In response to COVID-19 we're temporarily adjusting office hours to close at 4PM PST. View our hours.

Limiting Liabilities to Third Parties

Although the subject of this article has been addressed in prior writings, it remains a topic that truly is important enough to highlight once more.

Get the latest Claim Alerts delivered to your inbox.

We must remind appraisers that they are far more likely to receive a claim made by a third party than a claim from a client. There is case law in many states that is helpful to an appraiser’s defense because the cases specifically hold that an appraiser owes no duty to a borrower. To make the chances of success even stronger, it is recommended that appraisers always add additional language in their reports to reiterate intended use and intended user, as well as to specifically define the report’s parameters. Well crafted language within the report, coupled with supporting case law, gives defense counsel a much better chance of defeating third party claims.

For the past several years, between 80% and 90% of all lawsuits, claims, demands, and complaints filed with state licensing boards came from third parties. These matters involved both residential and commercial appraisals. Included in this category of third parties, we find sellers and listing agents, who file complaints with state licensing boards because the appraisal for a prospective buyer came in “too low.” When hired by one spouse in a divorce proceeding, an appraiser might have to defend a claim made by the other spouse who did not agree with the appraiser’s opinion of value. The same scenario might take place when the appraiser has been retained by a landlord, or tenant, involved in a rent renegotiation. Overwhelmingly though, the category of third parties that make the majority of claims against an appraiser are borrowers.

Borrower claims fall into three major groups which are value claims, defect claims, and square footage claims. Borrowers will allege they were induced by an inflated appraisal to pay more for a property than it was worth. On the flip side, a borrower will claim the appraised value is too low, when they are trying to refinance an existing loan, or asking a lender to remove PMI, and the opinion of value is not high enough to allow them to achieve their goal.

Defect and square footage claims are made when the borrowers take possession of a new property and find that they were “misled” with respect to size and/or condition.

Case Law

A number of states have case law that holds an appraiser owes no duty to a borrower. In states such as California, Florida, Indiana, and Maryland, to name a few, we are frequently successful when asking the court to grant a motion seeking dismissal of the appraiser from a lawsuit filed by the borrowers.

In a 2014 decision, the Court of Appeal in CA ruled in part:

“One who seeks financing to purchase real property has many means available to assess the property’s value and condition, including comparable sales, advice from a realtor, independent appraisal, contractor’s inspections, personal observation and opinion, and the like…Stated another way, the borrower should be expected to know that the appraisal is intended for the lender’s benefit to assist it in determining whether to make the loan, and not for the purpose of ensuring that the borrower has made a good bargain...”

The Court continued by stating:

“...instead of doing investigations that would help him determine whether the property suited his needs, [the borrower] chose to rely on the bank’s willingness to make him a loan as a sufficient indicator of the suitability of the property...The appraisal is ordered by the lender for its own protections and the borrower has his or her own means of ascertaining the desirability of the property.”

That law was followed by the CA Court of Appeal when they were deciding a similar case in 2018. The Court stated:

“…As a matter of law, borrowers cannot sue an appraiser for negligence where the appraisal was prepared for a lender.”

In 2003, a FL Court ruled:

“An appraiser who is hired in connection with a mortgage loan transaction is not liable to the buyer for a negligent misrepresentation on the appraiser’s report because the appraiser’s services were intended to assist the bank in a loan transaction and not to assist the buyer in a purchase transaction.”

Specific Drafted Language in the Appraisal is Crucial

Even with favorable case law, it is always important for appraisers to include additional language in their reports. In case after case, we see that Judges will look to the appraisal report for guidance when rendering their decisions.

In a KS case, the borrowers sued the insured appraiser (and others) alleging that a number of defective conditions were not properly disclosed to them prior to their purchase of a home. The defense counsel filed a motion asking the court to dismiss the appraiser. The Judge granted the motion. In his decision the Judge wrote:

“The appraisal report expressly states that the only intended user of the report is the Lender/Client. The report states that no additional intended users are identified by the appraiser. The appraiser goes on to say that the appraisal is not a home or environmental inspection and such inspections are recommended. The appraiser states that he has no knowledge of hidden or unapparent conditions, that he assumes no such conditions exist, and that he makes no guarantees or warranties, either express or implied.
Plaintiffs cannot establish that they were intended users of the report or that the report was prepared in a negligent manner. Judgement must be rendered in favor of the appraiser, dismissing all claims against him.”

A Judge in MT was also asked to rule in a lawsuit filed by borrowers. They were claiming that the appraiser acted in a negligent manner when he failed to disclose in the appraisal that the property being appraised had a leaky roof. The Judge dismissed the lawsuit and ruled in favor of the appraiser. In his decision, the Judge wrote:

“Here, the appraisal report clearly indicates that the intended user of the report is the VA approved lender and no other. Plaintiffs cannot point to any language in the report which states that it was prepared for their benefit. Further, the purpose of the report is only to establish a fair market value of the house. Plaintiffs can point to no language to establish any other purpose. Plaintiffs cannot establish that any duty was owed to them by the appraiser. In the absence of any duty, there can be no claim for negligence.”

A borrower lawsuit in NV alleged that an appraiser overstated value because he did not correctly measure the square footage in a single-family residence. The Judge in this case also looked to the appraisal report when granting the defense motion seeking to dismiss the appraiser. In his opinion, it was clear that the Judge went through the appraisal report, page by page, and carefully considered the language therein. The Judge stated, in part:

“The report was made directly and solely for the benefit of the lender/client. On the front page of the report it states that the appraisal is for the lender. On the second page of the report it says the purpose of the report is to provide the lender/client with an accurate and supported opinion of the market value of the subject property. On the fourth page of the report it states that the only intended use is for the lender/client to evaluate the property for a mortgage finance transaction. This intended use is stated throughout the report. Also repeated throughout the report is a statement that the only intended user is the lender/client.
In several addenda attached to the report it is stated that the intended user is the lender/client and the intended use is to evaluate the property for a mortgage finance transaction. Throughout the report, you can find highlighted in bold print, “No additional intended users are identified by this appraiser.”
Plaintiffs cannot point to anything in the appraisal report that indicates the report was prepared for their benefit or that they are intended users. There was never a duty owed to the Plaintiffs and that is dispositive of this entire case.”

Conclusion

When asked to rule in a case, we see that Judges will take the time to look over an appraisal report, sometimes in detail. They will be influenced by language within the report which clearly states that the ONLY intended user is the lender/client and that the ONLY intended use is to establish a market value of the property.

Judges are also persuaded by language which indicates that the appraisal is NOT a home inspection and that it should not be relied upon to report on the condition of the property.

We cannot stress strongly enough how important it is for every appraiser to take the time to draft and include specifically drafted language in each repo, even when it means they are restating language that is already set forth in preprinted sections of the appraisal. When the same premise is repeated over and over in the report, it is more difficult for a borrower to try to argue the opposite.

The lesson to be learned is not that specific language in an appraisal could be helpful to your defense. There are multiple examples which prove that specific language in an appraisal will be helpful if you have to defend yourself in a claim pursued by a third party.

For your Consideration

It would not be fair for us to stress the importance of specifically drafted language without giving you examples. Highlighted below is language taken from appraisal reports we have seen as well as language quoted in published opinions.

It is not suggested that anyone include in their reports all of the language noted below. Many of the examples are duplicative and simply provide alternate ways to say essentially the same thing.

No one can guarantee that having this language in an appraisal means any third-party lawsuit will be defeated. What we can say is that it will certainly provide your defense counsel with more ammunition with which to argue in favor of that dismissal.

General example:

“The only intended user of this appraisal is the client ________. There is no other intended user. No purchaser, seller, or borrower are intended users of this report. No party, other than the intended user, should rely upon this appraisal for any purpose, whatsoever. The fact that some party, other than the client, paid for the appraisal, either directly, or indirectly, does not make them an intended user.”

“The intended use of this report is to assist the client when deciding whether or not the subject property would be sufficient security for a requested loan. The report was prepared specifically to address, and to meet, the needs of the client. The report should not be relied upon for any other purpose. The report was prepared solely for the specific use of the client. No other use of the appraisal is intended, contemplated, or authorized by the appraiser.”

This language addresses the borrower head on:

“The only intended user of this appraisal is the client_______________. This report was not prepared for use by the borrower. The borrower should not rely upon this report when deciding whether or not to purchase the property. The borrower should not rely upon this report to determine value. The borrower should not rely upon this report to determine whether the subject property is a good investment. The borrower should not rely upon this report to determine the condition of the property, whether it is free from defects and/or whether it is in need of any repairs. The borrower should not rely upon this report to disclose the presence of any environmental hazards that might exist at the property. The borrower should not rely upon the sketch attached to this report nor upon the appraiser’s statements pertaining to Gross Living Area. The borrower should not rely upon this report to disclose if the subject property is located in a flood zone and/or if flood insurance should be purchased. The borrower should not rely upon this report when deciding how much insurance to purchase. The borrower should not rely upon this report to determine what it might cost to rebuild the property if it was completely, or partially, destroyed. If the borrower has any questions about any aspect of the subject property, the borrower should secure their own appraisal in order to answer those questions.”

With respect to defect claims, it is important to always reiterate and to distinguish the purpose of the appraisal versus a professional home inspection:

“This appraisal report is not a home inspection. It does not guarantee or imply that the house is free of defects. The appraiser is not a home inspector. It is suggested that the borrower secure a professional inspection of the property and take the necessary steps to insure the house is acceptable to them prior to closing escrow. Note: The term "Inspected" within this appraisal report shall be deemed to mean "VIEWED." The appraiser is not a professional home inspector or environmental inspector. The appraiser can only view reasonably accessible areas of the property in order to observe the overall condition. The appraiser is not qualified to warrant the mechanical, electrical, structure/roof, foundation, or any condition of any part or whole of the subject property”

This one includes more explanation as to the scope of work. This language is beneficial when defending all claims, not just those made by third parties.

“The appraiser is not a home inspector. The appraiser is not qualified to report on the quality of various systems present in the home. The Appraiser assumes no responsibility for determining the electrical service capacity. The Appraiser is not qualified in such matters. The Appraiser assumes no responsibility for the verification of the type, quantity, or quality of insulation, if any, used in the improvements. The Appraiser assumes no responsibility for the adequacy, capacity or operating status of mechanical equipment or systems including, but not limited to, electrical, heating, cooling, plumbing, sewers, septic systems, water supply, etc. The appraiser is not an environmental or hazardous waste expert or inspector. The Appraiser is not qualified to detect such substances. The appraisal was prepared based on the assumption that no such substances exist at the subject property. The Appraiser assumes no responsibility for determining whether or not flood insurance is required. The Appraiser attempted to review what was considered to be the most recent FEMA maps available. The appraiser assumes no responsibility for the accuracy of the FEMA maps. The Appraiser is not a surveyor, nor an expert in legal matters. The Appraiser assumes no responsibility for the legal description or the accuracy of any boundary issues, including easements and/or encroachments. The Appraiser is not an expert, and cannot be relied upon to determine building code and /or zoning code violations that might exist at the subject property.”

Copyright 2020. LIA Administrators and Insurance Services. All rights reserved.