Three easy steps to reduce your liability
Despite the large number of claims stemming from
the mortgage crisis, the professional
liability risk to appraisers remains
manageable with prudent loss prevention.
Most claims at this time – whether they
are frivolous or have a justifiable
basis – relate to appraisals completed
during the real estate and mortgage
bubble years of 2004-2007. An appraiser
has little control now over whether a
lender, borrower or other party will
make a claim about work in the past.
Our single
best piece of advice with respect to
reducing your risk for prior work is to
keep your reports and workfiles for
longer than the minimum five years
required by USPAP. We suggest keeping
them for seven or eight, or even longer.
USPAP has no relevance to any statute of
limitations period and whether a
plaintiff can sue you about an old
appraisal. Given that we are seeing
claims about appraisals dating back to
2004 and sometimes earlier, we think
that keeping reports and workfiles, in
paper or electronically, for seven or
eight years provides a better margin of
safety for appraisers.
Fortunately, there
is much more that an appraiser can do to reduce
the threat of liability from future work. You
may have heard the following tips previously
over the years, but they are more relevant now
than ever. You’ll find more information and more
tips in the loss prevention section of our
website at
liability.com and available at our
new resource readimember.org.
Appraise Your
Client and the Assignment. Appraisers report
hundreds of claims to us every year. Time and
again, appraisers start the story about a claim
with something like "I had a bad feeling about
this client" or "I had a suspicious feeling
about the transaction." Here’s a recent example:
an appraiser reviewed a sales contract in
connection with a home purchase loan and
accurately reported in her appraisal that the
contract contained significant sales
concessions. The concessions exceeded the limits
in new lending guidelines. After the appraiser
submitted her report, the lender’s agent very
quickly came back to the appraiser with a "new"
sales contract with the same date, signatures
and markings, but leaving out any concessions,
and wanted the appraiser to prepare a new
report. The appraiser declined. In other
situations, we’ve heard appraisers basically say
that they knew their client was going to use the
appraisal report in a misleading way, but that
they figured they could cover themselves with a
disclaimer or other cleverness in the report.
Your knowledge –
or even nothing more than a gut feeling – about
a dishonest situation is your radar in avoiding
lawsuits or disciplinary investigations. Many of
these situations do produce claims and your best
loss prevention strategy is to turn down the
assignment if any part of, or any party to, the
transaction "smells fishy".
Check and
Proofread Your Work. This is certainly obvious
advice, but we have to say it because we receive
too many claims that result from poor quality
control. Indeed, we have had claims asserted
against appraisers relating to plain old
typographical errors. In one recent case, an
appraiser delivered an appraisal report through
a management company to a lender for its use in
evaluating the sale of an REO property. In the
report, the appraiser entered the wrong first
digit in his opinion of value – i.e., the
appraiser keyed in $150,000 when the value in
the report should have been $250,000. While any
reasonable reader of the report should have
recognized the obvious error because the number
was outside the range of adjusted comparables
and could not be reconciled with other data in
the report, we still had to defend a claim by
the management company because the lender
allegedly agreed to sell the REO at a low price
based on the appraiser’s typographical error.
We also see too
many lawsuits and disciplinary matters each year
involving reports in which entire sections of
data or information are copied over from another
report and left unchanged. We see these problems
from both residential and commercial appraisers.
In residential reports, appraisers often carry
over data and information that remains in the
software template from a prior report in their
system. In commercial narrative reports, we see
appraisers borrowing sections written for other
reports but then failing to update or revise the
information to fit the new assignment. Claims
about problems like this are even uglier when
the data or information is copied from a report
by a different appraiser.
These are usually
embarrassing claims for the appraisers. Even if
the affected data or information would have had
no impact on the appraiser’s opinion of value,
this kind of carelessness provides fodder for
the lender or borrower’s attorney, and the
appraiser is never anxious to have his or her
deposition taken in a case like this or to take
the stand in court. Accordingly, our simple
advice is that a lot of liability risk can be
avoided by taking the time to check and
proofread your work.
Be Careful What
You Promise. As the mortgage crisis has
unfolded, businesses involved in lending,
whether residential or commercial, have become
more keenly aware of their potential
liabilities. Overall litigation related to
mortgage lending has increased more than tenfold
(far more than appraisal related litigation). A
visible result of all this litigation has been
an increasing use of indemnification provisions
in legal agreements, including appraiser
engagement agreements and AMC independent
contractor agreements.
Indemnification
essentially means a promise to reimburse someone
else for certain costs or expenses. Appraisers
need to be careful about what they agree to in
this regard because lenders, servicers and AMCs
are now routinely demanding that appraisers
promise more and more with respect to
indemnification.
For example, a new
independent contractor agreement used by a
well-known AMC states, in part:
Appraiser shall
further indemnify, defend and hold [AMC]
harmless from and against any and all claims,
losses, liabilities, costs and expenses
attributable to any allegation of intellectual
property infringement arising out of this
Agreement.
Under this
provision, the appraiser is agreeing to
indemnify the AMC for liabilities for things
like patent and copyright infringement in
relation to any appraisals delivered by the
appraiser – whether the alleged infringement is
the fault of the appraiser, the AMC or some
third party, such as a software provider.
Another AMC’s independent contractor agreement
states, in part:
Appraiser shall
indemnify, defend, save and hold harmless [AMC]
from and against any and all liability, claims,
damages, losses, fines, judgments, suits,
decrees, costs and expenses . . . in any way
related to . . . any appraisal report submitted
to [AMC] by Appraiser.
This provision
similarly would enable the AMC to argue that the
appraiser must indemnify the AMC for liabilities
or damages and even fines assessed against the
AMC relating in any way to appraisals delivered
to the AMC by the appraiser – even if the
alleged problems are the result of the AMC’s own
conduct.[*1]
Indemnification
provisions also appear in contracts for
commercial appraisal work. Fortunately,
commercial appraisers often have more leeway to
negotiate different or more reasonable language.
A reasonable indemnification provision – if one
is going to be included in a contract at all –
would ideally be two-sided, meaning that both
parties have a mutual obligation to each other
to indemnify the other party for liabilities
arising from one side’s negligence or errors or
omissions.
Residential
appraisers, on the other hand, often have
limited ability to negotiate with lenders and
AMCs, and often their only choice is to say "no"
to the business relationship if the risk being
shifted to them outweighs the benefit of doing
business with the lender or AMC.
There are
insurance concerns too with indemnification
provisions. As to this issue, appraisers should
understand that indemnification provisions such
as the two from AMC agreements exemplified above
do not change an appraiser’s E&O insurance
coverage or "void" the policy. The E&O policy
will still provide the same degree of protection
and coverage as if the indemnification agreement
did not exist. However, under these types of
indemnification provisions, appraisers are
agreeing to pay losses, damages, attorneys'
fees, etc. of the AMC even if the loss or damage
results from the AMC’s own errors or wrongdoing.
Further, the appraiser is agreeing to indemnify
the AMC for types of damages that are beyond the
realm of E&O coverage, such as damages for
patent infringement. Thus, the appraiser is
agreeing to pay potential costs and damages that
are broader than can be covered by the
appraiser’s insurance. An appraiser’s E&O policy
can only cover mistakes or damage caused by the
insured appraiser (not a third party such as the
AMC) and cannot cover liabilities forced on the
appraiser by contract.
When appraisers
are concerned about the nature of liabilities
they may be assuming under an indemnification
provision, we encourage them to discuss the
relevant language with us. More information is
also available on this topic in our loss
prevention resources at liability.com and
readimember.org.
Tell Tale Claims
Over Her Head in
Mold
An appraiser was
asked to appraise an REO property in Florida.
She was told by the client that a pipe had burst
in the home, causing mold. When the appraiser
got to the home, she was met by the mold
inspector. He said he would leave his hazmat
suit for her to put on before she went inside
because the mold was intense. Rather than
trusting her gut and walking away, and not
wanting to disappoint the client, this appraiser
donned the outfit and did an appraisal subject
to the remediation of the mold.
The client came
back later and asked for more work. They wanted
an "as is" value and also a "cost to repair". It
was at this point that the insured felt "over
her head" and called to ask for advice. Perhaps
she should have made that call prior to putting
on the hazmat suit.
$4,600,000 -
$3,100,000 = $400,000 Loss
A California
appraiser prepared a narrative appraisal of a 34
vacant lot residential parcel. He estimated a
value of $4.6 million. Almost one year later,
after a loan of $3 million was made, the lender
noticed a math error in the discounted cash flow
analysis. Once this was pointed out to the
appraiser he revised his value downward to $3.1
million. The loan defaulted and the lender made
a claim for more than $1.5 million in damages.
After a year of
litigation, and due in large part to this error,
the claim was settled with a payment of
$400,000.
Trust but Verify
A Colorado
appraiser assigned the appraisal of a mixed use
building undergoing rehab to a trainee. The
estimated value was $3.3 million. A year later,
the appraisal was the subject of a lawsuit by
the lender who had loaned $1.75 million. The
lawsuit claimed the appraised value was
overstated due to reliance on rental data
provided by the developer/borrower and not
verified by the appraiser and due to the use of
comparable sales that were not truly comparable
or that were out of the market area.
No expert could be
located who could support the insured's value.
The experts consulted by the defense could get
no closer than $1 million less than the
insured's value. Although a senior appraiser
within the firm had signed off on the report, he
later admitted that his other work and time
commitments had really precluded him from doing
much of a review. He trusted his trainee and
admitted his review had only been "cursory". The
case settled for over $250,000.
Copyright 2010. Liability Insurance Administrators. All rights reserved.
[*1]
Some state AMC laws now prohibit such unreasonable indemnification clauses in AMC agreements.
Utah's AMC law, for example, prohibits an AMC from requiring appraisers to indemnify the AMC
for claims "arising out of the services performed by the appraisal management company or its agents,
employees or independent contractors and not the services performed by the appraiser."