Per some (all that I have ever dealt with) utilities this is inside the house, It is on the customer side of the meter.
Unless the connections are loose, corroded or are in some other way defective, this should not be an arcing issue. Several other factors come into play these are national Electrical Code issues and UL listing issues; did they mix aluminum and copper conductors, how far is it to the HVAC disconnect is this a fusible disconnect, are the conductor termination connectors rated for a two conductor termination.
All in all without seeing it it sounds like there may be some issues but MAYBE not a fire hazard. Understand the average home inspector (THAT I HAVE DEALT WITH) has no business citing any electrical issues, in my experience (and as stated on numerous forums) home inspectors are, well LAUGHED AT best.
This is not to say there is not a place for home inspectors BUT UNLESS HE CAN SITE Code, if you really have ANY electrical concerns you should hire a QUALIFIED electrician.