Subterranean termites are native to the Midwest, live 10-20 feet below ground, and are not easily found by the lay person. Approximately 2 million structures1 per year are newly infested. Damage and repairs cost owners more than $2 billion annually and rarely are covered by insurance.2

1. "Quick Termite Facts" available online at www.heinbuch.com/quick_termite_facts.htm.

2. Springer Pest Solutions newsletter 2/03. Available online at www.springerpestsolutions.com/pests/pest-library-termite.htm.

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In short, this contract provides no protection to a homebuyer who later discovers an infestation.3 "Contractual provisions releasing parties from future liability, commonly referred to as exculpatory clauses or disclaimers, are not favored in Illinois and are strictly construed against the party they benefit."4 "However, such a provision will be enforced if: (1) it clearly spells out the intention of the parties; (2) there is nothing in the social relationship between the parties militating against enforcement; and (3) it is not against public policy."5

You might be able to overcome a disclaimer of warranties if you can show that the inspector knowingly misrepresented the infestation – e.g., that he found evidence of termite infestation but issued the report anyway. A disclaimer of warranties is not a shield for fraud.6 But except in the rare instances when you can show fraud, such language effectively leaves the buyer with no recourse.

Inspection contracts typically include arbitration clauses, which are usually enforced.7 They often include an attorney-fee-shifting provision, further deterring the bringing of a claim that is likely to be foreclosed.

Otherwise, the rights acquired by an agent while acting for this disclosed principal inure to the benefit of the principal.8 Buyers need to be aware that real estate brokers are usually agents of the seller, not the buyer.

The buyer can also argue that he or she is an intended beneficiary of the contract or argue that the inspection was ordered by one acting as his or her agent. Either argument can support a claim by the buyer against the inspector,9 but the best course is to assure at the outset that the buyer is expressly listed on the inspection contract.

If the damage is in such an unobstructed and accessible portion of the house that the inspector should have found it, his or her failure to do so can give rise to a claim and recovery for negligent misrepresentation, despite warranty disclaimers. Elements of negligent misrepresentation are (1) a false statement of material fact, (2) carelessness or negligence in ascertaining the truth of the statement by the party making it, (3) an intention to induce the other party to act, (4) action by the other party in reliance on the truth of the statement, and (5) damage to the other party resulting from such reliance when the party making the statement is under a duty to communicate accurate information.10

Numerous cases have held inspectors liable for misrepresentation where an accessible infestation is not reported. Significantly, the Moorman doctrine11

4. Chicago Steel Rule and Die Fabricators Co v ADT Security Systems, Inc, 327 Ill App 3d 642, 645, 763 NE2d 839, 842 (1st D 2002), relying on Scott & Fetzer Co v Montgomery Ward & Co, 112 Ill 2d 378, 395, 493 NE2d 1022, 1029 (1986); and Harris v Walker, 119 Ill 2d 542, 548, 519 NE2d 917, 919 (1988).

5. Chicago Steel Rule at 645, 763 NE2d at 842.

6. Bauer v Giannis, 359 Ill App 3d 897, 834 NE2d 952 (2d D 2005).

7. See, for example, Federal Arbitration Act, 9 USC §1 et seq; Uniform Arbitration Act, 710 ILCS 5/1 et seq; Melena v Anhaueser-Busch, Inc, 219 Ill 2d 135, 187 NE2d 99 (2006); Buckeye Check Cashing, Inc v Cardegna, 546 US 440 (2006).

8. Nardi & Co, Inc v Allabastro, 20 Ill App 3d 323, 314 NE2d 367 (1st D 1974).

9. Stamp v Inamed Corp, 777 F Supp 623 (ND Ill 1991).

10. Midfirst Bank v Abney, 365 Ill App 3d 636, 651, 850 NE2d 373, 386 (2d D 2006), relying on Board of Education of the City of Chicago v AC & S, Inc, 131 Ill 2d 428, 452, 546 NE2d 580, 591 (1989); and First Midwest Bank, NA v Stewart Title Co, 355 Ill App 3d 546, 557, 823 NE2d 168, 178 (1st D 2005).

11. Moorman Mfg Co v

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does not apply where the defendant is in the business of supplying the subject information, as a termite inspector clearly is.12

Illinois law requires the seller of a residence to disclose in writing whether he is "aware of current infestations of termites or other wood boring insects" and whether he is aware of a structural defect caused by prior infestations of such insects.13 "Awareness" in these cases means "to have actual notice or actual knowledge without any specific investigation or inquiry."14

Similarly, the liability of the seller under common law principles generally would require intentional misstatement, or intentional silence where there was a duty to disclose.15 A suit against the sellers would be hard to bring, particularly if the buyer could not prove that the seller knew of the infestation.

Illinois courts have found liability for common law fraud and violations of the Consumer Fraud and Deceptive Business Practices Act16 in cases where inspectors or sellers had actual knowledge of an infestation. For instance, inspectors have been found liable under the Act where they had actual knowledge of the infestation and reported no evidence of termites.

Warren v Lemay17 was one of the first Illinois cases to apply the Act to a termite infestation. The first page of the inspector’s report indicated no visible evidence of infestation, while the second page contained two very brief notations of "termite activity."

Warren held that both pages violated the Act by omitting any reference to previous termite treatments done by the inspector at the property. Page two further created a situation where, in light of the page one "no evidence" finding, the notations could easily have been interpreted as referring only to past infestations.

The Consumer Fraud Act is an attractive route, since it allows plaintiffs to recover their attorney fees and gives courts wide latitude in formulating remedies.18

Liability under the Act is not limited to inspectors. In Warren, the sellers had reported the ongoing infestation to their realtor, who remained silent despite actual, certain knowledge of infestation. The brokers were both held liable.

In another case, real estate brokers were sued after buyers discovered a termite infestation and damage that had been carefully concealed by the sellers. In Harkala v Wildwood Realty, Inc,19 the court held that the brokers’ representations that the home was a "good buy" and in "very good condition" did not violate the Act where they had no knowledge of the infestation. Apparently, the repairs had been extensive enough to mislead the brokers, too.

The court went on to note that the brokers had not made any specific statement that the house was termite-free, suggesting that liability could lie if they had.20 Apparently, the plaintiffs didn’t ask the right questions.

The Harkala court made two observations that are relevant. First, the court said, the Act is broader protection for consumers than common-law fraud, since it does not require that the plaintiff demonstrate reliance or diligence.

In CNA Ins Co v DiPaulo, 21 the court held that while the seller’s silence alone in not disclosing defects will not support a fraud action, silence combined with active concealment is enough. In DiPaulo, misrepresentations made in the Real Property Disclosure Report were adequate in themselves to support a fraud claim.22 It is thus vital that you ask specific questions about termites and structural damage.

Demand a Form NPMA-33 report. Once they appreciate the dangers, and after they make the proper inquiries, buyers can further protect themselves by requesting a more stringent inspection report. It is more detailed and formal than the report form described earlier.

Buyers can, and should, insist that the inspector use a Form NPMA-33 report.23 Federally funded loans now require Form NPMA-33, Wood Destroying Insect Infestation Report, released in 1995 by the National Pest Management Association. It has become something of a standard for inspections.

NPMA-33 has less exculpatory language and clearly warns the client that any evidence of infestation should be considered as evidence that at least some degree of damage is present and needs to be investigated, even if it is unseen. It goes on to warn that an inspector is not qualified to evaluate the extent of damage or the cost of repair.

When an inspector marks box "A" on Form NPMA-33, he (or she) is indicating that they found no visible evidence of infestation. Homebuyers and their attorneys must recognize that damage may still exist in obstructed or inaccessible areas of the structure, even if box "A" is checked. Form NPMA-33 also states that it is only valid for 90 days from the inspection date.

12. Stewart v Thrasher, 242 Ill App 3d 10, 610 NE2d 799 (4th D 1993); See also, First Midwest Bank (cited in note 10); Fox Associates, Inc v Robert Half Intl, Inc, 334 Ill App 3d 90, 777 NE2d 603 (1st D 2002); and In re Illinois Bell Switching Station Litigation, 234 Ill App 3d 457, 596 NE2d 678 (1st D 1992).

15. Prosser and Keeton on the Law of Torts, W. Page Keeton 5th Ed, §106.

23. Copy available at http://www.hudclips.org/sub_nonhud/cgi/pdfforms/npma-33.pdf.

Look for signs of trouble. Buyers must be aggressive in protecting themselves, especially after being put on notice of a possible infestation. A desire for the house can blind buyers to the potential problems facing them. It is the attorney’s job to open their eyes.

As suggested by the Harkala court, buyers or their attorneys should ask specific, pointed questions about insect infestation and structural damage in any property under consideration. These preventative measures are essential with properties that are older or visibly need maintenance. This should convince you to encourage clients to seek your assistance early on in the home-buying process, so that you can protect them from avoidable disasters.

Before buying or committing to a property, buyers should specifically ask the seller and broker if they have any knowledge of past or current evidence of infestations at the property or in the surrounding area. Infestations in the area should, at minimum, alert buyers to the need for closer inspections.

Termites typically swarm to disperse and start new colonies. Proximity to known infestations substantially raises the odds of becoming a destination for "swarmers." Swarmers emerging indoors are incapable of eating wood, seldom survive, and are best removed with a vacuum. They do, however, indicate that infestation is present. Discovering winged termites indoors almost always indicates an infestation warranting treatment.

Have buyers inspect it themselves. If they have any doubts or questions, clients should check the inspectors’ work by donning old clothes, finding a flashlight and looking for signs of trouble themselves. A sign of infestation is earthen (mud) tubes extending up over foundation walls, support piers, sill plates, floor joists, etc. The mud tubes are typically about the diameter of a pencil but can be thicker.

If a tube is vacant, that doesn’t necessarily mean that the infestation is inactive. Termites often abandon sections of tube while foraging elsewhere in the structure. Termite-damaged wood is usually hollowed out along the grain. Wood damaged by moisture or other types of insects won’t have this appearance.24

Red flags. As lawyers, of course, we should not be satisfied with oral representations from sellers and brokers. You may want to develop a supplemental disclosure form for potential sellers and brokers to sign. This step may seem like extra effort now, but when a situation develops into litigation it will be effort well spent. If your seller and broker complain about making the extra disclosures, this is a red flag indicating that a thorough inspection is in order.

You can’t discover every infestation beforehand, but see to it before it’s too late that any indication of possible infestation is immediately investigated by an outside professional who can accurately evaluate the extent of any problem. It is far better to act decisively and avoid a problem than to become the owner of a termite-infested property and have the uncertain prospect of suing for relief.

Conversely, those of you representing sellers should advise your clients of termite issues and warn them about the considerable risk in making unfounded "no-termite" representations. Facing the problem head-on should be less painful than misrepresenting and dealing with potentially ruinous consequences later. ■

24. Termite Control: Answers for Homeowners, by Michael F. Potter, Extension Entomologist, Univ of Kentucky College of Agriculture. Available online at www.uky.edu/Ag/Entomology/entfacts/struct/ef604.htm.

Reprinted from the Illinois Bar Journal,