Risk reward inadequate for inspectors

By Richard Hargreaves, Partner, Wynn Williams, New Zealand

I wouldn’t want to be a residential building inspector. It’s too risky for me.

Because you’re reading Resolve, I suspect you wouldn’t want to be a residential building inspector either – it’s too risky for you, too.

Over the past decade, I’ve acted for many inspectors defending liability claims. Ten years ago, they were underwritten with leading domestic insurers. Then my defence instructions came from smaller insurers, then from offshore, and finally from inspectors themselves who no longer had insurance. This isn’t a gripe about insurers not offering cover; it’s also too risky for them.

The issue is the risk/reward balance for inspectors in New Zealand. Last year’s High Court decision in McFarlane v Informed House Inspections [2023] NZHC 934 illustrates the point well. Informed House Inspections charged the vendor of a house $1,200 for a report. That’s expensive. Most pre-purchase reports tend to cost about $400–$600.

The purchaser relied on the report and then sued the inspector because the report was wrong, and the house leaked. The inspector was found personally liable for $524,000 plus interest. The purchaser’s lawyers acted ably for their client and the court applied the current law correctly. There can be no real legal complaint about the decision.

The problem is that, at some point, there won’t be any building inspectors left.

Huge exclusions

I’ve been emailing a building inspector client whose general liability and professional liability policies are up for renewal. His broker can’t renew cover for him. He’s currently insured via Australia, but the agency is not offering terms again. No other company will touch him because he has a claim on foot.

He’s faced with the choice of continuing uninsured or leaving the industry. I’m guessing the majority of New Zealand building inspectors are uninsured. Those who have cover might have huge exclusions (most commonly for any leaky building claims).
That’s unsatisfactory for two reasons:

• Inspectors are leaving the industry because they can’t accept the risk of continuing to operate. That reduces the pool of inspectors and drives up prices and wait times for reports.

• When inspectors do make a mistake, those who have suffered have no real recourse. Letters of demand to building inspectors are likely to be met with liquidation of their businesses and ‘no asset’ statements.

We’re currently in the golden age of building inspector liability (for plaintiffs). But there is a social need for building inspection reports. People need access to inspectors to assess the houses they want to buy. If the industry is going to survive, something needs to change.

Loose observations

I can’t offer any solutions, only some loose observations. The following will be opposed by my professional colleagues who specialise in leaky building work for plaintiffs. I may be dismissed as a lunatic and a nut bar, however:

Observation 1: The legal reality of the Fair Trading Act 1986 is that inspectors take on an uninsurable risk, with no upper limit of liability, for (typically) less than $1,000 a report. There is no opportunity to contract out. There is no fully effective way of limiting liability solely to the person commissioning the report.

Observation 2: Inspectors visit a property for a short time, often in dry conditions, and seem to be expected to identify all defects that may manifest in the next six years. Even if the defect did not exist at the time of the inspection, they are expected to identify the possibility of a defect emerging in the future.

Observation 3: The ‘corporate veil’ doesn’t exist for most building inspectors. If their name is on the report, they’re generally personally liable because they are directors and shareholders in their own company. Many don’t believe me when I tell them having a limited liability company does not magically stop all claims.

Even if there are excellent defences available to a building inspector, a speculative or weak claim against them can easily wipe out a year’s profit in legal fees alone, plus the stress and time spent defending claims. Admittedly, inspectors don’t help themselves. Many have retired from construction jobs and are not as legally savvy as they should be. Some reports are inadequate. Terms and conditions are not well drafted. 

Industry adaptation

If inspection is to be a viable business, either the law needs to change for building inspectors’ liability or the industry needs to adapt. There’s no chance the law will change any time soon, so what could the industry do to make itself less risky and therefore insurable?

There is room for a strong industry group to take the lead. The New Zealand Institute of Building Inspectors (NZIBI) does a good job and is in the best position to assist members to become better risks for insurers. Steps that could be formalised include:

• prescribing terms and conditions that all members must use
• increasing auditing/quality control on members’ reports
• adopting enforced CPD requirements for membership, with prescribed modules.

For the insurance industry, would these steps be enough to offer inspectors affordable cover? If not, would some form of mutual insurance fund for NZIBI members be realistic?

Unfortunately, there’s no stirring conclusion. It’s a tricky situation. As I said, currently I wouldn’t want to be a building inspector. But I do want building inspectors to exist when I next buy a house.