Limiting Liabilities to Third Parties

Real Estate Appraisers continue to ask how they can limit their risk of liability after their appraisal report has been sent to the client. This question is too important to be considered after-the-fact. Liability may be determined by State law, professional conduct standards, and clarifying statements contained within your appraisal. Clear statements naming the intended user and intended purpose of the appraisal in the comments section, or under a "Scope of Work" section in the addendum, will clarify the nature and extent of your responsibilities. Such statements in the appraisal report, along with the appraiser`s conduct, can be most helpful in limiting liability to third parties. Consider the following before you prepare your next appraisal report because the time you spend now may save you in time and legal costs later.

State Laws Often Determine the Right to Sue

A Real Estate Appraiser`s risk of being sued depends first on the State in which he/she works. For example, in Maryland, the courts generally follow the doctrine of strict privity. In other words, an appraiser`s only duty is to the client who hired them to perform the appraisal.

On the other hand, in California, some would argue the law states a Real Estate Appraiser`s duty is owed to anyone who might "foreseeably" rely upon their appraisal. This could include the lender, a broker, a buyer, or even a seller. Foreseeability is a legal term that creates both an expanded and vague universe of potential claimants. In such states, using additional language in your appraisal report to clarify the scope of your work becomes more important.

Additional Language in an Appraisal Report—A Good Starting Point

The best way for an appraiser to limit liability to third parties is to clearly state in their appraisal report (1) who is the client, and (2) what is the purpose of the appraisal. Add this information on the front of the Fannie Mae (FNMA) form, or in the paragraph describing the purpose and intended client in a narrative report. Then restate it in a specially drafted "Scope of Work" section in the addendum to your appraisal report to reduce your intended audience and lessen your liability exposure. Also include this information in your engagement letter, if you choose to use one. Remember, this type of additional language cannot be used too often.

Remember to consider any additional language very carefully because a judge will put as much emphasis upon them as you did. The following are some examples:

"This appraisal report is prepared for the sole and exclusive use of _________________ to assist with the mortgage lending decision. It is not to be relied upon by any third parties for any purpose, whatsoever."

"This appraisal report is prepared for the sole and exclusive use of the appraiser`s client __________________. No third parties are authorized to rely upon this report without the express written consent of the appraiser."

"This appraisal report is prepared for the sole and exclusive use of the lender _______________, to assist with the mortgage lending decision. The appraiser is not a home inspector. This report should not be relied upon to disclose any conditions present in the subject property. The appraisal report does not guarantee that the property is free of defects. A professional home inspection is recommended."

Actions Sometimes Speak as Loudly as Words

Be careful about releasing your report to another lender. Do you know this lender? Have you worked with them before? Do you know of their reputation? Has your original client given you permission to release it to another party? Just because someone calls and asks does not mean you have to comply.

Be especially careful of clients who ask you to sign a release that permits them to give your appraisal report to anyone they want, without your knowledge and/or consent. You should retain the right to choose with whom you do business. It is in your best interest to have control of this distribution.

Additional Language and Professionalism Help to Resolve Disputes

In a recent Alabama lawsuit, a Real Estate Appraiser was sued by the borrowers who claimed he had failed to discover termite infestation and other defects present in the property. When analyzing this lawsuit, the court first found that the borrowers were considered "intended users" of the appraisal report and had a right to rely on it. However, that "intended user" status was neutralized by the fact that the appraisal report also contained clear additional language stating the report was prepared solely for the lender`s use in making a mortgage lending decision and not for the borrower`s use to determine value. The additional language further defined that the appraisal report did not guarantee or imply that the house was free of defects and suggested that the borrowers secure a professional home inspection or take other necessary steps to insure the house was acceptable to them prior to closing escrow.

The court determined that the borrowers could not have reasonably relied upon the appraisal report to disclose conditions in the property because of this additional language. The lawsuit was dismissed.

In another example of successfully using additional language in an appraisal, a Colorado court determined that the plaintiff/lender was not justified in relying upon the appraisal report because it had been prepared for the exclusive use of another lender.

An appraiser was hired by Lender A to estimate the value of a subject property. The appraisal was prepared in connection with the borrowers` purchase of this property and to assist the lender in making a mortgage lending decision. For a variety of reasons, Lender A decided not to make the loan.

Lender A provided a copy of the appraisal report to the borrower. During the course of the next few months, the borrower joined together with other business associates and formed a joint venture. These business associates approached Lender B to secure financing and provided them with a copy of the eight-month old appraisal report that was prepared for Lender A. Lender B relied upon the original appraisal report and extended financing to the joint venture. When the loan went into default, the lender was unable to resell the property for enough money to cover the loan balance. As a result, Lender B filed a lawsuit against the appraiser.

When the appraiser was served with the complaint, he was taken by surprise because he had never done work for Lender B. The appraisal report stated that it had been prepared for the sole and exclusive use of Lender A and that no other party was entitled to rely upon this report-without the specific written consent of the appraiser. Lender B had never sought that consent or contacted the appraiser to ask if the eight-month old value could be re-certified.

Lender B tried to argue that since the original appraisal was prepared for Lender A, the appraiser knew that some lender, somewhere, would rely upon the appraisal report for some purpose. The judge dismissed the lawsuit because the appraisal report contained a statement that no third party may rely upon the appraisal, or use it for any purpose, without the written consent of the appraiser.

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Clear statements naming the intended user and intended purpose of the appraisal should be added throughout the appraisal report and your engagement letter. To strengthen the effectiveness of your written words, appraisers must also support these actions by not releasing their appraisal reports to just anyone who asks-without sufficient consideration.

Following these suggestions may not prevent you from being sued by an unknown claimant. However, these tips will go a long way in assisting you in a prompt and effective defense-and in limiting your liability exposure.

Copyright 2001. LIA Administrators and Insurance Services. All rights reserved.