Gathering Storm
A torrent of litigation provides key lessons about appraiser E&O
A flood of appraisal lawsuits has inundated Florida, wreaking
havoc for appraisers dragged into the storm and revealing how
many appraisers don't have the right E&O insurance coverage
in place when the clouds burst.
The storm developed because investors purchased from lenders the right
to sue appraisers over foreclosed mortgages. Most of the appraisals in these
lawsuits, which continue to be filed as we go to print, were for mortgages held
by Impac Funding Corporation, a subsidiary of a large mortgage company.
For each foreclosed loan, Impac allegedly has signed a "Common Interest
and Assignment Agreement" granting the investors "Any and all of its rights
to pursue any and all claims (in contract or in tort) against the real estate
appraiser(s) and/or the appraisal company."
In just two months, Llano Financing Group, the investor entity filing
most of the lawsuits, has sued more than 175 appraisers and appraisal firms
in Florida, and the hurricane of destruction is starting to hit other states.
I will put the frivolity of the claims aside for the purpose of this article, but
nevertheless, it's hard to ignore the fact that the lawsuit complaints use
identical, generic language to describe the purported negligence of the defendant
appraisers, regardless of the actual facts or the quality of the specific
appraisals under attack. Let's hope that Impac decides to stop selling claims
to litigation investors — the firm might make that decision once it discovers
its own lending practices will be as much on trial as the alleged mistakes
made by appraisers.
Complete Coverage
In the meantime, appraisers can learn two important lessons about having
the right E&O coverage to protect them from a gathering storm:
1 "Individual-Only" E&O Policy Problems.
Many of the appraisals being targeted
by Impac lawsuits were performed by
trainee appraisers working under the supervision
of certified residential or certified general
appraisers. In more than a dozen cases, the
trainees are long gone and are not named as
defendants, but the appraisers who signed the
reports as supervisors are defendants, as are
their appraisal firms. Coverage for some of
these claims against the supervising appraisers
has been denied by insurers because the
appraisers had individual-only E&O. (This
type of limited coverage is not sold in the
Appraisal Institute's endorsed E&O program.)
Individual-only policies are popular because
they can be quick to get and often are less
expensive than policies providing full coverage.
However, most individual-only policies
usually carry two large limitations — they
exclude coverage for the insured appraiser
when they are sued over work performed by
another appraiser and they exclude claims
related to appraisals where an insured
appraiser signed as a supervisor. If you have
ever had an employee appraiser, signed
reports as a supervisor or subcontracted any
work, this type of insurance policy may not provide you the necessary coverage.
The appraiser's current policy is going to provide coverage for appraisals as far back as the
"prior acts" or "retroactive" date of that policy, and that date, in most cases, should go as far
back as the appraiser and/or firm has maintained E&O insurance without lapse.
We often hear from the owners of appraisal
firms who say something along the lines
of, "I don't need a policy that covers me or
my firm for claims over work performed by
other appraisers because I've always required
my appraisers to have their own insurance."
However, you can't count on a policy carried
by your appraiser trainees or employees to
cover you because you're probably not named
as an "additional insured" on their policies,
and even if you are, there's no practical way
to ensure they keep that coverage in place
years down the road to cover a future claim
filed against you. Also, if you employ appraisers
and one of your employees is sued for an
allegedly negligent appraisal, most state laws
consider you, as the employer, to have a legal
obligation to pay for their defense and any
damages for which they are liable. If you have
individual-only coverage, that burden will fall
on you.
2 Understand "Prior Acts" and "Claims-Made."
Many appraisers, firms and
appraisal management companies
don't understand that E&O insurance for
appraisers (and almost all other professions) is "claims-made" coverage. What that means
is, the insurance policy that will cover the
claim is not the policy that an appraiser had
in place on the date of the appraisal but rather
the current policy that an appraiser has in
place at the time the lawsuit is filed or the
claim asserted. Very importantly, the appraiser's
current policy is going to provide coverage
for appraisals as far back as the "prior acts" or
"retroactive" date of that policy, and that date,
in most cases, should go as far back as the
appraiser and/or firm has maintained E&O
insurance without lapse.
Many appraisals targeted by the flood of
lawsuits hitting Florida relate to appraisals
performed in 2005 and 2006, and unfortunately,
a few appraisers have learned their
policies don't cover work dating back to those
years because they either allowed their coverage
to lapse at some point or they purchased a
policy that did not include prior acts coverage
even if they were eligible, as sometimes
occurs when an appraiser fills out an application
for individual-only coverage without
understanding prior acts coverage. Other
appraisers are finding they have no coverage
because they left the valuation profession
or allowed their policies to expire without purchasing "tail coverage," which would
have extended the time for reporting claims
on their last policy. The lessons: Remember
the importance of preserving coverage for
prior acts when making any kind of change
to your coverage. If you are eligible for prior
acts coverage, make sure your insurance
policy provides coverage for the appropriate
years. And, if you are leaving the valuation
profession, discuss "tail coverage" with your
broker — the insurance may be free under
your policy when you retire.
Looking Ahead
Appraisers dragged into the Florida storm
as defendants in the lawsuits — regardless
of their E&O situations — need to take the
situation seriously, obtain legal counsel and
start mounting a legal defense. The claims
can be successfully defended, and for the
long-term, all appraisers should carefully
weigh their decision to work for lenders that
sell alleged claims against them.
This article originally appeared in, and is reprinted from, Peter's regular column "Rest Insured" in the Appraisal Institute's Valuation (3nd Quarter, 2015). © 2015 by the Appraisal Institute, Chicago, Illinois. Archives of Valuation magazine, including Peter's past columns, are available at http://www.appraisalinstitute.org/publications/valuation-magazine/