The Defense Calls for...Your Appraisal Report

Does a third party have a right to rely on your appraisal report? Unfortunately, it is not a question that can be answered with a simple "Yes" or "No." Even if the claim against you is unjustified, it may still take considerable time and expense to obtain a dismissal. While it may not always be possible to prevent a disgruntled third party from filing suit against you, we believe there are ways to make these third-party claims more defensible.

Statistics show that the majority of third-party claims against appraisers are made by borrowers. In the typical scenario, the buyer/borrower applies to a lender for a purchase money loan. The lender hires the appraiser to estimate the market value of the property; the loan is funded and escrow closes. At some point during the transaction, the lender provides the borrower with a copy of the appraisal report. After taking possession of the property, the borrower discovers any of a number of problems with the property such as termite damage, settlement, etc. Consequently, the borrower files suit against the appraiser alleging that the appraisal was prepared for his/her benefit and the appraiser failed to disclose these problems on the report.

In order to make these third-party claims more defensible, you should consider taking the following steps when preparing an appraisal report:

1. Do not list the third party's name as a "Lender/Client."

Many appraisers include the third party`s name as a "Lender/Client" in the "Subject" section of the URAR form. You should be careful only to put the name of the individual or entity who actually contracted your services in this or any section of the report that requires identification of the "Lender/Client."

If the third party is listed as a "Lender/Client" on the report, the appraiser`s defense attorney will have a much more difficult time demonstrating that this party is not in actuality the appraiser`s client. A sophisticated plaintiff`s attorney will argue that the appraisal report clearly states that the third party is the appraiser`s "client" and is thus entitled to rely on the appraisal.

2. Include a brief cover letter with every appraisal report.

This cover letter should address a few key points such as the following:

a) "This appraisal has been prepared for our client ____."
b) "The purpose of the appraisal is _____."
c) "This appraisal may not be used or relied upon by anyone other than the client, for any purpose whatsoever, without the express written consent of the appraiser."

Such a cover letter would make third-party claims where the plaintiff has used the report without the appraiser`s written consent easier to defend.

In addition, you should refer to the cover letter in the body of the appraisal report and state that the appraisal report is incomplete and cannot be relied upon without the cover letter. This statement would place a reader on notice that if the appraisal report does not contain the cover letter, the reader has not received the complete appraisal report. In the event of a claim, the appraiser`s defense attorney could argue that the third party had no right to rely upon an incomplete report.

What if your state requires you to provide a copy of the report to the borrower? Additional language should be added advising that the report is being provided pursuant to authority from the "client," i.e., the lender, and that the borrower may not be entitled to rely upon its contents when making any decisions about purchasing the property.

3. Additional Language in the Appraisal Addendum

The standard limiting condition #8 states in part:

"Neither all, nor any part of the contents of the report, or copy thereof...shall be used for any purposes by anyone but the client specified in the report, the borrower if appraisal fee paid by same, the mortgagee or its successors or assigns,...without the previous written consent of the Appraiser;..."

Since the borrower is usually responsible for payment for the appraisal—whether payment is made directly to the appraiser or to the lender who in turn pays the appraiser—many plaintiffs` attorneys have argued that the above underlined language entitles the borrower to rely upon the report. This argument has been used in at least one case where the borrower did not even see a copy of the appraisal until after the close of escrow.

You should consider reinforcing intended usage by adding the following language in the comments section in the addendum:

"Neither all nor any part of the contents of this report shall be conveyed to any person or entity, other than the appraiser`s or firm`s client, through advertising, solicitation materials, public relations, news, sales, or other media without the written consent and approval of the authors, particularly as to valuation conclusions, the identity of the appraiser or firm with which the appraiser is connected, or any reference to (affiliation with any professional appraisal organization) or (designation). Further, the appraiser or firm assumes no obligation, liability, or accountability to any third party. If this report is placed in the hands of anyone but the client, client shall make such party aware of all the assumptions, limiting conditions and additional language of the assignment."

These three recommendations may not prevent a third party from making a claim against you. However, if you clearly identify who your client is and who is entitled to rely upon your report, your defense attorney may be able to secure a prompt dismissal.

Three ounces of prevention can be worth even more than a pound of cure.

Copyright 1995. LIA Administrators and Insurance Services. All rights reserved.