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Appraising After an Earthquake:
Is Your Liability Exposure on Shaky Ground?
(March 1994)
Does an appraiser face any special liability exposure in the aftermath of an earthquake? Experiencing a major earthquake can be a traumatic ordeal, but unfortunately, appraisers may feel the effects long after the last aftershock. Following the Northridge Earthquake on January 17, 1994, appraisers in Southern California were being asked by many lenders to re-inspect and re-certify the value of properties first appraised before the earthquake. Fannie Mae lenders specified that the appraiser must provide a signed statement certifying the re-inspection "revealed no indications of significant physical damage to the property or needed repairs to the site or the improvements other than those that were noted in the original appraisal report."
Is the appraiser expected to take on the responsibilities of a professional building inspector? The destruction of freeways, department stores and apartment buildings was obvious and well documented in the national press. However, damage to other properties may not be as extensive or conspicuous. Cracks in the wall of a single family residence may be easy to detect but structural defects to the foundation may be concealed.
When preparing reports on a property in an affected earthquake area, you should take special precautions. It is especially important to emphasize that you are not an engineer, building inspector or seismologist. You should also note that the inspection was conducted on a walk-through basis and inaccessible areas were not examined. Such statements should be included in your cover letter or the addendum to your appraisal report; sample wordings are provided later in this CLAIM ALERT. After an earthquake, it is also crucial to indicate the date and time of the inspection, since new or further damage can be caused by a subsequent aftershock.
Fault Rupture Hazard Zones (formerly known as Special Studies Zones) are commonly utilized in commercial appraisal reports, but it would be wise for all appraisers to be familiar with these reports if working in an earthquake area. These reports are readily available from the U.S. Geological Service or local city halls and it is essential to keep up-to-date with current releases. As demonstrated by the Northridge Earthquake, previously undetected faults are constantly emerging or being reclassified.
Noticeable damage and defects can be entered onto the report in appropriate areas such as Site Description and Improvements. Under the Comments section, needed repairs should be noted. However, the appraiser should only rely on quotes or repairs from state licensed contractors or engineers, and only those for which geological/geotechnical evaluations have been submitted. The client should be made aware of the fact that the appraisal report is subject to revision if new repair estimates are submitted and/or if new geological/geotechnical evaluations are received by the client after the appraisal. The effects of market stigmatization should also be taken into consideration, however, it is difficult to predict the impact on value trends. Amazingly, the 1989 Loma Prieta Earthquake had little or no bearing on property values as the real estate market was in a general upswing at the time.
Additional language should be included in your cover letter and/or in a "Scope of Work" section in the addendum to your appraisal report to address the special concerns relating to appraising properties after an earthquake. Whenever feasible, these statements should be discussed with your prospective client. You should also ask the client to sign off on the clauses to attest that they were received and accepted.
Please consider the following texts for inclusion in your cover letter and/or addendum:
Appraiser is not a building inspector or engineer
"Although a walk-through inspection is being/has been performed, an appraiser is not an expert in the field of building inspection and/or engineering. An expert in the field of engineering/seismic hazards detection should be consulted if an analysis of seismic safety and seismic structural integrity is desired."
"As a part of the visual walk-through inspection performed by the appraiser, the appraiser has not inspected inaccessible areas. If an inspection of areas which are not accessible is desired, an expert in the field should be consulted."
"The appraisal was prepared for lending purposes and does not constitute an expert inspection of the property."
Appraiser is not a seismologist
"The appraisal should not be relied upon as to whether a seismic problem exists, or does not actually exist on the property."
"The property which is the subject of this appraisal is within a geographic area prone to earthquakes and other seismic disturbances. Except as specifically indicated in the report, no seismic or geologic studies have been provided to the appraisers concerning the geologic and/or seismic condition of the property. The appraisers assume no responsibility for the possible effect on the subject property of seismic activity and/or earthquakes."
"We have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed seismic requirements by the city or county. It is possible that a survey of the property could reveal that the property does not meet the required seismic requirements. If so, this fact could have a negative effect upon the value of the property. Since we have no direct evidence relating to this issue, we did not consider possible noncompliance requirements in estimating the value of the property."
Appraisal report subject to new repair estimates
and/or technical evaluations
"The appraisal report and opinions therein are subject to future revision based on new repair estimates and new evaluations of engineers/geologists or other seismic experts."
Although our focus in this Claim Alert has been on appraising properties after an earthquake, we recommend the above precautions when working in any area historically prone to seismic activity.
Earthquakes are a fact of life in California; lawsuits don`t need to be.
Copyright 1994. Liability Insurance Administrators. All rights reserved.
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