Certification & Licensing
Copyright ©
InterNACHI®
InterNACHI® is a registered trademark of the International Association of Certified Home Inspectors
by Nick Gromicko, CMI®
This article summarizes the law applicable to certain aspects of InterNACHI’s pre-inspection agreement. InterNACHI encourages home inspectors to seek the advice of qualified counsel in their jurisdiction.
Inspectors often ask whether the limitation on liability in InterNACHI’s pre-inspection agreement is enforceable. Whether such provisions are enforceable depends on the jurisdiction and the wording of the agreement. This paper summarizes the applicable law on that issue and briefly discusses other provisions in InterNACHI’s agreement.
Under the strong public policy favoring freedom of contract, a limitation of liability is enforceable unless a Court finds the clause unconscionable or against public policy. See e.g., Computrol, Inc. v. Newtrend, L.P., 203 F.3d 1064, 1070 (8th Cir. 2000); § 64:17: Effect of limitation of liability provision, 24 Williston on Contracts § 64:17 (4th ed., 2017). However, liability limitations are usually unenforceable against claims of gross negligence. See e.g.,Ricciardi v. Frank, 170 Misc. 2d 777, 778 (N.Y. App. Div. 1996).
A few Courts have voided liability limitations in home inspection contracts as unconscionable. Lucier, 841 A.2d 907; Pitts v. Watkins, 905 So. 2d 553 (Miss. 2005); Glassford v. BrickKicker, 35 A.3d 1044 (Vt. 2011). Other Courts have voided these liability limitations as against public policy. Carey v. Merritt, 148 S.W.3d 912 (Tenn. Ct. App. 2004); Lucier, 841 A.2d 907; Finch v. Inspectech, LLC, 727 S.E.2d 823 (W. Va. 2012). In contrast to these decisions, other Courts have upheld home inspection liability limitations as not unconscionable and not against public policy. Gladden v. Boykin, 739 S.E.2d 882 (S.C. 2013); Head v. U.S. Inspect DFW, Inc., 159 S.W.3d 731 (Tex. App. 2005); Zerjal v. Daech & Bauer Const., Inc,. 939 N.E.2d 1067 (Ill. App. Ct. 2010). In addition, four states Alaska, California, Massachusetts, and Wisconsin, have legislation expressly prohibiting certain liability limitations in home inspection contracts.
InterNACHI’s limitation of liability clause is in Paragraph 6 of InterNACHI’s agreement. The clause reads:
We assume no liability for the cost of repair or replacement of unreported defects, either current or arising in the future. In all cases, our liability is limited to liquidated damages in an amount not greater than 1.5 times the fee you paid us. You waive any claim for consequential, exemplary, special or incidental damages or for the loss of the use of the home/building. You acknowledge that this liquidated damages is not a penalty, but that we intend it to: (i) reflect the fact that actual damages may be difficult or impractical to ascertain; (ii) allocate risk between us; and (iii) enable us to perform the inspection for the agreed-upon fee. If you wish to eliminate this liquidated damages provision, we are willing to perform the inspection for an increased fee of $______, payable in advance.
Courts will effect the intention of the parties by interpreting the contractual language alone as long as the language is facially unambiguous. Hoskins v. Inspector LLC, 961 P.2d 261, 263 (Or. App. 1998). Here, the language is facially unambiguous. Compare with Hoskins. The first sentence denies liability for the cost of repairing or replacing unreported defects. The second sentence states that in all other cases liability is limited to 1.5 times the amount of the inspection fee. The third sentence waives any consequential or similar damages. The last sentence provides justification for the liquidated damages provision. The limitation is supported by consideration as it lowers the cost of the home inspection in exchange for limited liability. The agreement also gives the customer the option to pay a higher fee to remove the limitation on damages. Therefore, the liability limitation should be enforceable unless it is unconscionable, against public policy, or prohibited by a statute.
The cases discussing the validity of liability limitations in home inspection contracts arise under similar factual circumstances. The complaint typically alleges that the home inspector failed to notice a significant defect with the property, such as a leaky roof or a sagging floor. See Lucier, 841 A.2d at 910; Pitts, 905 So. 2d at 556. Often, the person receiving the inspection specifically asks the inspector to look at the defective area of property, which at the time of the inspection is erroneously confirmed as sound by the inspector. See Pitts, 905 So. 2d at 556. The damages alleged from the resulting unreported defect range from the thousands of dollars well into the tens of thousands dollars. See Lucier, 841 A.2d at 910; Finch, 727 S.E.2d at 827. The cost of the inspection, along with the corresponding liability limitation is typically under $1,000. Glassford, 35 A.3d at 1046; Pitts 905 So. 2d at 556. The claims asserted are most often breach of contract and negligence. Id.
A few states expressly prohibit limitation of liability clauses in home inspection contracts. In Alaska and California, liability limitations that limit damages to the amount of the fee are “contrary to public policy” and void.[1] Massachusetts has a statute that allows the Board of Registration of Home Inspectors (“Board”) to suspend the license or otherwise penalize home inspectors for including liability limitations in home inspection contracts. Mass. Gen. Laws Ann. ch. 112, § 225 (West 2017). In an unpublished case, a Massachusetts Court upheld the Board’s decision to penalize a home inspector for his failure to report certain electrical system information as well as his improper inclusion of a liability limitation.[2] Crossen v. Bd. of Registration of Home Inspectors, 2012 WL 2335277 (Mass. Super. 2012). Lastly, Wisconsin prevents limitation of liability clauses for “failure to comply with the standards of practice.” Wis. Stat. Ann. § 440.976 (West 2017). This standard of practice is “a reasonably competent and diligent inspection.” Wis. Stat. Ann. § 440.975 (West 2017).
Because California and Alaska prohibit clauses limiting damages to the amount of the fee, the InterNACHI agreement limits damages to 1.5 times the amount of the fee. Massachusetts considers any attempt to limit damages unethical and such clauses may result in discipline. Massachusetts inspectors should remove the clause. However, in Wisconsin, InterNACHI’s liability limitation clause may still be valid as against unreported defects because a “reasonably competent and diligent inspection” may still omit home defects.
Generally, unconscionability considers whether the contract was fairly entered into—procedural unconscionability—and whether the terms of the contract are substantively unfair—substantive unconscionability. § 18:10. Elements of unconscionability-Procedural and substantive unconscionability, 8 Williston on Contracts § 18:10 (4th ed.). Most courts place the burden on the party seeking to void the contract to demonstrate both procedural and substantive unconscionability to hold a clause unconscionable. See, Maxwell v. Fid. Fin. Servs., Inc., 907 P.2d 51, 58 (Ariz. 1995).
A court will not likely hold InterNACHI’s liability limitation procedurally unconscionable unless the moving party has demonstrated a lack of meaningful choice in agreeing to the liability limitation. 8 Williston on Contracts § 18:10 (4th ed.). Substantive unconscionability poses a closer question because courts are split and the outcome will depend on the jurisdiction. Some courts have held home inspection liability limitations substantively unconscionable because they provide little incentive for the home inspector to act diligently and impose a disparate impact on the homebuyer while others have held clauses enforceable because they are commercially reasonable in lowering the cost of a home inspection. Compare Lucier, 841 A.2d 907, Pitts, 905 So. 2d 553 with Gladden, 739 S.E.2d 882 and Head, 159 S.W.3d 731.
The following subsection will first describe the contracts in which home inspection liability limitations have been held unconscionable. Then, it will discuss the different judicial approaches to analyzing unconscionability. Then, it will outline the arguments and counterarguments for holding home inspection liability limitations procedurally and substantively unconscionable.
As a preliminary matter, InterNACHI’s liability limitation is probably not unconscionable because the contract does not contain an arbitration provision.
New Jersey, Vermont, and Mississippi Courts have held that some liability limitations in home inspection contracts are unconscionable. See Lucier, 841 A.2d at 909; Glassford, 35 A.3d at 1049; Pitts, 905 So. 2d at 558. In each of these cases, the contract in question has also contained a binding arbitration provision. See Lucier, 841 A.2d at 910; Glassford, 35 A.3d at 1046; Pitts, 905 So. 2d at 555. Besides precluding the Plaintiff from judicial remedy, these arbitration provisions required the plaintiff to pay arbitration fees exceeding the liability limitation in order to pursue a claim. Glassford, 35 A.3d at 1046; Pitts, 905 So. 2d at 557. Courts determined this situation was unconscionable because it provided the plaintiff an “illusory remedy” thus precluding a “meaningful remedy.” Glassford, 35 A.3d at 1048; Pitts, 905 So. 2d at 558. (However, in Lucier the plaintiff received remedy from the home sellers in arbitration before seeking a claim against the inspector.) 841 A.2d at 911. Other courts, when faced with these interacting clauses have upheld the liability limitation or held the arbitration provision unenforceable as opposed to unconscionable. Gladden, 739 S.E.2d at 885 (upholding liability limitation, but not addressing validity of arbitration clause because issue not raised on appeal); O'Donoghue v. Smythe, Cramer Co., 2002 WL 1454074 (Ohio Ct. App. 2002).
The presence of a severability clause in these contracts also affects the outcome. For example, when presented this contractual situation, an Ohio Appellate Court held the entire home inspection contract unenforceable, but two years later, struck only the arbitration provision in part because of a severability clause.Compare O'Donoghue, 2002 WL 1454074 with McDonough v. Thompson, 2004 WL 2847818 (Ohio Ct. App. 2004). In contrast, the Vermont Supreme Court in Glassford struck both the arbitration and liability limitation clauses despite noting the presence of a severability clause. 35 A.3d at 1049.
To a lesser extent than arbitration provisions, courts disfavor contractual limitations periods. See e.g. Pitts, 905 So. 2d at 558. In Pitts, the Court held a contractually shortened limitations period unconscionable in addition to the unconscionable arbitration and liability limitation provisions.Id. In contrast, the Court in Zerjal held that shortened contractual limitation periods are valid as long as they are reasonable. 939 N.E.2d at 1075.
InterNACHI’s agreement is distinct from those in Pitts, Glassford, and Lucier because it does not contain an arbitration provision or any like provision requiring the plaintiff to spend fees in order to pursue a claim. InterNACHI’s contract states that if the plaintiff “fails to prove a claim,” he agrees to pay all the home inspector’s “legal costs, expenses and attorney’s fees.” This clause—which might dissuade the Plaintiff from pursuing a claim—does not require the payment of a fee to pursue a claim. InterNACHI’s provision is also distinguishable because it preserves judicial avenues for the customer.
However, like the contracts in question in Pitts and Zerjal, InterNACHI’s imposes a limitation period. The relevant clause reads: “If you believe you have a claim against us, you agree to provide us with the following: (1) written notification of your claim within seven days of discovery in sufficient detail and with sufficient supporting documents that we can evaluate it; and (2) immediate access to the premises. Failure to comply with these conditions releases us from liability.”
Some Courts might hold this mandatory seven-day notification period unconscionable for imposing a contractually shortened limitations period. However, the clause is reasonable in that it encourages communication between the parties and can lead to more efficient dispute resolution without the expense of judicial resources.
In sum, InterNACHI’s liability limitation and the two clauses described above do not act together to preclude any meaningful remedy.
Unconscionability is an “amorphous concept.” See, e.g., Lucier, 841 A.2d at 911. Often, unconscionability indicates a lack of “good faith, honesty in fact and observance of fair dealing” and is evidenced by terms so “one-sided as to oppress or unfairly surprise.” Id.; O'Donoghue, 2002 WL 1454074. Interpretations vary from jurisdiction to jurisdiction. However, many Courts use the following definition: “an absence of meaningful choice on the part of one of the parties to a contract, combined with contract terms that are unreasonably favorable to the other party.” See Pitts, 905 So. 2d at 558; Gladden, 739 S.E.2d at 884; , 939 N.E.2d at 1073–74.
In Pitts, the Court interpreted “absence of meaningful choice” to include an absence of meaningful remedy. 905 So. 2d at 558. The dissent, in a statement that illustrates how some other jurisdictions require both procedural and substantive unconscionability, disagreed: “Clearly, the ‘absence of meaningful choice’ requirement of Entergy Miss., Inc. refers to whether the party had a meaningful choice in agreeing to the contraId., at 561. As the Court in Gladden emphasized:
Courts should not refuse to enforce a contract on grounds of unconscionability, even when the substance of the terms appear grossly unreasonable, unless the circumstances surrounding its formation present such an extreme inequality of bargaining power, together with factors such as lack of basic reading ability and the drafter's evident intent to obscure the term, that the party against whom enforcement is sought cannot be said to have consented to the contract.
739 S.E.2d at 884–85. Most jurisdictions, thus, while not necessarily requiring a finding of both procedural and substantive unconscionability, require at least some elements of procedural abuse to hold contract terms unconscionable. 8 Williston on Contracts § 18:10 (4th ed.). As an outlier, the Vermont Supreme Court in Glassford stated the presence of procedural unconscionability was not required to void a contract. 35 A.3d at 1049. Despite this declaration, the Court proceeded to note elements of procedural unconscionability in the home inspection liability limitation. Id., at 1053.
Because most jurisdictions require elements of both procedural and substantive unconscionability to void a clause for unconscionability, it would be prudent to emphasize the procedural aspect of the doctrine. As discussed immediately below, InterNACHI’s contract lacks many elements of procedural unconscionability and should withstanding such scrutiny.
InterNACHI’s liability limitation is not procedurally unconscionable because there is not a large disparity in bargaining power between a home inspector and a homebuyer. While other elements, such as an opportunity to understand contractual terms inform the analysis, the backbone of procedural unconscionability is a lack of meaningful choice in agreeing to the contract resulting from a disparity in bargaining power. 8 Williston on Contracts § 18:10 (4th ed.); Gladden, 739 S.E.2d at 884–85.
Adhesion contracts are standardized preprinted form contracts, presented on a take-it or leave-it basis with no opportunity for negotiations. See Lucier, 841 A.2d at 912; Gladden, 739 S.E.2d at 886. The Courts in Lucier andGladden determined a standard home inspection contract presented to the consumer was one of adhesion. Lucier, 841 A.2d at 912; Gladden, 739 S.E.2d at 886. However, as the Court in Gladden noted adhesion contracts are not per se unconscionable and are merely the beginning of the analysis. 739 S.E.2d at 886.
InterNACHI’s contract is printed on a standardized preprinted form. However, the agreement specifically offers the customer an opportunity to pay a higher fee to remove the limitation on damages. And, unlike an adhesion contract presented by a large company to an individual consumer in shrink-wrap or over the internet, InterNACHI’s agreement is typically presented to the consumer by the home inspector in a face-to-face interaction. Thus, the consumer has more opportunity to negotiate InterNACHI’s terms than in a typical adhesion contract.
In Lucier v. Williams, the New Jersey Court focused on the relative sophistication of the two contracting parties in determining that two parties, “one a consumer and the other a professional expert, [had] grossly unequal bargaining status.” 841 A.2d at 912. The court focused on the naivety of the first-time home buyers, unrepresented by an attorney, in comparison to the inspector’s expertise informed by twenty years of experience, an engineering degree, and thousands of home inspections to determine a “gross” disparity existed between the two parties. Id., at 910, 912. In contrast, in Gladden v. Boykin, the Court stated that the self-employed home inspector had no “significantly greater bargaining power” than a homebuyer who had some real estate training. 739 S.E.2d at 885. Important to the Court’s analysis, the homebuyer negotiated with other home inspectors prior to the inspection and the inspector had previously modified a liability limitation per a customer’s request. Id.
Compared to most commercial situations, a contract between a home inspector and consumer is one made on relatively equal footing and not one displaying a large disparity in bargaining power. If a “grossly unequal bargaining status” exists between an experienced home inspector and a first-time homebuyer, I strain to imagine what words could adequately describe the disparity in bargaining power between Apple and an iTunes user. Additionally, the court in Lucier is misplaces its emphasis on the home inspector’s expertise as a reason a gross disparity in bargaining power existed. In many commercial situations, the contracting party is more of an expert than the consenting party as to the content of the contract simply because the contracting party is providing a service that the consenting party is often incapable of performing. In sum, a home inspector typically does not enjoy significantly greater bargaining power than a consumer.
The prevalence of liability limitations in the home inspection industry can indicate a lack of meaningful choice in agreeing to the clause. Gladden, 739 S.E.2d at 885. However, without evidence indicating the prevalence of these clauses there is no “support for an inference that the homebuyer lacked meaningful choice” or the home inspector “possessed a decisive advantage of bargaining strength.” Id.;Russell v. Bray, 116 S.W.3d 1, 7 (Tenn. Ct. App. 2003) (voiding the contract on public policy grounds). Based in part of this lack of evidence, the majority in Gladden held the consumer had a meaningful choice in agreeing to the contract. 739 S.E.2d at 885. In contrast, the dissent in Gladden thought the consumer lacked a meaningful choice because there was evidence the clause was prevalent in the industry. Id., at 886. Dissent noted the inspector was using a contract “presented in a class regarding home inspections that he took in another state” and had only altered the contract once over the course of thousands of inspections. Id. at 886, n. 5.
Even if evidence indicates the prevalence of the clause, the Court should next inquire whether the Plaintiff was compelled to sign the contract. In Zerjal v. Daech & Bauer Const., Inc., the Court noted the homebuyers had a meaningful choice in agreeing to the contract because they were “under no economic or other compulsion to sign the inspection contract.” 939 N.E.2d at 1074.
Based off the interpretation in Zerjal, only in rare circumstances would a consumer be compelled to sign the contract. A homebuyer, who has demonstrable resources, could offer consideration to negotiate the liability limitation or could contact another home inspector. And, absent evidence indicating the ubiquity of the clause, the Court should not infer a lack of meaningful choice. Thus, under the precedent in Zerjal and Gladden, a homebuyer would rarely lack meaningful choice in agreeing to a liability limitation in a home inspection contract.
Whether the plaintiff had the opportunity to understand the liability limitation is an aspect of procedural unconscionability. 8 Williston on Contracts § 18:10 (4th ed.) citingNew v. GameStop, Inc., 753 S.E.2d 62 (W. Va. 2013). Aspects of this factor include the conspicuousness of the clause, the consumer’s ability to understand its language, and the timing of contractual presentation. Id.
Although a conspicuous clause can minimize procedural unconscionability, the Court in Gladden suggested the “proper test is whether an important clause was particularly inconspicuous, as if the drafter intended to obscure the term.” 739 S.E.2d at 885. The Court noted the home inspection liability limitation was not particularly inconspicuous as part of a one-page contract, presented in the same font as the other terms, except for its emboldened and capitalized heading. Id.
In contrast, the Court in Glassford v. BrickKicker referenced the liability limitation’s location and font size as elements of procedural unconscionability. 35 A.3d at 1053. There, the Court noted the liability limitation appeared on the opposite side of a double-sided contract from the signature line. Id. The liability limitation had no heading and read in small font, except for its capitalized statement of liability. Id. The Court thought these differences important due to the conspicuous home inspection liability limitation in Head v. U.S. Inspect DFW, Inc. where the clause was boxed off and had a space for initials. Id., at 1054. The Texas Court of Appeals in Head upheld the liability limitation in part due to its conspicuous. 159 S.W.3d at 749.
The new InterNACHI agreement contains a heading in bold that states LIMITATION ON LIABILITY AND DAMAGES. Unlike the double-sided contract in Glassford, InterNACHI’s clause appears in the middle of a one-page contract.
Allegations the plaintiff did not or could not understand the contractual terms are important to the procedural unconscionability analysis. For example, in Lucier, the Court noted that although the clause was conspicuous, the homebuyer alleged he didn’t understand the liability limitation language. 841 A.2d at 909. In Gladden, the Court noted the homebuyer did not allege she lacked the education to understand the terms. 739 S.E.2d at 885. Similarly, in Zerjal, the Court noted “the plaintiffs [did] not claim that they did not understand the contract.” 939 N.E.2d at 1074.
As a minority approach, the Court itself in Glassford expressed displeasure with the drafter’s “attempt to justify the liability limitation as a liquidated damage amount.” 35 A.3d at 1053. The Court quoted one commentator: “many consumers would not understand . . . a ‘liquidated’ damage concept” as a justification for a liability limit in a home inspection contract.” Id., citing G. Marsh, The Liability of Home Inspectors in Residential Real Estate Sales, 59 Ala. L.Rev. 107, 153 (2007). In comparison, the Court in Zerjal noted the “liquidated-damages provision was clear and explicit, stating, ‘The Client further agrees that the Inspector is liable only up to the cost of the inspection.’” 939 N.E.2d at 1074.
A comparison of the clauses from Lucier and Glassford to InterNACHI’s is illustrative in determining whether InterNACHI’s clause is comprehensible. The clause in Lucier:
Client and CAL have discussed the risks, rewards and benefits of this assignment and CAL's total fee for services. It is acknowledged that benefits vary disproportionately between them. Accordingly, the risks have been allocated such that the Client agrees that, to the fullest extent permitted by law, CAL's total liability to Client for any and all injuries, claims, losses, expenses, damages or expenses arising out of this Agreement from any cause or causes shall not exceed the total amount of $500, or 50% of fees actually paid to CAL by Client, whichever sum is smaller. Such causes include, but are not limited to, CAL's negligence, errors, omissions, strict liability, breach of contract or breach of warranty. CAL will not be liable to Client or Client's insurers, in contract, warranty, tort, (including negligence), or otherwise, for any special, indirect, or consequential damages resulting from the performance of or failure to perform services under this Agreement, which damages shall include specifically, but without limitation, loss of use, cost of replacement substitute facilities, cost of capital or similar damages.
841 A.2d at 909. The clause in Glassford:
Client understands and agrees that it would be extremely difficult to determine the actual damages that may result from an inspector's failure to properly perform duties under this contract. As such, it is agreed that the liability of the Inspection Company arising out of this inspection and subsequent Property Inspection Report shall be limited to actual damages, or equal to the inspection fee charged, whichever is less. IT IS AGREED THAT THIS IS AN ADEQUATE LIQUIDATED DAMAGE AND IS IN NO WAY INTENDED AS A PENALTY, ADMISSION OF NEGLIGENCE OR DEFAULT SETTLEMENT. THE CLIENT UNDERSTANDS AND AGREES THAT ACTUAL DAMAGES, OR EQUAL TO THE INSPECTION FEE PAID, WHICHEVER IS LESS, IS THE CLIENT'S SOLE AND EXCLUSIVE REMEDY NO MATTER THE THEORY OF LIABILITY UPON WHICH THE CLIENT SEEKS RECOVERY ....
35 A.3d at 1046.
Thus, compared to limitation of liability clauses in Lucier and Glassford, InterNACHI’s liability limitation clause is shorter and the sentences are more concise. And, while InterNACHI’s liability limitation is presented as a liquidated damages provision, the contract provides reasoning for the concept unlike the clause in Glassford.
As a final matter, courts disfavor contracts presented to the customer after the home inspector has completed the inspection but before the home inspector has provided the report. Gladden, 739 S.E.2d at 889; Pitts, 905 So. 2d at 554. A contract presented in this manner leaves the consumer little time to review the contract, and further limits the consumer’s bargaining power because the inspection has already been performed. Therefore, the home inspector should present the contract to the customer before beginning the inspection.
In sum, InterNACHI’s liability limitation is conspicuous, relatively comprehensible, and part of a short, one-page contract. Therefore, it is not procedurally unconscionable unless the consenting party can demonstrate a lack of meaningful choice in agreeing to the clause. The home inspector, unlike a large company, does not wield a vast advantage in bargaining power over the consumer.
Substantive unconscionability relates to the contract terms themselves and whether these terms are unreasonably favorable. 8 Williston on Contracts § 18:10 (4th ed.). Courts have determined some home inspection liability limitations substantively unconscionable because they did not provide the inspector “a realistic incentive to act diligently” and because they imposed a disparate impact on the homebuyer. Lucier, 841 A.2d at 912–13; Pitts, 905 So. 2d at 556–57.[3] The Court in Lucier stated, in reasoning that has been adopted by other Courts that “the substance of the provision eviscerates the contract and its fundamental purpose because the potential damage level is so nominal that it has the practical effect of avoiding almost all responsibility for the professional's negligence.” 841 A.2d at 912 (Cited in Pitts, 905 So. 2d at 557 and referenced in Glassford, 35 A.3d at 1051). Other Courts reason that because home inspection liability limitations are routinely entered into and are commercially reasonable in making the service more affordable, they are not “so oppressive as to be unconscionable.” Gladden, 739 S.E.2d at 884; Head, 159 S.W.3d at 748–49. Thus, the question of whether InterNACHI’s liability limitation is substantively unconscionable may be a matter of judicial interpretation.
This section will analyze the merits for holding the clause substantively unconscionable under the analysis presented in Lucier and Glassford. First, it will discuss whether the clause provides a realistic incentive to act diligently, and then whether the clause imposes a disparate impact on consumers.
The Courts in Lucier and Pitts were concerned that due to a liability limitation, a home inspector would have no incentive to perform the inspection diligently, thus eviscerating the purpose of the home inspection contract.
The Court in Lucier cited precedent that reasoned “to be enforceable, the amount of the cap on a party's liability must be sufficient to provide a realistic incentive to act diligently.” 841 A.2d at 912. Based off this precedent, the Court in Lucier determined the home inspection liability cap provided “no meaningful incentive” for the professional home inspector to act diligently. Id., at 913. The liability limitation thus effectively immunized the inspector "from the consequences of his own negligence.” Id. The Court in Pitts v. Watkins took this analysis a step further, reasoning that without a sufficient liability cap, “home inspectors [could] walk through the house in five minutes, fabricate a report, and escape liability, without any consideration of the consequences of their conduct.” 905 So. 2d at 557 (cited in Glassford, 35 A.3d at 1051).
The above analysis ignores other reasons besides the potential for liability for a home inspector to act diligently. The reputation of the home inspector’s business, disseminated online and through word of mouth provides one incentive for the inspector to act diligently. Additionally, statutory schemes often provide mechanisms for reviewing and penalizing inspector’s misconduct. Three, a liability limitation will never shield an inspector from gross negligence, as the scenario described in Pitts seems to envision. And, in cases with a high home inspection fee, the refund of the full inspection amount provides more incentive to act diligently. Finally, without a liability cap, the prudent home inspector will purchase insurance to protect him from his losses. Would this insurance also operate a shield, effectively immunizing the inspector from his negligence?
Thus, the liability limitation in InterNACHI’s contract should not be held unenforceable for not providing a realistic incentive to act diligently when many other factors encourage a home inspector to act diligently. These other factors minimize any impact limiting the inspector’s liability would have on the quality of the home inspection. Thus, the clause should not be held substantively unconscionable on this ground.
Courts focus on the home inspection’s importance in the home purchasing decision in determining the liability limitation imposes a disparate impact on the homebuyer. Lucier, 841 A.2d at 912; Pitts, 905 So. 2d at 556; Glassford, 35 A.3d at 1051. “The purchase of a home is, for most people, a very infrequent occurrence, and a very major undertaking.” Lucier, 841 A.2d at 912. At the time of the home purchase, often the only issue remaining is “the integrity of the house” determined through the home inspection. Pitts, 905 So. 2d at 556. In addition to informing the homebuyer about the condition of their probable purchase, a home inspection is often required in order to finance the home. Glassford, 35 A.3d at 1051. Thus, these Courts reason a home inspection that fails to reveal defects impacts purchase price, habitability, as well as repair costs. Lucier, 841 A.2d at 913. This impact is then disparate compared to the inspector’s capped at the liability limit.
However, as the Courts in Gladden and Head noted, the liability limitation has a legitimate commercial purpose in lowering the cost of a home inspection. 739 S.E.2d at 884; 159 S.W.3d at 748–49. The purpose of a home inspection, as one Court noted, is not to guarantee the safety of a home but “to provide the homebuyer with a non-invasive examination of the structure and the systems contained therein in order to enable the buyer to make a more informed purchasing decision.” Fellerman v. PECO Energy Co., 159 A.3d 22, 29 (Pa. Super. Ct. 2017).
Without a liability limitation, the very nature of the home inspection would likely change. The process would likely take longer, and prices would likely rise. In states without home inspection insurance requirements, inspectors would be smart to acquire insurance. Even in states with insurance requirements, the cost of the inspection would likely rise due to increased insurance costs resulting from the insurance companies’ increased exposure. In addition, other parties, particularly the homebuilder and/or the seller may be in a better position to know possible home defects. Gladden, 739 S.E.2d at 884. Statutory schemes and judicial precedent can impose this burden on these parties. Id. Thus, Courts should be circumspect in placing the impact resulting from an unreported home defect solely on the shoulders of the home inspector. Therefore, a Court should not hold the InterNACHI’s liability limitation substantively unconscionable due to the commercial reasons justifying its inclusion.
In sum, because the inspector has other incentives to act diligently and because the clause is commercially reasonable in making the service more affordable, InterNACHI’s liability limitation is not substantively unconscionable. Given the nature of the home inspection process, the liability limit is not so one-sided as to shock the conscience. InterNACHI’s contract does not contain many of the elements of procedural unconscionability required by most courts to void a clause for unconscionability. Furthermore, InterNACHI’s contract does not contain a binding arbitration provision. Thus, under the strong public policy for freedom of contract, courts should not hold InterNACHI’s liability limitation unconscionable.
Clauses that exculpate a party for negligence can be invalid when the “public interest requires performance.” Jones v. Dressel, 623 P.2d 370, 376 (Colo. 1981). Whether the public interest requires performance is often determined by whether the legislature has regulated the industry in question. See e.g., Tunkl v. Regents of Univ. of Cal., 383 P.2d 441, 445 (Cal. 1963).
Public policy is typically the prerogative of the legislature, the popularly elected voice of the community. See e.g., Gladden, 739 S.E.2d at 883. “Courts assume this prerogative only in the absence of legislative declaration.” Id. Therefore, if the legislature has explicitly prohibited liability limitations in home inspection contracts, the analysis ends and the clause is unenforceable.[4] However, if the legislature has regulated other aspects of the home inspection industry, what affects the public interest becomes a judicial determination.
New Jersey, West Virginia and Tennessee Courts have found some home inspection liability limitations void as against public policy. Lucier, 841 A.2d at 913; Finch, 727 S.E.2d at 826; Carey, 148 S.W.3d at 918; Russell, 116 S.W.3d at 8. As a threshold matter, these Courts first equated the liability limit to an exculpatory clause, and thus subject to a similar analysis. See e.g., Lucier, 841 A.2d at 913. After this determination, some of these courts determined the clause affected the public interest through an application of the Tunkl factors, which consider, for example, whether the industry is suitable for regulation. Carey, 148 S.W.3d at 916; Russell, 116 S.W.3d at 5–6. The New Jersey and West Virginia courts based their analysis on other provisions regulating the home industry and precedent invalidating liability limitations in other services deemed to affect the public interest. Lucier, 841 A.2d at 913–16; Finch, 727 S.E.2d at 823.
In contrast to these approaches, other Courts recognize that it takes more than regulation of an industry to find a public policy interest. Zerjal, 939 N.E.2d at 1072. Statutes are a product of compromise and the “purpose of a statute includes not only what it sets out to change, but also what it resolves to leave alone." W. Virginia Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 98 (1991) (J. Scalia). In Zerjal, the Illinois Appellate Court recognized that when “the legislature has intended to regulate the liability of parties, it has done so; the legislature has declared it to be against public policy for innkeepers, professional bailees, landlords, and building contractors to be exculpated from liability for their negligence.” 939 N.E.2d at 1072. As a New York Court recognized, a “legislature's silence with respect to contractual limitations of liability is significant and must be construed as intentional.” Dicker v. The Housemaster, 11 Misc. 3d 1051(A) (N.Y. Sup. Ct. 2006). Furthermore, other legislation may already provide “specific protection for the consumer risks associated with undisclosed [home] defects, and [the Court] must defer to its judgment.” Gladden, 739 S.E.2d at 884.
Therefore, if a state has not regulated home inspections, a Court mindful of the legislative prerogative should not find a home inspection liability limitation against public policy.[5] And, even if the state has regulated home inspections, the Court should be cautious in applying the public policy exception.
Services affecting the public interest have a duty to the public. See, e.g., Jones, 623 P.2d at 376. In light of this duty, courts have held that these services cannot contract away liability for their negligence. Id. Historically, these businesses “clothed with a public interest” have been common carriers such as restaurants inns, and railroads, or quasi-monopolies such as public utilities or railroads. See, e.g., Munn v. Illinois, 94 U.S. 113, 128 (1876). In the 20th century, this public duty exception has expanded to include “professionals who hold themselves out to the public as having special knowledge, labor or skill” such as doctors and lawyers. See, e.g., Lucier, 841. A.2d at 914. Recently, some courts have held that home inspectors affect the public interest. Id. A common thread of the public policy exception is the extent to which the consenting party’s person or property is placed under the control and subject to the risk of the other party. See, e.g., Vodopest v. MacGregor, 913 P.2d 779, 788 (Wash. 1996). The bargaining power between the two parties is also an important aspect in determining whether to hold the clause against public policy. See, e.g., Jones, 623 P.2d at 376.
Courts employ various definitions and interpretations in an attempt to define the contours of the public policy exception. Like unconscionability, public interest is an amorphous concept that is difficult to apply. Wolf v. Ford, 644 A.2d 522, 526 (Md. 1994). The California Supreme Court in Tunkl v. Regents identified six public factors that provide a “rough outline” of the concept. 383 P.2d at 444–45. These factors, adopted by many other jurisdictions, include whether the business is suitable for regulation, and whether the service is of great public importance. Id. Other courts eschew the Tunkl factors as too restrictive and consider the totality of the circumstances against the current societal backdrop. Wolf, 644 A.2d at 527. Still other jurisdictions employ a more rigorous standard, voiding a contract for public policy only when it is “so obviously . . . against the public health, safety, morals or welfare that there is virtual unanimity in regard to it, that a court may constitute itself the voice of the community.” Fellerman, 159 A.3d at 28;Mullins v. N. Kentucky Inspections, Inc., 2010 WL 3447630 at *4 (Ky. Ct. App. 2010) (similar language).
When the legislature does not expressly preclude liability limitations in home inspection contracts, the clause’s validity becomes a judicial determination. The courts that have held these clauses against public policy first determine the clause to be tantamount to an exculpatory clause, and thus subject to the same analysis. See e.g., Lucier, 841 A.2d at 913. Courts reach this determination for two reasons. One, the potential recovery isde minimus compared to the alleged damage. See e.g., Glassford, 35 A.3d at 1049. Two, the Courts determine the clause operates as an exculpation clause by effectively shielding the inspector from his negligence. See e.g., Lucier, 841 A.2d at 913.
To avoid analysis under an exculpatory clause analysis, it can be argued that the liability limitation is not tantamount to an exculpatory clause. If inspection fee is high and the alleged damages are low, liability is not de minimus in comparison to damages. Additionally, surrendering an expensive inspection fee may not be an effective shield against negligence. However, this argument may appear disingenuous in cases where the alleged negligence vastly exceeds the inspection fee.
A few Courts have found home inspection liability limitations void through an application of the Tunkl factors. Carey, 148 S.W.3d at 918; Russell, 116 S.W.3d at 8; Mullins, 2010 WL 3447630. In Tunkl v. Regents, the Court invalidated an exculpatory provision that shielded physicians from their own negligence because the clause affected the public interest. Tunkl, 383 P.2d at 441–45. In so holding, the Court recognized that “no public policy opposes private, voluntary transactions in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party.” Id., at 446. However, in this case the Court found the service to be “one which each member of the public, presently or potentially, may find essential to him.” Id, at 447.
This section will discuss the Court’s application of the Tunkl factors to the home inspection industry and provide counterarguments for that application.
The Tunkl factors are:
1) It concerns a business of a type generally thought suitable for public regulation.
2) The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public.
3) The party holds [it]self out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards.
4) As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks [the party's] services.
5) In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence.
6) Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or [the seller's] agents.
Id., at 445–46. Courts have invalidated home inspection liability limitations for presenting “some or all” of these Tunkl factors. See e.g., Glassford 35 A.3d at 1050. In Russell v. Bray, the Tennessee Court of Appeals held a home inspection liability limitation violative of the public interest when it affected four of the six Tunkl criteria. 116 S.W. 3d at 8. A year later, the same court held a substantially similar clause violative of the public interest when three of the Tunkl criteria were present. Carey, 148 S.W.3d at 916–18. A Kentucky Court in an unpublished decision cited to this latter decision in voiding a liability limitation for meeting three of the Tunkl criteria. Mullins, 2010 WL 3447630. Helpfully, each of the Tunkl factors are followed by a footnote, identifying the situations based on which the factor was formulated.
In the footnote explaining this factor, the Court in Tunkl drew a distinction between “contracts which modify the responsibilities [of] a relationship which has been regarded in other connections as a fit subject for special regulatory treatment and those which affect a relationship not generally subjected to particularized control.” 383 P.2d at 446, n.9. Thus, whether the home inspector-customer relationship is suitable for regulation depends on the scope of the judicial inquiry. Do these “other connections” include regulations outside of the instant state?
At least one court thinks so. The Vermont Supreme Court in Glassford looked at home inspection regulations in other states to determine the business was suitable for regulation. 35 A.3d at 1050. In Tennessee, the regulation of inspectors of new homes led the Court to infer that the inspection of old homes was a “type of business that is generally thought suitable for public regulation.” Carey, 148 S.W.3d at 917. However, in a case unrelated to home inspections, the Ninth Circuit held this factor was not met because the relationship between the two parties was “not subject to regulation or governmental oversight of any kind. Am. Structural Composites, Inc. v. ICBO Evaluation Servs., Inc., 220 F. App'x 660, 662 (9th Cir. 2007).
Based on this precedent and the extent of home inspection regulations, many courts will deem the business suitable for regulation. However, in states that have not regulated home inspectors, a court, mindful of the legislative prerogative in matters of public policy, should not constitute itself the voice of the people.
Services of great importance to the public include places of public accommodation, hospitals, doctors, and those involving ultra-hazardous activities. See e.g., Tunkl, 383 P.2d at 446, n.10; Schlobohm v. Spa Petite, Inc., 326 N.W.2d 920, 926 (Minn. 1982) Additionally, contractual agreements in the aggregate, such as apartment leases, can be as important to society as common carriers. Tunkl, 383 P.2d at 446, n.10. Courts interpreting this factor also look to whether the industry is regulated to determine whether the service is important to the public. Carey, 148 S.W.3d at 917.
Courts have determined home inspections are a service of great importance to the public because they are an often-necessary step in a large purchase of personal import. Id; Glassford, 35 A.3d at 1051. These Courts reason inspections are often required to finance the home and few people have the knowledge to perform their own inspection. Id.; Russell v. Bray, 116 S.W.3d at 7. Additionally, home inspection statutes and regulations indicate its importance to the public. Russell, 116 S.W.3d at 7. For these reasons, these Courts have determined home inspections are a service of great importance and a practical necessity to some members of the public.
In so doing, these courts have stretched this factor out of its original proportion. For one, it seems redundant to look at regulations to determine whether the service is of great importance to the public when the first Tunkl factor explicitly asks whether the service is suitable for regulation. Two, unlike places of public accommodation, such as restaurants or bus routes frequented by members of the public, a home inspection is not a service used repeatedly by individuals. And, unlike a doctor or lawyer’s services, which are (hopefully) infrequently used, a home inspection does not have at stake a person’s life or liberty. It is an important step in a large purchase, but it is just a step in that purchase. And, in distinction to apartment leases, a home inspection contract governs one interaction and does not delineate parties’ behavior over a long period.
Most home inspection companies, like any business, hold themselves out as willing to perform the service for the public. However, in Carey v. Merritt, the Tennessee Court of Appeals stated that although the Defendant represented himself as a company, there was no other evidence to support the fact that he held himself out as “willing to perform services for any member of the public.” 148 S.W.3d at 917. Ultimately, though, this Court held the liability limit violated public policy under three other Tunkl factors.Id.
These factors, similar to an unconscionability analysis, focus on the disparity in bargaining power between the two parties. Particularly, these factors consider whether the Plaintiff could have used another home inspector; whether the service is so essential the contracting company can essentially dictate the contractual terms; and whether the consumer could have bargained away the exculpatory clause. See Carey, 148 S.W.3d at 918. The Courts holding home inspection liability limitations violate public policy have done so without applying these factors.
Courts have found that a home inspection places the home under the control of the home inspector and thus subject to his carelessness. Carey, 148 S.W.3d at 918; Glassford, 35 A.3d at 1052. In these cases, the home sales agreement was made contingent on a satisfactory home inspection. For example, in Glassford v BrickKicker, the home purchase agreement contained a provision allowing plaintiffs to back out if the inspection revealed defects. 35 A.3d at 1052. Similarly, in Carey v. Merritt, the Court noted that like the situation in Russell v. Bray, the sale of the property was conditioned on items included in the home inspection “being in normal working order.” 148 S.W.3d at 918. Thus, these Courts determined the house was property was placed under control of the home inspector, subject to his carelessness. Id.; Glassford, 35 A.3d at 1052.
This analysis stretches the definition of control. Contrast the home inspector to other services affecting the public interest, in which a member of the public or his property is placed under the control of the contracting party. Poor bus driving, a botched surgery, undercooked food can lead to personal injury. A bad lawyer can lead to a loss of liberty. In the case of a negligent home inspection, the injury suffered by the homebuyer is the omission of a defect in the home inspection report. However, the defect, or injury to the property, was already there. As the Court in Zerjal stated “plaintiffs' problems with their home were not a direct result of an alleged breach of [the home inspector’s] duty to inspect and report on the condition of the home.” 939 N.E.2d at 1073. A home inspection is a quality control check, a safeguard for the homebuyer and financing company. It is not a service that places property under the control of another, in a manner that his negligence can cause injury to the property. Therefore, courts should hold this factor does not apply because the property is not subject to the home inspector’s carelessness.
In sum, although Courts have held home inspection liability limitations invalid as against the Tunkl factors, there are counterarguments for applying these factors, suggesting that InterNACHI’s liability limitation may be valid under aTunkl analysis.
As alluded to above, the extent of home inspection regulations inform the Court’s decision on whether to hold a home inspection liability limitation against public policy. A few Courts have interpreted these regulations as expressing a clear public policy preference against liability limitations. Lucier, 841 A.2d at 913; Finch, 727 S.E.2d at 826.
As of 2017, sixteen states, including the District of Columbia, do not have any home inspection regulations.[6] Therefore, 35 states regulate home inspectors to some degree. Legislation ranges from a few general provisions to comprehensive statutory schemes such as Massachusetts’, which essentially creates a state agency regulating home inspections.
The provisions most indicative of the public policy towards home inspection liability limitations are insurance requirements and licensure requirements. See Lucier, 841 A.2d at 913; Finch, 727 S.E.2d at 826. Currently, over thirty states have licensure requirements.[7] These licenses may require inspectors to complete a certain number of hours training, pass an examination, or complete a certain number of home inspections.See e.g. N.J. Stat. Ann. § 45:8-68 (West). Twenty-five states require home inspectors to carry insurance in the hundreds of thousands of dollars for either general liability and/or errors and omissions.[8] Errors and omissions insurance would cover the damages resulting from “unreported defects” that are limited by InterNACHI’s liability cap. InterNACHI’s liability limitation also disclaims losses “in all cases” which general liability insurance would cover.
Although an insurance requirement may affect the enforceability of a liability limitation, the question of the liability limitation’s validity is somewhat moot. If the liability limitation is invalid in a state with an insurance requirement, insurance will cover the home inspector’s damages in cases of negligence.
In Lucier, the Court held an insurance requirement “evince[d] a clear expression of policy” that home inspectors shall be fully liable for their negligence. 841 A.2d at 914–15. The Court supplemented this “clear expression” through press releases included in the official legislative history: “Without insurance, a consumer's only recourse to recover losses is to sue the inspector and the inspection company.” Id. at 915.Similarly, the West Virginia Supreme Court in Finch v. Inspectech, LLC noted an insurance requirement as further proof the clause violated public policy. 727 S.E.2d at 835.[9]
However, Courts in New York have upheld liability limitations despite that state’s statutory insurance requirement. See Smith-Hoy v. AMC Prop. Evaluations, 52 A.D.3d 809, 810 (N.Y. App. Div. 2008). These Courts focus on New York’s precedent regarding liability limitations, which states “a clear contractual provision limiting damages is enforceable absent a special relationship between the parties, a statutory prohibition, or an overriding public policy.” Id. The insurance requirement evidently did not constitute an overriding public policy. Similarly in Illinois, where home inspectors are regulated, but not required to carry insurance, the Appellate Court in Zerjal reasoned that “[s]ince the legislature had the opportunity to prohibit or limit exculpatory clauses in home inspection contracts but did not, we decline the opportunity as well.” 939 N.E.2d at 1072–73.
Thus, despite the public policy inference that can be drawn from an insurance requirement, legislative silence is significant and often a result of compromise. Legislatures have explicitly invalidated liability limitations in the home inspection industry as in California. Within the state, that same legislature has probably invalidated liability limitations in other industries. Thus, the choice not to invalidate liability limitations in home inspections may be a conscious one.
Home inspection licensure requirements can lead a court to classify the home inspector as a professional or to impose a special relationship upon the home inspector-consumer relationship. See Lucier, 841 A.2d at 913; Finch, 727 S.E.2d at 826. Based off either classification, courts can then hold the liability limitation against public policy. In contrast, other Courts are reluctant to equate the home inspector-homebuyer relationship to a special relationship deserving of heightened protection. See Zerjal, 939 N.E.2d at 1073.
As alluded to above in the context of doctor-patient relationships, liability limitations are especially disfavored when they shield professional service providers from negligence. See Lucier, 841 A.2d at 914. Generally, professionals are held to the standards of conduct within their industry. Id. Thus, due to some professionals’ unique position in relation to the public, this standard of care cannot be contracted away in a liability limitation. Id.
In Lucier, the Court held the home inspection liability limitation as against “the state’s public policy of holding professional service providers to certain industry standards.” Id., at 913. The Court identified this public policy through precedent. An earlier New Jersey case invalidated a bank’s liability limitation because the investment advisors were “professionals who hold themselves out to the public as having special knowledge, labor or skill.” Id., at 914. The Court also analogized the home inspector-customer relationship to that of a doctor-patient due to the substantial disparity of consequences resulting from the negligence. “It would be indeed a hollow arrangement if a physician could charge $100 for an office visit and then, if, due to negligence, a diagnosis is missed, resulting in a catastrophic illness or even death, the patient's only recourse would be a refund of $50 of the original $100 fee.” Id. Thus, the Court determined the home inspector was a professional having “specialized knowledge, labor or skill and the labor or skill is predominantly mental or intellectual, rather than physical or manual.” Id. Additionally, the specific facts of Lucier enabled the Court to more easily categorize the home inspector as an professional. There, the inspector had an engineering degree and had performed thousands of inspections. Id., at 910.
Unlike much of the Lucier opinion, this analysis was not adopted by the Courts in Pitts or Glassford. The Lucier opinion defines “professional” so broadly that no one in an industry that required licensure or a certain amount of training (New Jersey requires 180 hours for home inspectors) could include a liability limitation in a contract for service. Furthermore, the consequences resulting from a negligent home inspection pale in comparison to that of a negligent medical procedure, or negligent engineering, which can result in death or serious injury. Finally, while performing a home inspection requires specialized knowledge, the course of required study is not as rigorous as that of a doctor or a lawyer, who endure years of graduate school. Nor is a home inspector required to graduate college, a practical prerequisite for other professions such as accountants or investment bankers. Lastly, a home inspector’s work is more physically rigorous than these other occupations. There are more analogues between a home inspector and a typical tradesman, say a plumber, than a home inspector and the traditional professional.
Thus, InterNACHI’s liability limitation should not be unenforceable under this public policy exception because a home inspector is not easily categorized as a professional.
In Finch, the West Virginia Supreme Court held a home inspection limitation of liability clause against public policy because it “absolve[d] a party of liability for failure to conform to a statutorily imposed standard of conduct.” 727 S.E.2d at 832. In so holding, the Court relied on two cases that had invalidated exculpatory clauses for conflicting with statutory standards of conduct. Id., at 830–32. In the instant case, the Court reasoned that provisions adopting “general standards of practice for the home inspection industry” defined the statutory standard of care. Id., at 833. The statute then detailed the various components of the home to be included in a home inspection. Id. Thus, based off statute and precedent, the Court determined the liability limitation conflicted with the state’s public policy of holding home inspector’s to a certain standard of care.Id.
The Court also held the liability limitation invalid because it exempted a tortfeasor from liability to a “member of a protected class.” Id., at 832. The statute’s language provided that the legislation was enacted “in order to protect consumers. Id., at 833. Thus, based off the same precedent that invalidated liability limitations for conflicting with statutorily standards of care, the Court also held the clause counteracted the legislative purpose of insulating homebuyers from the negligence of home inspectors. Id.
In contrast, the Court in Zerjal held the liability limitation did not affect the public interest. 939 N.E.2d at 1074. Like West Virginia, the Illinois legislature outlined home inspectors standards of conduct (albeit with less detail) for the purpose of consumer protection. 225 Ill. Comp. Stat. Ann. 441/1-5 (West 2017). However, the Illinois Appellate Court held that the home inspector-homebuyer relationship did not amount to a relationship warranting a “heightened status” of protection that would necessarily invalidate a liability limitation. Zerjal, 939 N.E.2d at 1074
Thus, as both Zerjal and Finch make clear, it takes more than the regulation of an industry to invalidate a liability limitation. The outcome in Finch appears to result from particular precedent that invalidated liability limitations for conflicting with a statutory standard of care and for failing to protect members of a statutorily identified class. And as Zerjal illustrates, absent such precedent, the relationship between the home inspector and consumer is distinguishable from other relationships warranting heightened protection.
Thus, in states without precedent invalidating liability limitations based on statutory standards of care, Courts should not hold InterNACHI’s liability limitation invalid for this reason. To do so would remove the freedom of the contracting parties to apportion their own liability.
The Court’s reasoning in Zerjal is useful in refuting the public policy exception applies to liability limitations in home inspection contracts. The Court reasoned that the “heightened status afforded to common carriers and employer-employee relationships is based on the protection of the public and to ensure that the carrier performs its essential and important duties.” 939 N.E.2d at 1074. The Court continued: “common carriers are responsible for their patrons' physical safety for which there is no second chance if a mistake should occur, and employers have the duty of protecting their employees while they are serving the employer's interests.” Id. In contrast, the duty of the inspector is to inspect the property and prepare a report. Any problems with the home preexist the report and are not a “direct result of an alleged breach of [the home inspector’s] duty to inspect and report on the condition of the home.” Id., at 1073. Thus, the Court held homeowners were not in a similar position to an employee or a patron of a common carrier because the homeowners “were in control of their own fate and could have gotten a second inspection or bargained for different terms.” Id.
In sum, courts should hold a home inspector does not owe a duty to the public that cannot be contracted away in a valid liability limitation for the following reasons. In a home inspection, the property is not placed under or subject to the home inspector’s control. The injury resulting from a negligent home inspection is the inspector’s failure to notice a preexisting problem with the property. Nor are the consequences resulting from a negligent home inspection typically as dire those resulting from the negligence of a bus driver, surgeon, or lawyer. Because home inspectors are not professionals in the same sense as doctors, nor is the home inspection industry a quasi-monopoly or common carrier, the public policy exception should not apply to home inspectors.
However, some Courts, based off regulation in the home inspection industry and precedent may hold a home inspection liability limitation violates public policy, depending on the language in the agreement.
Most Courts focus on two factors to determine the validity of a liquidated damages provision; (1) whether the damages resulting from a breach would be uncertain in amount or difficult to prove; and (2) whether the liquidated damages sum reflects a reasonable estimate of likely damages. See Watson v. Ingram, 881 P.2d 247, 249 (Wash. 1994); Glassford, 35 A.3d at 1052; Sutton v. Epperson, 631 So. 2d 832, 835 (Ala. 1993). In contrast to this approach, the Court in Zerjal treated the home inspection liquidated damages provision the same as a liability limitation. 939 N.E.2d at 1074.
In Glassford, the Court held the liquidated damages failed to meet the two factors regardinga liquidated damages provision. 35 A.3d at 1052. First, the determination ofthe damages “represent[ed] a routine application oftort damages rules.” Id. Second, the liability limit—the homeinspection fee—was not a reasonable estimate of the customer’s likely damagesresulting from a negligent inspection. Id.A Connecticut Appellate Court also held a liquidated damages provision invalidin a home inspection for similar reasons. Mattegat v. Klopfenstein, 717A.2d 276, 280 (Conn. App. 1998). In this case, the Court noted the damages hadalready been proven, the liquidated sum at $225 was unreasonable compared tothe $19,865 in damages proven at trial, and there was no intent to liquidatethe damages in advance because the liquidated damages provision was notdiscussed prior to the contract’s acceptance. Id.
Under the first factor, the damages resulting from a negligent home inspection would seem easy to quantify. For example, the damages resulting from an omitted roof leak would simply be the cost of repairing that roof leak. Although issues such as habitability are harder to calculate, these are typical consequential damages applied in tort damages cases. And, any uncertainty in placing the damages on the home inspector, seller, or constructor is a question of liability not a question of damages.
Secondly, especially in cases where the inspector has omitted multiple defects, the liquidated damages sum may not reflect a reasonable estimate of damages. For example, liability capped at $500.00 would not be a reasonable estimate of damages reaching into the tens of thousands of dollars.
In sum, when a client challenges InterNACHI’s limitation as a liquidated damages provision, the inspector should focus on the difficulty of proving actual damages. The inspector should point out that the limitation allows damages equal to 1.5 times the amount of the fee paid, and that the client had the option to pay a higher fee to remove the damages limitation.
InterNACHI’s liability limitation will probably not be held unconscionable in jurisdictions of first impression. With regard to the public policy exception, the home inspector-consumer relationship is distinguishable from the typical relationship deserving heightened protection.
[1] See Alaska Stat. Ann. § 08.18.085 (West 2017) (“Contractual provisions that purport to limit the liability of a home inspector to the cost of the home inspection report are contrary to public policy and void.”); Cal. Bus. & Prof. Code § 7198 (West 2017) (“Contractual provisions that purport to . . . limit the liability of the home inspector to the cost of the home inspection report are contrary to public policy and invalid.”).
[2] (Penalties included a $1,000 fine, license probation, and continuing education requirements).
[3] In Glassford v. BrickKicker, the Court analyzed substantive unconscionability under a similar framework as well as under public interest factors.
[4] (Perhaps in the Lochner era Courts might strike down this legislative provision as violating private contractual rights).
[5] Here, the Vermont Supreme Court’s approach in Glassford appears an outlier. However, while this Court used public policy to bolster its unconscionability argument, it never explicitly held the clause violated public policy.
[6] Colorado, D.C., Hawaii, Idaho, Iowa, Kansas, Maine, Michigan, Minnesota, Missouri, Nebraska, New Mexico, Ohio, Utah, Vermont, Wyoming.
[7] Alabama, Alaska, Arizona, Arkansas, Connecticut, Florida, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Washington, West Virginia.
[8] Alabama, Alaska, Arizona, Arkansas, Florida, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, West Virginia.
[9] Both courts also held the liability limitation violated public policy for other reasons discussed below.