I’m intimately familiar with a lawsuit against a CREIA home inspector from a few years ago. We’ll call him “Sir Paul.” Sir Paul lived down the street from me, and we would occasionally carpool to the CREIA/ASHI dinner meetings. He had no E&O insurance and was named in one of those broadcast lawsuits. He asked for a good real estate attorney and ultimately used mine. In going over everything with him, there was absolutely nothing he could have done to prevent the lawsuit because everything that the plaintiffs complained about was either expressly discussed, expressly disclaimed, or expressly recommended for further evaluation because of the conditions at the time of the inspection. The plaintiffs had even created a real nice Excel spreadsheet with four columns:
Item noted in report
Ask seller to take care of
We will take responsibility for
Need further evaluation
The few items complained about against him were listed in either the “we will take responsibility for” or the “need further evaluation” columns. Well, duh.
Both Realtors are top Realtors in San Diego County.
The pest control inspector settled for $3,500 out of court and is no longer in business.
Sir Paul settled for $32,500 out of court and is no longer in business. His expenses with my attorney were something like $53,700. And that was just to settle out of court!
The buyer’s agent settled for $55,000 out of court. We don’t know her attorney expenses, but she had E&O through her brokerage.
The seller’s agent settled for $255,000 out of court. I understand that this particular agent makes about $40 million a year and simply sets aside 10% of his gross income into a slush fund to pay off claims. That’s one way to do business, not my way, but one way nonetheless. I’m sure you’ve heard his name and probably know of him very well.
The seller had no money to settle out of court so the lawsuit went on. I believe they had a jury trial sometime around August 2006 but I’m not real sure about that.
For those who settled out of court, several things had to occur. First everyone in the lawsuit, or left in the lawsuit, had to approve the out of court settlement for the one leaving. Second, the papers that Sir Paul signed stated that he admitted no guilt and that plaintiffs gave up any and all rights for any additional lawsuits in accepting the settlement. That’s important to defendants who settle out of court and is why Mr. Seller’s Agent above can work the way he does; he never has to admit any guilt. Third, the settlement papers always seem to state that everyone agrees that a settlement is preferable to going to trial in order to save the time and expense of such a trial. Duh.
Sir Paul had gotten a second mortgage on his home, but his new job didn’t pay him as well and ultimately he went into foreclosure with two trust deeds on the house. So the lack of E&O insurance forced him out of business and caused him to lose his home. The cost of E&O for one person (about $2,500 per year) is a very small price to pay for the opportunity to keep one’s job and home.
If Sir Paul would have had E&O insurance with a $5,000 deductible, Sir Paul would have been out $5,000 instead of the $86,000 that he was out. Sir Paul did around 300 inspections a year, so a mere $8.33 tacked on to each inspection each year to cover his E&O insurance overhead would have allowed him to stay in business and keep his home (“Sir Paul” also has a wife and two young daughters). His Clients would not have noticed an extra $10 tacked on to each inspection.
Now if Sir Paul would have had E&O insurance, after $5,000 has been spent (Sir Paul’s deductible), most insurance companies will excuse the defendant and let him get back to work, calling on him only if absolutely necessary. A good insurance company that is in business to make money knows that settling out of court saves time and expenses and that an out-of-court settlement involves those documents that state that the defendant admits no guilt and the plantiff gives up all future claims.
Here in San Diego, as I’m sure you’re aware, attorneys demand a mere $5,000 retainer just to take a case, although you can find some retired attorneys working for $50 an hour on craigslist to pay their gas bills. My attorney currently charges $285 an hour and her junior attorneys are $235 an hour down to $185 an hour, with her paralegals charging $135 an hour. Charges are about triple that for a court trial, and most jury trials last at least one day. There also is preparation for the trial, including pleadings, discoveries, admittances, etc., all of which have to be researched and written in legal terms. Additionally, if the defendant wants to go to trial, the defendant has to pay the cost of the jury trial. Of course, one can get a waiver, but the Court doesn’t look kindly on a waiver if one can still be working, has equity interest in real property, etc. The most recent statistic I saw, which I think was back in February, was that a one-day jury trial in San Diego County Superior Court (which is where a home inspector trial would take place in most cases due to common complaints of gross negligence, professional negligence, incompetence, etc., things that could result in punitive damages) would cost a minimum of $235,000. One day of my attorney working on my behalf would cost me $2,280. And it’s going to take him at least one day just to read over the plantiff’s complaint. I wish someone would pay me $2,280 to read for eight hours!
If an insurance company has the opportunity to settle a case out of court for, say, $100,000 instead of paying all the attorney fees for discoveries, pleadings, etc., as well as the $235,000 for the jury trial, why wouldn’t it? It has no bearing on the defendant because of the way out-of-court settlements are structured. Granted, the defendant’s pride might be injured, but a few margaritas will help him get over that. Remember that a jury trial could also result in punitive damages. If readers don’t understand punitive damages, do a Google search. So an award of, say, $250,000 on the complaint could also come with punitive damages of several more hundreds of thousands of dollars, or even millions of dollars.
The inherent risk of a jury trial is too great for a good insurance company to take it to trial instead of settling out of court. Of course, the plaintiffs and other defendants have to approve the settlement, so there is the possibility that even a good insurance company will get taken to court because of stubbornness on someone else’s fault. Remember, though, that these typically will be civil trials, not criminal trials, so there really is nothing to prove by anyone. The plaintiffs are merely looking for a redistribution of wealth through the American legal system—note that I did not say “justice system” since there rarely is any justice in the civil system, sometimes not even in the criminal system (witness O.J., not to mention all the DNA reversals of death row inmates in the Great Nation of Texas).
I’m sure you knew all that, but I understand the gist of your question.