Home Inspector Sued for Referring Subcontractor

The following is a real home inspection claim from InspectorPro Insurance’s archives. To protect the insured’s identity, all identifiable characteristics from this mold damage claim—including names and associations—have been altered or removed.

Agent referrals can make or break your inspection business. Back in 2001, a study by the National Association of REALTORS® and ASHI reported 69% of home buyers chose their home inspectors based on their REALTORS’ recommendations. More recently, home inspectors reported as much as 80% of their business coming from agents. That’s a vast majority of customers.

So when real estate agent Jenny Jones called home inspector Nash Whitmore, he picked up on the first ring. “Hey, Nash! I have a favor to ask: Do you know anyone who does sewer camera videos?” Jones asked. “We’re in a tight contingency period, and I need someone fast.”

Whitmore didn’t do sewer scope inspections himself, but he did have a contact: the Sewer Sleuth. He called them on behalf of the real estate agent, set up the appointment, and then invoiced the agent’s client $280. 

He paid the Sewer Sleuth $180 for their services and took $100 for his referral, as they’d agreed to over the phone. In a few quick phone calls, Whitmore had supported his referring agent and made some extra cash.

Nearly two years later, Whitmore was sued for fraud and negligent misrepresentation. It was all because Jones’ homebuyers had a defective sewer line that needed to be replaced, and Whitmore had made the referral.

Why is a subcontractor agreement important?

As a generalist, a home inspector like you can’t identify every property defect. Many ancillary services and comprehensive evaluations require specialized knowledge or licensing and fall outside your standard inspection scope. That’s why referring clients to specialists can be so valuable.

Whether they’re sewer scopers or mold samplers, code inspectors or roofers, dedicated experts can give clients the complete picture they’re looking for. Knowing which specialist to call and providing a referral can make inspectors all the more valuable to their clients and agents. 

But, as Whitmore discovered, making referrals can also increase your liability. Without a solid subcontractor agreement in place, you could be putting your business and your insurance coverage at serious risk.

What is a subcontractor agreement?

So, what is a subcontractor agreement, exactly? It’s a legally binding document that defines the working relationship between you (the inspector) and another service provider (the subcontractor) you bring onto jobs.

Note that you need a new pre-inspection agreement for every job you render for a client, even if you’re inspecting for the same clients or examining the same property multiple times. However, you can issue one subcontractor agreement between you and the subcontractor for all the jobs you refer them to. It just needs to be updated if any of the details change, like the services they render or the payment you receive.

What should be in a subcontractor agreement?

Here are a few of the important sections in a standard subcontractor contract:

Scope of Work: Define what services the subcontractor will render and performance expectations. Ambiguity here creates disputes later.

Independence: Clearly establish that the subcontractor is an independent contractor, not an employee. State that they control how they perform their work, use their own tools and equipment, and pay their own taxes. 

Payment Terms: Defines how people get paid, including referral fees.

Liability and Indemnification: This is where most claims get resolved before they become lawsuits. A subcontractor agreement should include an indemnification or hold harmless clause stating that the subcontractor agrees to hold you harmless for claims arising from their own work.

Insurance for Subcontractor Requirements: To ensure they can cover claims, outline the minimum coverage required and make submission of a certificate of insurance for subcontractors (subcontractor COI) a condition of starting work. You may also consider utilizing an additional insured endorsement, which would add you to their insurance policy. Using uninsured subcontractors isn’t worth the claims risk. Learn more about insurance for subcontractors at inspectorproinsurance.com/insurance-101/subcontractor-insurance-requirements.

For home inspectors, a well-drafted subcontractor service agreement is more than a formality. If a subcontractor you referred or hired makes an error, like the Sewer Sleuth did, a client may hold you responsible—even if you didn’t perform that service yourself. 

Without a clear subcontractor contract establishing the boundaries of each party’s liability, you may find yourself named in a claim.

What consequences might I face with an inadequate subcontracting agreement?

You might be thinking, “An agreement with my subcontractors sounds nice, but they’re good at their jobs, and we’re all busy. Do I really need a subcontractor agreement?”

Whitmore isn’t our only client who’s received claims for referring subcontractors’ work, and he won’t be the last. 

While not as common as claims for your own services, claims over subcontracted services still happen. At InspectorPro, we’ve seen both general liability and errors and omissions claims against home inspectors for services rendered by subcontractors. And with ancillary services expected to grow more popular in the home inspection industry’s future, we predict a potential uptick in these claims.

Without ironclad subcontractor agreements in place, you may face both immediate and long-term consequences, like:

Insurance claims against your business.

Immediate financial loss addressing claims.

Eroding trust between you and your clients and agents.

Damage to your reputation.

In some of the claims we see, the ripple effect from an inspector’s bad subcontractor referral continues to hurt their business even after the claim closes. Properly managing your subcontracting relationship can mitigate some of the less obvious, long-term consequences of a bad referral.

How can I ensure I’m using the right subcontractors?

Most of the inspectors we insure have a gut feeling about who to trust. 

It starts with the paperwork, including licenses and certifications to perform the services they’re contracting, and the contract with the subcontractor. We recommend using a “trust but verify” approach, checking paperwork annually to ensure there aren’t lapses in your subcontractors’ credentials.

But it’s also about how the subcontractor presents themselves. Consider their communication style and whether they seem genuinely invested in doing a good job. You learn to spot the ones who are in it for the long haul, versus those just looking for a quick gig.

If I use a subcontractor, do I still need an endorsement?

Whitmore didn’t perform the sewer scope inspection; the Sewer Sleuth did. But Whitmore still needed a sewer scope endorsement on his policy. Why?

Most insurance policies exclude ancillary services, like sewer scope inspections, because they go beyond the scope of a standard inspection. While in a perfect world the Sewer Sleuth would pick up the claim against Whitmore, since it was for the Sewer Sleuth’s own services, it didn’t happen that way. Whitmore filed the claim with us so we could respond to the attorney’s demands. 

Thankfully, Whitmore had a sewer scope inspection endorsement, which added sewer-scope-related coverage to his policy. So even if you are subcontracting a service out, we always recommend carrying the related endorsement to secure claims coverage.

What are common issues with subcontractor insurance?

Be warned: One major vulnerability to your insurance policy is that its protection only extends to your clients with whom you have a signed pre-inspection agreement. If you receive a claim for a referral you provided, but you didn’t perform an inspection for the client yourself, you likely would not receive coverage for the claim.

For example, Joe Stevens referred his favorite mold sampler, Mold & Behold, to an agent and their client. Stevens didn’t perform a home inspection for that client. After the client moved in, they discovered mold and sued both Mold & Behold and Stevens for failing to identify the elevated levels. Stevens’ home inspector insurance would not respond to the claim because Stevens did not have an agreement with the client.

Knowing your inspector insurance policy’s limitations, you may decide not to refer subcontractors unless you, too, are performing a service for the same client. What you do is up to your own risk tolerance.

How do I secure the right subcontracting agreement for my business?

If you’re like most inspectors, you likely rely on generic subcontracting agreement templates you’ve found online. If you’ve had some close calls, you may have realized those templates don’t cover the nuances of your inspection business, and you might have started modifying them.

But you’re no lawyer, and neither is your subcontractor. And there’s a much greater emphasis now on ensuring client interests are protected, even when you’re using a subcontractor. That means subcontractor agreements have to be more robust and specific.

That’s why InspectorPro put our claims team to work crafting a subcontractor agreement catered to home inspector referrals. We integrated inspectors’ experiences, past claims, and case law to author a subcontractor agreement fit to protect you the way it should. And we offer it free of charge to all our insureds. 

Contact your InspectorPro broker or fill out the form on our pre-inspection agreement page to secure your copy. 

Stephanie Jaynes is the Marketing Director for InspectorPro Insurance, which offers ASHI members exclusive benefits through its program: InspectorPro with the ASHI Advantage. Through risk management articles in the ASHI Reporter and on the InspectorPro website, InspectorPro helps inspectors protect their livelihood and avoid unnecessary risk. Get peace of mind and better protection with InspectorPro’s pre-claims assistance and straightforward coverage. Learn more at inspectorproinsurance.com/ashi-advantage.

Note: The Managing Risk column with InspectorPro Insurance provides home inspectors with tips to protect their businesses against insurance claims

Opinions or statements of authors are solely their own and do not necessarily represent the opinions or positions of ASHI, its agents, or editors. Always check with your local governmental agency and independently verify for accuracy, completeness, and reliability.