Liability to existing wiring upgrades?

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Situation: I am a master electrician and work for myself. I pulled a permit (residential) to: add sub panel, install 5 circuits out of that sub panel completely to code. The home has existing wiring issues: exposed joints, open junction boxes, knob and tube wiring. The inspector failed my inspection due to these existing conditions in the house. Needless to say, I was pissed. The general contractor that hired me told me he would take care of the covers and did not want to have me replace the knob and tube. I spoke to the inspector and agreed to install junction boxes for the exposed joints, replace the covers for the junction boxes, and staple up wildly ran romex in the attic. I am in debate with him over the knob and tube, because I did not touch it, tap into it, or modify it in any way. He is trying to hold me responsible for replacing the knob and tube wiring to romex.

Question: Under what code enforcement/law/ordnance/etc... is this true? How can I be held responsible for replacing existing wiring to meet current code?

I have never heard of this and the inspector is threatening that I could have my license pulled for this. I told him I want to see the city ordnance on it and he said its federal housing standards and threatened to have my license pulled. By that logic, seems like if I went to install a GFCI in a bathroom, I become responsible for bringing the entire house up to the current code...? It makes no sense to me. In my experience, it is my duty to inform the homeowner of violations of existing wiring which could have met code at the time of their original installation, but since then code has changed. If they want to pay, then I do the work. Also, as long as you don't touch the existing wiring or modify it in any way, then it can remain in its original installation state. By the way, the city ordnance says nothing on this to support his position.

I just need some insight into this and some help if any because this particular inspector acts like he got me by the nuts and to an extent, its his discretion, but I think its wrong. I need help. Thanks.
 
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