Iowa's highest court has considered whether a home inspector hired by a relocation company who was in the process of selling a home can be liable to the purchaser of the home for negligently performing its inspection of the property.
American Escrow and Closing Company ("Relocation Company"), a relocation company, retained Radon Analytical Laboratories ("Inspection Company") to conduct an inspection of a home in February 1999. Michael Davis ("Inspector") conducted the inspection for the Inspection Company.
In June 1999, the Relocation Company entered into a sale agreement for the home with Daniel Burbach ("Purchaser"). The sales contract gave the Purchaser ten days to obtain a satisfactory inspection of the property. Instead of hiring an inspector, the Purchaser personally inspected the property and also received a copy of the Inspector's report from his real estate professional.
Following the closing, the Purchaser discovered that his home had Louisiana-Pacific Innerseal Siding, a siding composed of wood chips and glue. This type of siding is the subject of a class-action lawsuit settlement, and is recognized as being a defective product by home inspectors if it is not properly maintained or installed because it will expand and cause the absorption of moisture. While other employees of the Inspection Company had received training in how to recognize this siding in order to note its presence in their reports, the Inspector had not received this training and so had merely identified the siding as "wood siding."
The Purchaser filed a lawsuit against the prior owners of the home, the Relocation Company, and the Inspection Company over the failure to disclose the presence of the allegedly defective siding. The prior owners and the Relocation Company settled with the Purchaser, and so the only remaining allegations in his lawsuit were against the Inspection Company for failing to disclose structural defects in the home and negligently performing its inspection. The trial court granted the Inspection Company's motion for judgment in its favor on the grounds that the Inspection Company did not owe a duty to the Purchaser when the Inspector performed his inspection of the property since the Inspection Company was hired by the Relocation Company. The Purchaser appealed.
The Supreme Court of Iowa reversed the trial court and sent the case back to the lower court for further proceedings. Looking at earlier decisions by Iowa courts, the court found for the Purchaser's lawsuit against the Inspection Company to succeed, the Purchaser would need to show two things: first, the Inspection Company was in the business of providing reports intended to guide others; and second, the Inspection Company knew its report would be relied upon by third parties like the Purchaser. Since it was clear the Inspection Company fell into the first category, the only question for the court was whether the Inspection Company knew that someone like the Purchaser would rely upon its report in deciding to purchase the home that was the subject of the Inspector's report. There were two previously decided cases in Iowa involving home buyers on this issue. The first involved an appraisal report prepared for the lender and the second involved a termite inspection report prepared for the seller. Both reports were given to the home buyers prior to purchasing the property. While the buyers in the appraisal case were able to proceed with their case, the case involving the termite report was not allowed to proceed because the report was written three years before the sales transaction and thus the court found the facts were too remote to impose a duty on the termite inspector.
Looking at this case, the court found that this case somewhere between the two earlier decisions. The appraisal report had been prepared with a specific borrower in mind, unlike the Inspection Company's report here. But the court found that the Inspector's report contained language showing that the Inspection Company knew its report might be shared with third parties, stating that "the client may, at its discretion, disclose [the report] to other interested parties." Since the Inspection Company apparently knew that its report might be shared with third parties and relied upon by them, the court found it owed a duty to the Purchaser. Therefore, the court reversed the lower court and sent the case back to the trial court for further proceedings about whether the Inspection Company's report was negligent because of its failure to note the presence of the allegedly defective siding.
Burbach v. Radon Analytical Lab., Inc., 652 N.W.2d 135 (Iowa 2002).