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Appraisal Report Language is Key

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Carefully crafted language, both specific and standard, is key in appraisal reports. One insured appraiser recently avoided a potentially costly lawsuit by including well-thought-out language that addressed issues related to large rural properties.

In 2017, a roughly 10-acre property was subdivided into two parcels, one was about 7 acres and the other almost 3. Each parcel had a single-family home. The owner who subdivided the property sold the smaller parcel to a third party while continuing to occupy the residence in the larger 7-acre parcel.

In 2018, the insured appraiser was retained to appraise the larger parcel in connection with a refinance loan application. The borrower in this transaction was the owner who arranged the subdivision in 2017. The appraised value was $485,000. The appraisal noted that the property was serviced by a septic system and included language in his report specific to the septic. The report stated:

"The appraiser noted from public records that the property has a septic system. The appraiser assumes this information to be correct, but is unable to independently verify the accuracy of the records reviewed. The appraiser is unable to determine the exact location of the septic system and cannot be held accountable if the system cannot be easily accessed for repair. The appraiser can only conduct a limited inspection of visibly accessible areas. The appraiser did not visually inspect the septic system and cannot confirm whether or not it is functional or adequate for the subject property. A septic inspection by a qualified professional is suggested."

The report contained other standard language that explained the difference between an appraisal and a home inspection, and further advised that the appraisal was not prepared to disclose the presence of any defective conditions on the property.

In addition, the appraiser disclosed that the property was located in a Flood Zone. The appraiser also included some language specific to the Flood Zone. The report stated:

"The property appears to be located in a FEMA Flood Zone pursuant to FEMA Map No. ______, dated ______. FEMA Flood Zone maps can be difficult to read and the appraiser is not an expert. The subject parcel is 7 acres +/-. The appraiser cannot state with certainty where the Flood Zone is located on the subject property and whether or not the residence, or any other structures, might be located within the designated Flood Zone. A survey or specific Flood Zone Certification is suggested."

This thoughtful and specific language turned out to be invaluable, as it was instrumental in getting the appraiser out of a complicated and potentially expensive lawsuit.

In 2019 the owner of the 3-acre parcel was experiencing plumbing problems and hired someone to clean out the septic that serviced his home. It was discovered that prior to the subdivision in 2017, the residence was an accessory unit to the larger residence on the 7-acre parcel. There was only one septic system that serviced both homes and it was located on the 7-acre parcel. The owner of the 3-acre parcel was told he would have to dig a new septic for that home and the cost would be significant because a good portion of the entire property was located in a FEMA Flood Zone. The owner of the 3-acre parcel sued numerous parties, including the seller, who was the original owner of the parcel and who still owned the adjoining 7-acre parcel. It was that seller who filed a third-party complaint against the insured appraiser.

The seller claimed the insured appraiser was "negligent" for not discovering in 2018 that the subject septic system was connected to both homes. It was also alleged that the appraiser failed to discover that the septic system was partially located under a barn and in the FEMA Flood Zone. Due to the location of the septic, the costs to repair, enlarge, or relocate the system would be substantial.

Obviously, the seller realized he would probably be held accountable to the buyer of the adjoining 3-acre parcel and he was trying to push some of that blame onto the insured appraiser. This property was located in a state that did not have any specific case law speaking to whether or not an appraiser owes a duty to the borrower. Defense counsel still filed a motion to dismiss in response to this third-party complaint. The motion was based on the language within the appraisal report.

Counsel argued that the appraisal addressed each issue raised by the borrower in the report, and the Judge agreed. In a well written decision, the Judge noted that whether the borrower (seller) might be held to answer to the claims made by the adjoining landowner was still to be determined; however, it was clear that the borrower could not attempt to shift his responsibility (if any) to the appraiser.

The appraisal report was prepared for the sole use of the lender and the appraiser took the time to identify potential issues (such as those with the location of the septic and the extent of and placement of the Flood Zone).

The motion to dismiss was granted due in large part to the appraiser's own due diligence. When appraising a property with acreage, it can be especially difficult to determine where buildings or underground services might be located on the vast property. This is especially true when it comes to the placement of a septic system or a water well.

Many properties might be partially (or entirely) affected by a Flood Zone. It is also virtually impossible to tell from maps where the Flood Zone begins and ends.

It would serve most appraisers well if they considered drafting language to address such issues. If an appraisal gives rise to a claim, this type of specially drafted language might be the difference between a quick exit and a long and expensive defense.

Originally posted on ASFMRA https://www.asfmra.org

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