10:23 PM (5 minutes ago)
New York State official legal opinion: Self Underwritten Warranties as promoted and encouraged by Kevin O’Malley and Warranty Management (or done on their own without an underwriting entity and without proper terms and conditions) are illegal.
(This email being forwarded to industry leaders that may be promoting in some way an unlawful service to inspectors unknowingly)
The same regulations, or at least substantially similar in their scope (as most have the same origin), exist and are enforced in most states and pretty much all populated states, a list of which we are happy to supply to any of you who inquire. Be advised that no inspector in these states should engage in these practices. Be advised that Warranty Management is not itself in violation of state laws but rather encourages inspectors to engage in insurance practices without proper licensure or underwriting and without any legal exemptions to such regulations, and that Home Owners Network (“HON”) regularly cross promotes said program and utilizes submissions to HON for said purposes. Exemptions they have attempted to claim, in error, have all been addressed at the bottom of this email directly from an official with the State of New York. One of the primary exemptions they have claimed erroneously has been that the inspectors did some sort of “service” to the property, which is not only specifically outside of the scope of an inspection but also untrue as defined by said exemptions and nothing an inspector does reduces such risk for future failure as specifically annotated below and reasonably concluded by common sense.
It should be additionally noted that not only do Inspectors deal with any consequences regulatory or otherwise, but Kevin O’Malley has insulated himself and his companies from any damages thereto by adding a line to their agreements suggesting in writing that any participant in their programs seek legal counsel to ensure it is compliant with their state laws and participants sign such a statement and take on any and all damages that may be incurred as a result of non compliance. Of course inspectors generally do not do so as far as we can tell, but when they do they are told it is not compliant other than by Warranty Management and their legal counsel, who has no background in insurance regulation and in internal documents (available upon request) admitted to not actually have ever looked into any specific state statutes which is at the very least reckless considering these issues are in fact regulated on the state level.
It is important for inspectors to utilize compliant warranty programs like those offered by Inspector Services Group and Residential Warranty Services. This is not the first time this issue has come up, regulatory authority notices are available by request from the states of North Carolina, Virginia, and Florida, and we are doing our best to accumulate these without involving any of the few dozen participants in these programs from Kevin that innocently got involved based on implicit endorsements offered by equally innocent associations, conference organizers selling Warranty Management booths at events, and various industry partnerships along with the incredible credibility and notoriety of individuals involved including Kevin himself with his almost unparalleled and impressive resume as well as attorney Joe Denneler. We are focusing our effort next to obtain such documents, without implicating any particular participant, in Georgia, California, Illinois, Texas, Nevada, Arizona, and Utah. We feel after these states have made such statements, as they will in accordance with their laws just as the previous states did as they leave little room for interpretation, that the likelihood of this matter really continuing any further will diminish completely.
The inspector’s name has been redacted who made this particular inquiry. He also is an innocent participant who simply followed the guidance of his attorney and received feedback from the State of New York and has arrived at the decision to utilize a compliant program as a responsible business owner should. Please respect his privacy as I have and his wishes not to grind any axe, but rather to promote knowledge of these issues and avoid disaster for potential victims of this Warranty Management program in states like his and around 30 others where most of these inspectors in the US do business.
I encourage each of you as industry leaders copied on this email to make any actions taken as a result of this information quiet, restrained, and for the benefit and protection of inspectors- not the embarrassment of any particular individual especially Kevin O’Malley or Joe Dennaler who we don’t know the true level of involvement here or whether their knowledge base actually led to an intentional wrong, and certainly not aimed at any inspector participants whom we hope will make prudent decisions prior to any regulatory actions be taken by any regulatory authority, which we will not be something we will be a party to and will certainly try to do anything in our power to prevent from happening. It should also be noted that changes to the program could be made to make it compliant in some or even all of the regulated states. Thus far Warranty Management has been unwilling to make such changes and having been informed of their lack of compliance on numerous occasions with state laws have chosen to ignore the issue, respond at times with bogus legal justifications from unqualified or complicit counsel, put inspectors in harms way, and ensure their own liabilities are eliminated through disclosures Inspectors sign that indemnify Warranty Management fully from any and all regulatory issues.
I would humbly suggest, as good stewards of the industry and as entities that wish not to be or to become liable for the complex compliance issues involved here, that any further promotions of Warranty Management or the concepts of inspectors engaging in insurance practices without demonstrated compliance, be halted until such compliance can be demonstrated beyond the words and statements of their own counsel who has been proven incorrect in his legal justifications at every challenge (you’ll see below in Matthew Yantzer’s responses paragraphs clearly written by an attorney but citing inspection regulations when asked directly about insurance issues).
Thank you for your attention to this matter and feel free to respond with any questions you may have. Either myself with nearly two decades of service contract and risk management experience or my full time, on staff compliance attorney and one of only three in the world we are aware of that focuses primarily on service contract/warranty issues will ensure your questions are answered with extreme accuracy and proper citations. We are happy to submit full copies of the various state regulatory issues and statutes as well as documents demonstrating our compliance with the various state laws, as examples, to show where these programs from Warranty Management are lacking.
Enclosed: Email to WM from Inspector, Response to questions from New York State responded to by Warranty Management directly, official legal opinion from New York State (in that order).
P. Nathan Thornberry
Begin forwarded message:
From: (Inspector Name Redacted)
Date: November 30, 2016 at 9:55:58 PM EST
To: Nathan Thornberry <firstname.lastname@example.org>
Cc: Matt Yantzer <email@example.com>, firstname.lastname@example.org
Subject: Re: DFS OGC: Warranties provided by Home Inspection Company or Inspector
Last year at 3 Days of Secrets revealed with Mike Crow we met and I looked at your program. I later signed up at your encouragement, but I had second thoughts when Nathan Thornberry told me that the program was non compliant in most states including the state of New York. I took his advice with a grain of salt because he is a competitor, but he was quite specific in the way in which it violated the laws.
With the participation from Matt Yanzer at your company Matt and I began to do due diligence with the regulatory authorities in my state. I made the inquiry, they had some questions, and I sent those questions both to Matt as well as to Nathan Thornberry for responses. Both responded quickly and I appreciate that, and Matt indicated that his information came directly from your attorney Joe Dennaler. I sent those responses without edits to the State of New York and they continued their processes.
It took around 8 months, but I finally got a response from a Senior Attorney with the New York State Department of Finance and the insurance regulators, and much to my surprise they came back with a response that was almost word for word what Nathan Thornberry said they would
I have included the initial inquiry, answers supplied by Matt that he said came from Joe Dennaler and the response from the State of New York and the accompanying email strings for your review.
I cannot begin to describe to you the disappointment and anger I am feeling at this moment. For a company headed up by an inspection industry legend and highly recommended by many of the MIC coaches to be encouraging inspectors like myself here in New York to participate in a program that violates state rules and puts myself and my livelihood in harm’s way in the form of fines and even potentially the loss of a business license is completely beyond my comprehension.
I don’t know exactly where to go with this other than to inform you and others promoting your program that it is definitively non-compliant with New York State law as well as other states with similar regulation unless you have a better solution to make sure other home inspectors are not in harm’s way and that this matter is corrected.
I have CC’d Matt Yanzer and Nathan Thornberry on this email because they both provided me with assistance in making this inquiry with New York State.
The string of emails to and from Ms Kluger of NYS amd Matt Yanzer are below.
Your prompt response is appreciated.
On Thu, Feb 11, 2016 at 6:39 PM, wrote:
Dear Ms. Kluger:
Thank you for giving me the opportunity to address your questions as per your e-mail to Mr. (redacted) on which I was copied. The warranty contemplated by this inquiry is a professional services warranty related to professional home inspection services. The home inspector warrants that it and each of its employees, consultants and subcontractors, if any, that it uses to provide and perform the professional home inspection services has the necessary knowledge, skills, experience, training, qualifications, and resources to provide and perform the services in accordance with applicable standards of practice for home inspectors in New York. The warranty would further provide that the professional home inspection services will be performed for and delivered to the inspector’s client in a good, diligent, workmanlike manner in accordance with applicable standards.
I’ve taken the liberty of addressing each of your questions as they were stated. If you need more detailed information as a result of these responses please do not hesitate to send me your questions. It is our goal to provide you with whatever information you need to consider Mr. (redacted) original inquiry regarding using a warranty as part of his home inspection business.
Please send me a copy of the underlying inspection contract. Please see attached copy of Mr. (redacted) home inspection contract. Generally modifications are required to a home inspection contract where an inspector is offering his/her own professional services warranty as most home inspection contracts include a disclaimer of any express or implied warranties. The inspection contract would likely contain a provision indicating that the only warranty being given is the professional services warranty that is the subject of this inquiry.
I would also like to have your detailed description of exactly what work will be done by the home inspector to inspect the systems/components that are covered under the ____ Day Limited Professional Services Warranty (the “Warranty”). Home inspections are a regulated professional service in New York. Home inspectors are licensed by the Department of State. Home inspectors may only report on readily accessible and observed conditions as outlined in Article 12 B of the Real Property Law and the regulations promulgated thereunder including, but not limited to, the Code of Ethics and Regulations and the Standards of Practice, 19 NYCRR § 197-5.1, et seq. Home inspectors are not permitted to provide engineering or architectural services. Home inspectors cannot determine a property’s boundary lines or encroachments, easements or any limitations of use of the property. Home inspectors cannot determine compliance with regulations, codes, laws or ordinances. Home inspectors cannot determine the market value of a property or its marketability. Per the regulations previously cited, a home inspection means the process by which a home inspector observes and provides a written report of the observable systems and components of a residential building including, but not limited to, the heating system, cooling system, plumbing system, electrical system, structural components, foundation, roof, masonry structure, exterior and interior components or any other related residential building component as recommended or required by regulation to provide the Client with objective information about the condition of the residential building. A home inspection does not include an inspection for radon or pests. Inspect means to visually examine any system or component of a building in accordance with the regulations using normal operating controls and opening readily operable access panels. Observable means able to be observed at the time of the inspection without the removal of covering, fixed, finished and or stored materials. The home inspection report, per the regulations, shall: (A) clearly identify which systems or components of the residential building were observed; (B) identify those systems and components observed that, in the professional opinion of the inspector, are deficient, not functioning properly and/or unsafe; (C) disclose those systems and components which are/were designated for inspection pursuant to the regulations and are/were present in the property at the time of the inspection but are/were not inspected and the reason(s) they were not inspected; and (D) recommend further evaluation by a qualified professional, tradesperson, or service technician beyond that provided by the inspector where necessary. Essentially, a home inspection is a visual inspection of the readily accessible systems and components of a home to determine whether or not they are deficient. That is the professional service for which the warranty would be offered.
What is the minimum and maximum number of days of coverage that may be provided under the Warranty? Inspectors generally provide warranties with a term of ninety (90) to one hundred twenty (120) days after the inspection or thirty (30) days after the homeowner takes possession of the property, whichever is longer. The warranty contemplated by this inquiry is not similar to a separately purchased home warranty that acts as a form of insurance. Coverage is not predicated on the happening of any fortuitous event, any contemplated future occurrence or event, or any agreement by Company to indemnify the Client against loss or damage to any system or component of the inspected property. As systems and components of a home can change, and as this warranty is not contemplated as being a safeguard against failure for wear and tear, the coverage period is generally limited in scope.
What is the maximum coverage amount that may be provided under the Warranty? The warranty coverage amount is generally stated as a portion, or multiple, of the fee for the professional home inspection services. The contemplated warranty is entirely incidental to the home inspection services, and since the warranty does not attempt to pay a repair or replacement charge for any deficient system or component originally inspected, the amounts general offered as reimbursement are related entirely to the inspection cost. As the inspection fee relates to several systems and components, the reimbursement is tiered to reflect the portion of the inspection fee, or a multiple thereof, that is attributable to the individual system and component that later becomes the subject of a complaint by a client of the inspector. However, if it would be permissible, we would like to explore the option of having the warranty provide payment to the inspector’s client based on the value of repair or replacement of a system or component where applicable. We do not want to create a service contract as that is defined by New York law, so if providing repair or replacement value as part of the warranty triggers the application of the laws related to service contracts we would not go in that direction.
Will the home inspector charge the client homeowner for the Warranty, either separately or as part of its home inspection fee? No. Rather, this professional services warranty is offered as merely incidental to the business of the home inspector in performing property inspections, and the home inspector would not be engaged in the making or issuance of warranties, guarantees or surety agreements as a line of business. Similarly, the contemplated warranty is not intended to be a service contract, as it is not issued for a separate or additional consideration.
If the Warranty is breached, what benefit or compensation can the client expect to receive from the home inspector? This warranty is not intended to be a service contract and is not issued for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and tear. This warranty is not insurance of the risk that any inspected system or component will remain free from defect for any period of time. The inspector’s obligation for breach of this warranty would be to (a) use commercially reasonable efforts to perform the home inspection services in a manner that conforms to the warranty, or if the services cannot be repeated, (b) make payment to the inspector’s client in the amounts specified in the warranty for the nonconforming services. As you are likely aware, since a home inspection is generally done within the confines of an inspection contingency period contained in an agreement of sale of property, when an issue arises for an inspector’s client it is usually after the client takes possession of the property and therefore a subsequent home inspection is not an appropriate means of satisfying the inspector’s obligation under the warranty. This is why there is also an option to make a specified payment to the inspector’s client to compensate the client for the non-conforming services.
I hope this e-mail provides you with the information you requested. As you indicated that you will likely have more questions, I am available at your convenience to further address any questions or to discuss the contemplated warranty in any way. Thank you for considering this inquiry.
Attached is a pdf of my current pre inspection agreement with a paragrapgh at the end specifically requested by Residential Warranty Services http://residentialwarrantyservices.com. They currently allow home inspectors to offer this warranty to customers in NYS and they pay the claims if any arise.
Warranty Management, LLC.
On Wed, Feb 10, 2016 at 9:25 AM, Kluger, Barbara (DFS) <Barbara.Kluger@dfs.ny.gov> wrote:
At this point I’d like to get some background information from you and your answers to some preliminary questions on the home inspection warranty you are asking about. I will no doubt have more questions once I review your responses.
Please send me a copy of the underlying inspection contract. I would also like to have your detailed description of exactly what work will be done by the home inspector to inspect the systems/components that are covered under the ____ Day Limited Professional Services Warranty (the “Warranty”). What is the minimum and maximum number of days of coverage that may be provided under the Warranty? What is the maximum coverage amount that may be provided under the Warranty? Will the home inspector charge the client homeowner for the Warranty, either separately or as part of its home inspection fee? If the Warranty is breached, what benefit or compensation can the client expect to receive from the home inspector?
NYS Department of Financial Services
Sent: Tuesday, February 09, 2016 4:30 PM
To: dfs.sm.OGC.CATS; Kluger, Barbara (DFS); Matt Yantzer
Subject: Re: DFS OGC: Warranties provided by Home Inspection Company or Inspector
I would like to introduce you to Matt Yammer of Warranty Management. He along with Warranty Management’s company attorney will be able to answer any follow up questions you may have as well as clarify any information.
Looking forward to a decision on this matter.
On Feb 9, 2016 2:33 PM, <OGCCATS@dfs.ny.gov> wrote:
RE: Warranties provided by Home Inspection Company or Inspector
The Office of General Counsel at the New York State Department of Financial Services hereby acknowledges receipt of your inquiry dated FEBRUARY 9, 2016 by Email. All inquiries are assigned promptly and responses are issued in a timely manner to the very best of our ability given the nature of the inquiry, the research involved and the volume of correspondence received.
Your inquiry has been assigned to Barbara Kluger and given the following reference number OGC-2016-237997. Unless you have new information relevant to the resolution of your inquiry, please allow at least 3 weeks from the receipt of this letter before attempting to inquire about the status of your anticipated response. You may contact Barbara Kluger via email at Barbara.Kluger@dfs.ny.gov or by phone at 212-480-7211.
If you have any other questions, you may contact me at 212-480-5253. Please be aware that many of the Opinions of the Department of Financial Services are now available on our website at www.dfs.ny.gov.
Very truly yours,
New York State Department of Financial Services
One State Street
New York, NY 10004-1511
Kluger, Barbara (DFS)
Nov 18 (12 days ago)
to me, Michelle
You have asked whether the proposed home inspection agreement (the “Agreement”) that (redacted), a New York licensed home inspection company, wishes to issue in New York constitutes a warranty such that the making of the agreement would not constitute the doing of an insurance business or service contract in New York.
(Redacted) employs home inspectors to conduct home inspections for a fee. The Agreement would be issued to (redacted) clients who have hired (redacted) to inspect a home. Under the terms of the Agreement, (redacted) would be obligated to pay claims in the amounts specified for failures of covered systems or components in the home that do not operate or function after the home was inspected when the report stated that they were working. The covered items include plumbing; electrical systems; built-in appliances; heating, ventilation and air conditioning; structure; garage; and roofs. Even though the contract states that it covers only those systems or components where the company determines that they were functional at the time of the inspection, the systems and components are only visually inspected by the home inspector. The terms of the Agreement address loss to covered systems and components from nonconforming services should any of (redacted) ’s employees, consultants and subcontractors not have the necessary knowledge, skills, experience training qualifications and resources to do the home inspection in accordance with industry standards and applicable laws and regulations. A failure following the home inspection of a covered system or component may be completely unrelated to the skill, or lack thereof, of the home inspector. It could be that the system or component just happened to cease functioning after the inspection was conducted due to ordinary wear and tear or because someone intentionally mishandled it. A separate fee would be charged for each covered system or component.
Although the Insurance Law does not define a “warranty”, in general, a warranty relates to the nature or efficiency of a product or service. The Department has previously opined that where the maker of the contract has a relationship to the product or service, or does some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by Insurance Law section 1101(a), then the contract is a warranty. Where there is no such relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business. If the maker is not an authorized insurer, then the maker would be violating Insurance Law § 1102. Even where the contract is truly a warranty, the making of such an agreement would nonetheless constitute the doing of an insurance business unless it was made as incidental to any other legitimate business or activity of the warrantor. See, Opinion of the Office of General Counsel No. 08-04-39 (April 30, 2008) http://www.dfs.ny.gov/insurance/ogc02008/rg080439.htm .
Applying this analysis to the Agreement, although the Agreement purports to warrant that the home inspection company or home inspector will meet the stated standards for performing the home inspection, it actually covers the risk that specified property in the home being inspected that the inspector visually inspects will continue to operate for the period of time the Agreement is in effect. The visual inspection of the property in the home is not enough to significantly reduce or eliminate the risk that the property will fail to be operable during the coverage period. Thus, the agreement is an insurance contract, the issuance of which would constitute the doing of an insurance business under Insurance Law §1101(b) (1)(B) because it is being done as a vocation by (redacted), and not as merely incidental to its business of conducting home inspections, which requires that (redacted) be licensed as an insurer by the Department.
Note that Insurance Law Article 79 provides an exception from Insurance Law § 1101 with respect to contracts to perform the repair, replacement or maintenance of property, or indemnification thereof, due to a defect in materials or workmanship or wear and tear. Under Insurance Law §7903(a), the marketing, sale, offering for sale, issuance, making, proposing to make, and administration of service contracts by any provider, administrator or other person is exempt from being viewed as the doing of an insurance business provided that the service contract provider registers with the Department and complies with Article 79 and regulations thereunder.
However, if (redacted) wishes to register as a service contract provider, the terms of the Agreement would have to be modified. In its current form, it does not constitute a service contract as defined in Insurance Law § 7902(k), because it does not provide that (redacted) is obligated to perform or indemnify for the cost of repair, replacement or maintenance of the home’s covered system/components due to a defect in materials or workmanship or wear and tear. Currently, the benefits afforded under the Agreement are triggered by a failure due to any cause after the home inspection report found them to be in good working condition.
Nov 18 (12 days ago)
to Barbara, Michelle
Thank you very much for providing a legal opinion on the issue of home inspectors providing warranties in the state of NY.
As a small business owner, it’s very difficult to navigate what is and what is not allowed. Knowing that NYS has attorneys to define the law gives me peace of mind.
I really appreciate the time that you personally took to keep me in the “loop” during this lengthy process.
Kluger, Barbara (DFS)
Nov 18 (12 days ago)
to me, Michelle
You are quite welcome, Mr. (redacted). I am glad that this was helpful to you.