This article is based on a presentation by Diana Mendez and Jim Meseck, White and Steele; Colorado. The information below is for informational purposes only and references regulations in Colorado. Be sure to check specific regulations and permit requirements in the county/state of the property in question. If you’re a CRES Customer and have questions regarding a transaction in your state, you can call the CRES Legal Advisory Hotline.
Septic systems (or as they’re often called in Colorado, onsite waste treatment systems) are a huge source of litigation.
We’re seeing a lot of septic claims, and it appears that 100% of these claims are preventable. If you haven’t sold a property with a septic tank recently (especially since new regulations in states like Colorado have been in place), there are critical steps you should take to protect yourself.
How to Avoid Septic System Claims
First, if you have access to Legal Advisory Services (like CRES includes with real estate E&O insurance), be sure to call about septic issues if you’re not sure what you need to do. When we get a new claim and we first speak to a client who’s facing litigation or a licensing complaint, our first question is always, “Did you use the CRES risk management hotline?”
What to Look for as the Buyer’s or Seller’s Agent
Let’s say you’re taking a potential buyer to a property, you’re not sure if it has a septic system, and the MLS listing doesn’t say. There are some red flags to look for:
If the home was built around 1970 or earlier, it’s more likely to have a septic system (but that varies by state). It’s also more likely to have a septic system that’s at the end of its useful life and may need some modification or overhaul.
Do you see a lush green marshy area in the yard? Is the grass there greener and growing faster than elsewhere? That tends to indicate that there’s a problem with the leach field.
Your seller tells you they’ve had some plumbing issues, but they had someone come in and it’s been resolved. If there are plumbing issues, a backup may indicate there are problems with the septic system.
Why Recommend Septic System Inspection
You do have a duty to advise your clients what’s in their best interest. You should be advising buyers and sellers with septic systems (especially the buyers) that they should get a septic inspection, even if it’s not required (some counties in Colorado require inspections).
We had a case where the home was previously occupied by a couple, and then became occupied by a family. Plumbing problems began, because the family was obviously using that septic system more. A septic system inspection could have revealed deficiencies in the system.
If there are problems, damages could range from $10,000 or $20,000 to the six-figure range.
This is a big-ticket item. Always suggest to your seller or your buyer to have the septic system inspected. Put your suggestion in writing, have your buyer or seller sign the disclosure, and place a copy in the transaction file. You want to be sure you’ve told your buyer or your seller (and have evidence of the disclosure) that the inspection should be done.
When You Need Septic Permits or Inspections
In 2013, Colorado adopted Regulation 43 regarding the use, modification, repair, permitting and inspection of septic systems. Regulation 43 is a 115-page comprehensive manual about what you need to do when you’re using, installing, modifying, or repairing a septic system. Several counties in Colorado and local municipalities have passed ordinances or local laws that require owners of properties to get septic permits. (Note they are not building permits, they are separate septic permits.) In addition, they may require transfer of title permitting inspections prior to selling a property.
So what are you supposed to do if you’re selling a home that has a septic system? If you’re the seller’s agent, ask if they have a permit on the system. You need to know if they’ve had any issues with the septic system.
We frequently see situations where we have a seller’s property disclosure that discloses that there’s a septic system, but doesn’t provide a permit number (required in some counties in Colorado).
If you’re a seller’s agent in Colorado and the seller’s property disclosure says there’s a septic system but doesn’t list a permit number, you need to follow up. You need to ask if they’ve ever gotten a permit. If they haven’t, you need to make sure they’re not in one of the counties where permits are required.
What Triggers Septic System E&O Claims
Typically, problems after the sale start in either of two ways: the new buyers may have a plumbing backup, or they want to expand the property.
Maybe you have buyers who told you about their plans to revamp a property or make it larger. The property might have an existing septic system that works. It may be permitted or unpermitted. The buyers might not know what they’re going to have to modify, and that they’re going to have to go through these Regulation 43 issues to see if they can even do the improvements or additions. Even if there’s an existing permit, they might have to switch to sewer because the county is only permitting the existing system.
The buyers go to the county. They figure out what they need to do. They find out they have to hire engineers. They have to do plans. They have to get an inspection, and they realize it’s going to cost them money. The buyers start pointing the fingers at the brokers or agents who were involved with the transaction, as well as the seller. “You guys didn’t tell me I needed to do this. You knew this was my first home purchase. You knew I’m not from around here, I’ve never had a septic system,” etc., and litigation ensues.
Although the regulations and the ordinances do say that it’s the seller’s responsibility to make sure that these permits are in place and that the transfer of title inspections happen, we like to say “you can beat the rap but not the ride.” There have been claims made against agents and brokerage firms on negligence, breach of fiduciary duty, or breach of contract for failure to advise.
Not every county in Colorado requires the transfer of title inspections or the permits. There are currently 12 counties in Colorado that have passed these regulations. Those include:
Adams, Arapahoe, Boulder, Clear Creek, Douglas, El Paso, Albert, Gilpin, Jefferson Park, Pitkin and Summit County.
The list is now being revised to include additional counties.
Although the regulation was passed in 2013 in Colorado, and is slowly being adopted county by county, we think eventually this is going to be a requirement statewide.
Address Septic Issues Prior to Closing
Why is it important that you deal with these issues prior to closing? Like any other part of the home that should be inspected, a septic inspection can help protect all parties involved. In the Colorado counties that require a transfer of title inspection, if you don’t do it, and later the buyer comes back to you, you’re going to deal with a lawsuit and maybe a licensing complaint.
Even though the seller could be fined by the county, there are also repercussions that you have to deal with. As suggested earlier, the buyers could discover they don’t have a septic permit. In the process of trying to obtain one, they may discover they’re in a county where there’s sewer available, and they need to plug into the sewer system if they’re able to.
That means they have to remove the septic tanks, close out the old septic system, install a new sewer line to connect into the county line and pay the connection fees. When the buyers find out the cost (it varies by county and by how far the sewer hookup is from the house), you can guarantee you’re going to be hearing from their attorney.
If you’re in a new county, you should be aware of these regulations and find out if it’s a county that requires transfer title inspections. You can check on the Colorado Department of Health website (or call the CRES Legal Advisory Hotline). They’ll give you a checklist with everything you need to do in the specific county.
You want every client to think you were really thorough – because real estate is largely referral based. It’s always better to let buyers know ahead of time if they might have to foot a $10,000, $20,000, $30,000 bill with the septic system versus having them find out later.
When You Help Avoid a Septic System E&O Claim, You Help Your Business
Septic system E&O claims are such avoidable claims. Should you have to be involved in litigation, the time, expense, and stress it causes will negatively affect your business.
Having to take an hour or two away from your business to talk to an attorney, having to come in for depositions, having to go to mediations – these activities take a toll. It’s not only stressful for you, but it takes time away from what you want and need to be doing to grow your business.
What’s the statute of limitations on legal actions? The answer is that it really depends on the kind of action that may be brought against you and the laws in your state. There are different kind of claims that we’re seeing related to septic problems (including breach of contract claims, breach of fiduciary duty claims, negligence claims and negligence).
In Colorado, we believe that all of those claims have two years statute of limitations. There are a couple of circumstances where it can be three years for certain negligence claims. But that’s not just from the time of closing. Under Colorado’s statute of limitations law, it’s from the time of discovery. The buyers are going to say they didn’t discover the issue until the septic system had problems. Even though they bought the property five years ago, they have two years from the time of discovery.
The bottom line is that you want to take every precaution to avoid septic system E&O claims. That means being aware of red flags, knowing about permit requirements in the county, and recommending septic system inspection.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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