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When the Septic Hits the Fan

Over the past few years, a new breed of real estate malpractice litigation has surfaced: septic system permitting and inspection disputes. Due to increased septic system regulations, several states and municipalities have passed septic system transfer-of-title mandatory inspections and permitting requirements that may affect your next real estate transaction.

These claims all follow a similar fact pattern: a home with an existing septic system is sold to a new purchaser. The purchaser moves in and has a septic system backup, or seeks to update or fix the existing system. In so doing, the purchaser discovers that the system has not been permitted or inspected prior to sale and, due to the cost of permitting, inspection, and repair, the purchaser ultimately files suit against all parties and brokers involved in the transaction.

As a real estate broker representing buyers or sellers, you need to stay abreast of county-specific septic system permitting and inspection regulations in order to keep you, and your clients, out of septic system litigation. This is especially true when you are selling property in a new or unfamiliar county. But with the right prep work, knowledge, and contingency plans you can safely navigate septic system issues. Here’s how:

Protect yourself and your client: Signs to look for

How do you know whether the home has a septic system, needs an inspection, or has an existing permit? Be watchful of the following indications in the transaction file, public record, and your own observation:

  • The Seller’s Property Disclosure indicates a septic system, but no permit number
  • The MLS indicates a septic system, but no pumping records, inspection or permit is provided
  • The property is 1 acre or more
  • The property is in an unincorporated area
  • The property is located in a small mountain or foothill community
  • The number of bedrooms listed does not match the public records
  • The home was constructed before 1970 (average useful life of a septic system is approximately 30 years)
  • The property is unoccupied or only 1-2 persons have been living in the property
  • Unaccounted high water use
  • A leaking tank, soft, marshy wet spots, grass/vegetation that stays green and grows quickly, or unpleasant odors
  • Unidentified tank lids and electrical wiring in the yard area
  • Plumbing backups
  • The neighboring properties have septic systems
  • There is no publicly available sewer system near the property

When to call CRES ClaimPrevent® Risk Management Hotline

If you encounter any of the above and/or have doubts about the next steps in the process to protect yourself from a real estate lawsuit, call CRES ClaimPrevent® Risk Management Hotline (available to CRES E&O policyholders as part of your E&O insurance). We can help clarify regulations in the process of selling a property with a septic system and identify potential risks while telling you how to avoid a real estate lawsuit.

What to do if you are involved in a septic system dispute

What if you have already assisted a buyer or seller in purchasing a property with a septic system? You may have nothing to worry about, as the septic system may have been properly permitted, or the property may be in a county with more relaxed regulations than those listed above. However, if you find yourself on the receiving end of a demand letter from the buyer’s attorney, you should take immediate action and forward a copy of the demand to your insurance carrier.

Pre-suit resolution

It is best to address disputes in a pre-litigation setting, in other words, before it becomes an actual lawsuit. To do so, you need to make an action plan and follow through promptly so that the buyer does not become impatient.

You’ll want to suggest mediation, and advise all parties that you’ll first want to gather more information and have some issues sorted out, i.e., what is the issue with the system, and what will it cost to repair. In order to assess the condition of the septic system, you should hire an expert, preferably someone that is licensed to make septic repairs in the county where the property is located. Consider the following questions:

  1. Would the septic system have passed inspection at the time the transaction closed?
  2. Did the seller or the broker have actual knowledge of an adverse material condition relating to the septic system that was not disclosed?
  3. Was the system properly functioning when in use by the seller, or had the seller had problems in the past?
  4. Who serviced the septic system and how often was it pumped or repaired?
  5. How old is the septic system?
  6. Have additional bedrooms been added to the home after the septic system was installed?
  7. What kind of system was installed? What records exist for the system?
  8. Has the system failed? If so, has there been any contamination of water sources, soil, or neighboring properties?
  9. What are the existing on-site conditions?
  10. What is the appropriate remedy?
    1. Repair?
    2. Replace?
    3. Tap into a public sewer system?
  11. What is the cost?

After you have a better understanding of the issues based on the above questions, you need to try to get everyone that was involved in the transaction (the seller, the seller’s agent, the buyer’s agent, and the title agent) to mediation. You want to select a mediator who understands: 1) home construction, including plumbing; and, 2) real estate law, including disclosure requirements, contracts, and closing requirements. A mediator familiar with county and local health regulations and the regulatory climate is also helpful.

Apportioning fault among the parties

The seller usually has some fault, as they knew of the regulation and usually are required to obtain a septic permit from the county. The seller’s agent may also have some fault, and may choose to contribute to the settlement at mediation, as they run the risk of a cross claim by the seller for failing to advise the seller of the septic permit requirements. The buyer’s agent may be found at fault for failing to advise the buyer because the buyer’s agent is required to refer the buyer to an expert on matters outside of the agent’s expertise. The title agent may be at fault if the property lacks a septic permit because a permit is required before the property can be transferred. The buyers also share in a portion of the fault, as they need to act diligently in selecting a property and inspecting it prior to purchase.Depending on the facts of your claim, there may be other parties at fault including a home inspector, the septic inspector, or septic service providers. You will need to consider whether these other parties will be included in mediation.

Once you determine the appropriate parties to be involved, and the approximate percentage of fault that is attributable to each party, mediation becomes a numbers game. An ideal settlement is one where each party contributes their apportioned share of the cost of repair or replacement.

Concluding thoughts

Ultimately, the best way to stay out of septic system litigation claims is to be aware of the septic inspection and permitting regulations that exist in every county where you conduct business. However, if you find yourself involved in a septic system dispute, you need to try to resolve the case quickly and quietly by containing exposure to a limited percentage of reasonable damages. This will allow you to avoid the time and expense of litigation, unwanted exposure, negative attention, and risk of racking up attorney’s fees that may be shifted to the broker. Additionally, these claims lend themselves to pre-litigation resolution if you deal with them head-on and formulate an appropriate resolution strategy.

And when you have CRES E&O, you have CRES ClaimPrevent® Risk Management Hotline to rely on whenever a septic system issues arises.

Read the Colorado specific version of this article here.

By: James M. Meseck and Diana M. Mendez
(303) 296-2828

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