misrepresentation.
 
            The Uniform Deceptive Trade Practices Act or similar statutory schemes have been adopted in every state.  These laws protect consumers and other businesses in much the same way as the FTC Act. The UDTPA provides that a person or business has engaged in an illegal deceptive trade practice when the business or person does any of the following things:
·         Passes off goods or services as those of another.
·         Causes likelihood of confusion or misunderstanding as to the source or   approval of goods or services; or an affiliation with or certification by      someone else.
·         Uses deceptive representations or designations of the geographic source             of the goods or service.
·         Represents that goods or services have sponsorship, approval, characteristics, ingredients, uses or benefits that they don't have, or that a person has some sponsorship, approval or connections that he or she does not.
·         Represents that goods or services are of a particular standard, quality or grade, or of a particular style or model, when they are not.
·         Disparages the goods, services or business of someone else by false or misleading representations.
·         Advertises goods or services with no intent to sell them as advertised or that supplies needed to meet reasonable demand (unless the advertisement discloses a supply limitation).
·         Makes false or misleading statements of fact concerning the reasons for or the existence of price reduction.
·         Engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding.
 
RULE 6: DON’T REPRESENT YOURSELF
 
            There are many reasons why you should hire an attorney rather than attempt to represent yourself in legal matters:
BUT DON’T TAKE MY WORD FOR IT.  HERE’S WHAT ONE NON-ATTORNEY HAD TO SAY ABOUT REPRESENTING YOURSELF:
           
Representing yourself is called "Pro Se," which when translated into English means, "You're F%#^&$%ed!"…  The first thing you need to know when representing yourself is that the system is designed to screw you over. So whatever you think is your killer argument, they've probably heard it before. As I was saying, laws are passed by lawyer legislators and they are designed to make lawyers rich. Judges are lawyers too and if they lose an election, they go back to practicing law. These guys make a lot of money by f^*#$%*ing people over and if you represent yourself you are a direct threat to their pocketbook. You are the competition and they want to make sure you don't succeed. So the rules a very complex and if you stumble, they eat you alive. And if you don't stumble, they eat you alive anyway. Just because you're right and you have the law on your side doesn't mean that you're going to get a ruling in your favor. I've had judges rule against me for no other reason than that I didn't have a lawyer. And once you've represented yourself, your marked as a "bad boy" and they continue to f#%&$&ck you over.[3]
 
RULE 7: KEEP GOOD RECORDS
            Lawyers, judges, juries, and claims adjusters decide cases based on EVIDENCE.  Testimony is one form of evidence, but it is more credible if corroborated by documentation.
§         Written contract
§         Inspection notes and photos
§         Emails (I have an Outlook fold labeled “CYA”)
§         Cancelled checks
RULE 8: WHAT TO DO WHEN YOU GET SUED
·         Call your lawyer if you have one; hire one if you don’t have one.
·         Get a copy of the Summons and Complaint to your lawyer.
·         Note the court appearance date or answer date.
·         Gather all relevant documents and emails.
·         Put thoughts and memories on paper while fresh in your      mind.
·         Get other relevant witnesses to send you a statement via       email.
·         If you are insured, notify your insurer.
RULE 9: WHAT NOT TO DO WHEN YOU GET SUED
§         Immediately apologize to the customer
§         Destroy evidence
§         Talk to customer, customer’s lawyer, or customer’s insurance rep
 
ESSENTIAL ELEMENTS OF A GOOD HOME INSPECTION CONTRACT
 
1.      Identification of the parties; addresses.
2.      Identification of the property to be inspected;
3.      Statement of services to be provided, scope of inspection, and deadline for inspection;
4.      Statement of consideration to be paid, how it will be paid, and when it will be paid;
5.      Limitations on liability;
6.      Warranties or disclaimers;
7.      Governing law;
8.      Forum selection;
9.      Costs and attorney’s fees;
10.    Merger / Integration Clause;
11.    Modification.
This is the standard InterNACHI Agreement that I use in Colorado; but I have highlighted portions in bold.
 
 
InterNACHI Home Inspection Agreement for Colorado
 
The address of the property is: ____________________________________________________________________, Colorado.  The fee for the home inspection is $____________________.   INSPECTOR acknowledges receiving a deposit of $_________________ from CLIENT.
 
THIS AGREEMENT made this _____________ day of _______________, 2006, by and between ________________________ (Hereinafter “INSPECTOR”) and the undersigned (hereinafter “CLIENT”), collectively referred to herein as “the parties.”    The Parties Understand and Voluntarily Agree as follows:
 
1. INSPECTOR agrees to perform a visual inspection of the home/building and to provide CLIENT with a written inspection report identifying the defects that INSPECTOR both observed and deemed material.  INSPECTOR may offer comments as a courtesy, but these comments will not comprise the bargained-for report.  The report is only supplementary to the seller’s disclosure.
2. Unless otherwise inconsistent with this Agreement or not possible, INSPECTOR agrees to perform the inspection in accordance to the current Standards of Practice of the International Association of Certified Home Inspectors posted at http://www.nachi.org/sop.htm.  CLIENT understands that these standards contain certain limitations, exceptions, and exclusions.  Unless otherwise indicated below, CLIENT understands that INSPECTOR will NOT be testing for the presence of Radon – a colorless, odorless, radioactive gas that may be harmful to humans. 
 
3. The inspection and report are performed and prepared for the use of CLIENT, who gives INSPECTOR permission to discuss observations with real estate agents, owners, repairpersons, and other interested parties.  INSPECTOR accepts no responsibility for use or misinterpretation by third parties.   INSPECTOR’S inspection of the property and the accompanying report are in no way intended to be a guarantee or warranty, express or implied, regarding the future use, operability, habitability or suitability of the home/building or its components. Any and all warranties, express or implied, including warranties of merchantability and fitness for a particular purpose, are expressly excluded by this Agreement to the fullest extent allowed by Colorado law. If any structure or portion of any structure that is to be inspected pursuant to this Agreement, is a log home, log structure or similar log construction, CLIENT understands that such structures have unique characteristics that make it impossible for an inspector to inspect and evaluate them by an exterior visual inspection.  Therefore, the scope of the inspection to be performed pursuant to this Agreement does not include decay of the interior of logs in log walls, log foundations or roofs or similar defects that are not visible by an exterior visual inspection.
 
4.  INSPECTOR assumes no liability for the cost of repair or replacement of unreported defects or deficiencies either current or arising in the future. CLIENT acknowledges that the liability of INSPECTOR, its agents, employees, for claims or damages, costs of defense or suit, attorney’s fees and expenses and payments arising out of or related to the INSPECTOR’S negligence or breach of any obligation under this Agreement, including errors and omissions in the inspection or the report, shall be limited to liquidated damages in an amount equal to the fee paid to the INSPECTOR, and this liability shall be exclusive.  CLIENT waives any claim for consequential, exemplary, special or incidental damages or for the loss of the use of the home/building even if the CLIENT has been advised of the possibility of such damages. The parties acknowledge that the liquidated damages are not intended as a penalty but are intended (i) to reflect the fact that actual damages may be difficult and impractical to ascertain; (ii) to allocate risk among the INSPECTOR and CLIENT; and (iii) to enable the INSPECTOR to perform the inspection at the stated fee.
 
5. INSPECTOR does not perform engineering, architectural, plumbing, or any other job function requiring an occupational license in the jurisdiction where the inspection is taking place, unless the inspector holds a valid occupational license, in which case he/she may inform the CLIENT that he/she is so licensed, and is therefore qualified to go beyond this basic home inspection, and for additional fee, perform additional inspections beyond those within the scope of the basic home inspection.  Any agreement for such additional inspections shall be in a separate writing or noted here: ____________________________________________________________________________________________________.
 
6. In the event of a claim against INSPECTOR, CLIENT agrees to supply INSPECTOR with the following: (1) Written notification of adverse conditions within 14 days of discovery, and (2) Access to the premises.  Failure to comply with the above conditions will release INSPECTOR and its agents from any and all obligations and from any liability which might otherwise attach. 
7. The parties agree that any litigation arising out of this Agreement shall be filed only in the County or District Court of Boulder County, Colorado.  In the event that INSPECTOR prevails in any such litigation, CLIENT agrees to pay all of INSPECTORS legal costs, expenses, and attorney’s fees.  
8. If any Colorado court having jurisdiction declares any provision of this Agreement invalid or unenforceable, the remaining provisions will remain in effect.  This Agreement represents the entire agreement between the parties.  All prior communications are merged into this Agreement, and there are no terms or conditions other than those set forth herein.  No statement or promise of INSPECTOR or its agents shall be binding unless reduced to writing and signed by INSPECTOR.  No change or modification shall be enforceable against any party unless such change or modification is in writing and signed by the parties.  This Agreement shall be binding upon and enforceable by the parties and their heirs, executors, administrators, successors and assignees.  CLIENT shall have no cause of action against INSPECTOR after one year from the date of the inspection.
8. Payment of the fee to INSPECTOR (less any deposit noted above) is due upon completion of the on-site inspection.  Interest on any unpaid balance shall accrue at the rate of 1.5% per month.  CLIENT agrees to pay all legal and time expenses incurred in collecting due payments, including attorney’s fees, if any.  If CLIENT is a corporation, LLC, or similar entity, the person signing this Agreement on behalf of such entity does personally guaranty payment of the fee by the entity.
CLIENT HAS CAREFULLY READ THE FOREGOING, AGREES TO IT, AND ACKNOWLEDGES RECEIPT OF A COPY OF THIS AGREEMENT.
 
_______________________________                  _______________________________________________________________
FOR INSPECTOR                                                 CLIENT OR REPRESENTATIVE
 

[1] Westlaw search conducted by author on 2/2/06 of 50-state court database for appellate decisions containing the terms “negligent” and “home inspection.”
[2] Between December 28, 1998, and November 22, 1999, the Wisconsin Department of Regulatory Licensing received 16 complaints against home inspectors, including one for “sexual harassment,” which it referred to the Division of Enforcement. See, Wisconsin Regulatory Digest, Vol. 1, No. 1, which may be found at http://drl.wi.gov/boards/rhi/digest/20000300.pdf.

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