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Risks of Expert Work

Appraisers experiencing a slowdown of their workload may consider doing expert work. Some appraisers believe that taking on expert assignments will protect them from potential litigation. However, excerpts from various claims, included below, show that no specific type of work guarantees protection against lawsuits. It is important to clarify that we are not advising appraisers to decline expert assignments. What we are emphasizing is that expert work carries its own risks, just like lender work. Appraisers should not take on expert assignments with the misconception that it is a simple way to fill the gap until their regular assignments increase, or that it is a way to make some easy money.

1. In a California case, homeowners whose luxury northern California home was destroyed in a fire were dissatisfied with the compensation offered by their insurance company for the rebuilding costs. They followed their counsel's advice and accepted around $3 million from the insurance company, which was considered the "full replacement cost" of their home. Subsequently, they filed a lawsuit against the insurance company, claiming they were underpaid by $1 million.

The attorney for the homeowners hired the insured, Appraiser A, to act as the expert for the Plaintiffs in their case against their insurance company. Appraiser A stated that the home was constructed with high-quality materials and meticulously maintained before the fire, estimating the cost to rebuild it at no less than $4 million.

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Not surprisingly, the insurance company hired their own expert, Appraiser B, who acknowledged the home's beauty and custom design but estimated the full replacement cost to be no more than $3 million. Appraiser B further argued that the homeowners were seeking upgrades to the features destroyed in the fire, accounting for the $1 million difference in opinion.

Efforts to settle the case were unsuccessful and it proceeded to trial. The jury ruled in favor of the insurance company, considering their offer of $3 million as reasonable and representing the full replacement cost. Additionally, the jury determined that the homeowners had to pay approximately $200,000 in attorney's fees to the insurance company.

Rather than accepting this decision, the Plaintiffs/homeowners then hired new counsel. Their new attorney filed a lawsuit against their former trial attorney, Appraiser A (who served as their expert witness), and Appraiser B (hired by the insurance company).

The theory in this new complaint was somewhat novel. The homeowners/Plaintiffs argued that their former attorney had not adequately assessed the merits of their claims against the insurance company, suggesting that he should have dissuaded them from filing suit knowing it would likely fail. They claimed that Appraiser A was negligent in providing his expert opinion and should have recognized the reasonableness of the insurance company's $3 million valuation. Had Appraiser A done so, they believed their trial attorney would have realized the case had no merit, and they would have avoided the adverse verdict and the resulting financial obligations. The claims against the opposing expert, Appraiser B, were also unique. The Plaintiffs/homeowners alleged that Appraiser B had a duty to testify truthfully and accused him of lying about their intentions. They claimed he accused them of fraudulently inflating the value of their home and the rebuilding expenses, portraying them as attempting to construct a home that was "far better" than the original and coercing the insurance company into covering these costs. The homeowners believed that Appraiser B's false testimony had influenced the judge and jury, contributing to the unfavorable verdict.

Appraiser B was successful in having the case against him dismissed promptly, while the defense of Appraiser A was more challenging. The defense counsel had to maintain that Appraiser A's expert opinion, provided on behalf of the homeowners, was credible and reasonable, despite the jury's ruling in the initial case.

By the time this lawsuit went to mediation, almost ten years had passed since the homeowners' home was destroyed in the fire. Eventually, the Plaintiff’s insurance company agreed to accept $100,000 out of the $200,000 awarded to them as the prevailing party in the original case. The payment was made by the Errors and Omissions (E&O) insurance carrier for the homeowners' original trial attorney. Additional funds for the "cost of defense" were paid by the attorney's insurance carrier and Appraiser A's insurance carrier to resolve the litigation.

After almost 10 years of litigation, the homeowners walked away with about $50,000, but they still paid much more than they recovered. While they did not have to pay the insurance company, they had paid their former trial attorney almost $100,000 in fees before firing him after they lost at trial. They did not have to pay their second attorney or Appraiser A.

Appraiser A was never paid the nearly $50,000 in expert fees he was due for his work done on the underlying case and his insurance company paid over $200,000 combined, between settlement and attorney’s fees.

We use this case as an extreme example of the various consequences that might arise because of accepting certain “expert” assignments.

2. An appraiser in South Dakota agreed to act as an expert for 12 property owners regarding the diminution in value in their newly constructed homes that would be caused by new commercial construction underway right next door to their subdivision.

A lawsuit had been filed by the attorney for the homeowners against a national builder/developer and it was the attorney who drafted the engagement agreement. The assignment was to prepare 12 “Before & After” individual appraisals, plus provide litigation support and expert testimony. The fee was to be $3,500 per property, for a total of $42,000.

When the appraiser met with the attorney to sign the agreement, she was excited about the substantial fee but overlooked certain "holes" in the agreement, such as unclear dates for completing the work and receiving payment. She received a check for $3,500 but didn't hear anything for several months.

Eventually, the attorney called to inquire about her progress. She admitted that she hadn't started the work yet, and he expressed annoyance, mentioning upcoming deadlines. Over the following weeks, the appraiser dealt with numerous calls from paralegals to schedule inspections and homeowners canceling inspections. She also repeatedly inquired about payment.

During one inspection, the appraiser overheard a property owner discussing a conflict between an upcoming deposition and vacation plans. This prompted her to call the attorney's office to understand the situation. Instead, she was yelled at regarding an approaching discovery deadline and was told to finish the reports within the next two weeks. When she asked about payment, the attorney said she would get paid when the work was delivered and threatened to file a complaint against her license and sue her for malpractice if she backed out, urging her to complete the job.

Feeling uncertain, the appraiser consulted her personal attorney and insurance carrier, seeking advice on whether she had the right to walk away from the assignment. After reviewing the engagement agreement she had signed, they advised her that there didn't seem to be any grounds for her to do so. The terms in the agreement were simply too vague.

The attorney managed to secure additional time for completing the reports. However, a dispute arose over payment when the case settled. The attorney believed he had the right to withhold part of the fee since the appraiser was not deposed or required to testify at trial. He argued that she would only be entitled to the entire fee if she provided "litigation support and expert testimony" in his understanding, involving depositions and trial appearances. Since she was not required to do either of those things, he felt he was justified in paying only part of the promised fee. As a result, she received $30,000 instead of the full amount.

This experience taught the appraiser a valuable lesson about the importance of ensuring more detailed terms in her engagement agreements for future assignments.

When working as an expert, it is crucial to be extremely cautious when it comes to disclosing anything that could be perceived as a potential conflict. Take the time to carefully consider any prior assignments that might impact your work in this expert role. When uncertain, it is always better to err on the side of disclosure.

Consider documenting your disclosure in writing. By sending a written "disclosure" communication, you create a record that can be referred to in the future if any questions or disputes arise regarding the nature or extent of your disclosure. In the case described below, the appraiser could have avoided a lawsuit by simply sending an email to confirm their discussion about a previous appraisal they had conducted.

3. A Colorado insured was conducting an appraisal for financing on a small commercial warehouse property. The report indicated an "as is" value of $80 per square foot. The appraiser had been hired by a local lender client for this assignment.

The appraiser had just finished taking his photos and was heading down the block to return to his office. When he turned the corner, he almost ran into a prominent local attorney, Mr. Watson, as Watson was leaving a sandwich shop. They exchanged greetings. The insured had done some expert work for Mr. Watson and his firm in the past. The appraiser mentioned that he had just appraised a small warehouse nearby for a lender client and was heading back to his office. Watson said that he had just finished lunch and was headed back to his office. The gentleman shook hands and parted ways.

A few weeks later, Watson reached out to the appraiser, inquiring about the possibility of serving as an expert for condemnation litigation that his firm was handling. The City had made low purchase offers for several commercial properties in the area, leading to condemnation proceedings as the property owners deemed the offers inadequate. Watson's firm was representing four property owners in this matter and believed the appraiser's familiarity with the area made him a qualified expert.

Watson explained that his firm had assembled a team of experts to support a “highest and best use” valuation of the four commercial parcels. Besides the insured, the experts included a noted real estate consultant, a hotel development consultant and an architectural firm versed in hotel and retail development. All experts conducted a thorough analysis of the "highest and best use" of the block, considering the potential construction of retail spaces or a hotel.

The experts reached a valuation of $150.00 to $175.00 per square foot for the subject property depending upon whether it was to be developed retail or hotel/retail. The City had only been willing to offer in the range of $80.00 to $90.00 per square foot to acquire the four parcels owned by the people they represented.

The insured appraiser reminded Watson about their chance encounter downtown and mentioned appraising the warehouse property at $80 per square foot. However, it was acknowledged that this appraisal was not directly comparable to the four parcels involved in the condemnation litigation. The $80 per square foot value was solely based on the property's "as is" condition, while the $150 to $175 per square foot value stemmed from a detailed analysis considering the block's "highest and best use" with potential retail/hotel development. Watson seemed satisfied with this explanation, and both parties proceeded to sign the engagement letter.

Shortly before the condemnation litigation was scheduled to go to trial the insured was advised that three of the four property owners had agreed to settle with the City for $105.00 per square foot. The fourth property owner was committed to taking the matter to trial. Trial preparation was extensive and the insured attended frequent and lengthy meetings with Mr. Watson and other attorneys from the firm.

Just one day before the trial was set to begin, the appraiser received a brief letter from Watson stating that the case had settled and instructing the appraiser to discontinue any further work.

Surprised by the letter, the appraiser immediately called Watson to obtain more details about the settlement. To the appraiser’s astonishment, Watson informed the appraiser that the final property owner had agreed to settle for $105 per square foot. Additionally, during the settlement negotiations, the appraiser's appraisal of a property across the street from the subject property had become a matter of concern.

The appraiser was perplexed by Watson's statements. It seemed to the insured that Watson was implying that he had no previous knowledge of the fact that the insured had appraised the other property. Since the two appraisals in question were so completely distinguishable, the insured could not understand why the old appraisal had played any role, whatsoever, in settlement discussions. As the appraiser continued to inquire, Watson grew impatient and provided no further details about the settlement. This marked the final conversation between the appraiser and Watson, as all subsequent phone calls went unanswered.

The insured was mystified by what had transpired. A few days later, the insured received a telephone call from another attorney client with whom the insured was working in connection with unrelated litigation. The other attorney client expressed to the insured some concern about proceeding forward with the insured acting as an expert in that case. The attorney explained that he had recently spoken with attorney Watson about problems in connection with the condemnation litigation. According to this attorney, Watson complained that the insured had “sand bagged” the litigation. He stated that the insured had performed another appraisal which valued the property located directly across the street at half of what he was saying the subject property was worth. Watson alleged that he only became aware of this other appraisal days before the trial when the City Attorney brought it to his attention. This conflicting appraisal severely damaged the credibility of the appraiser as an expert, leaving Watson with no choice but to settle the case for his unhappy clients.

The insured denied this version of events. He steadfastly maintained that Watson was fully aware of the fact that he had appraised the other property for $80.00 per square foot. He maintained that Watson “dismissed” the other appraisal because the “as is” valuation reflected therein was clearly distinguishable from the “highest and best use” valuation performed in connection with the condemnation litigation.

A few weeks later, the insured was served with a summons and complaint filed on behalf of the settling property owner. The complaint contained one claim of negligence. It was alleged that the insured was responsible for the difference between the amount that the property owner could have achieved at trial ($150.00 to $175.00 per square foot) versus the amount of the settlement ($105.00 per square foot) which presented a range of $562,500 to $875,000. Plaintiff further alleged that the insured failed to advise their attorney of the prior appraisal. When it was discovered on the eve of trial that the opposing party had obtained a copy of the appraisal, it became clear that the insured would be seriously discredited/impeached on the witness stand.

Plaintiff maintained that had the insured disclosed this other appraisal they could have retained a different appraiser, who was not subject to impeachment, continued through the trial and successfully obtained a judgment for compensation in excess of $105.00 per square foot.

The lawsuit was reported to the E&O carrier and counsel was retained. Defense counsel believed the insured to be credible. He believed the insured could present valid distinctions between the two appraisals at issue and wondered why he was not given the opportunity to do so.

Mr. Watson had to admit during his deposition that he was aware of the fact that the insured had appraised the other property because he recalled running into him that day after lunch. However, Watson insisted that he never had any knowledge of the insured’s estimate of value in that appraisal. Rather, he could only recall asking the insured whether he had ever done any appraisals that were adverse to his retention as an expert in the condemnation litigation. In response to that question the insured answered, “no”.

Watson further testified that a few days before the trial he received a telephone call from chief trial counsel for the City. This attorney stated that he had evidence which would “blow away” Watson’s expert. He also stated that this evidence would completely undermine Mr. Watson’s case against the City.

Counsel for the City told Watson that he had a copy of the other appraisal. He intended to use that appraisal at trial to show that the property owner’s own expert believed the property located across the street from the subject was only worth $80.00 per square foot, the same value placed on the property by the City’s expert. This explosive information would serve to completely impeach the expert, undermine the credibility of the entire case and result in nothing more than an $80.00 per square foot award.

Despite having this explosive information that would completely undercut the property owner case, the City was willing to settle with Watson’s client for $105.00 per square foot because that was what they had agreed to pay the other three property owners.

Watson testified that he was completely shocked by this information. He called the clients and explained to them that they had no alternative but to settle for $105.00 per square foot. He felt responsible, in some way, for the fact that the expert he had selected had not been forthcoming about the other appraisal. Had he known about the other appraisal, which would have undermined the expert’s credibility, he could have chosen another appraiser expert. Due to his poor judgment in selecting an expert, Watson believed that he was compelled to waive an undisclosed amount of attorney’s fees because the client was now being forced to accept a settlement for far less than what the case should have been worth.

Watson was asked why he never called the appraiser to discuss this “shocking” revelation. Didn’t he think it might be worthwhile to see if the appraiser had any explanation? Didn’t he think it might be worthwhile to even give the appraiser a chance to explain?

Watson replied that his only concern at that point was his client.

The case against the insured went to trial and resulted in a defense verdict. The jury did not find Mr. Watson’s testimony to be credible. The jury also thought that Watson’s waiver of his firm’s fees indicated his own admission of fault for the manner in which the case was handled. We never really understood why Watson panicked on the eve of trial for no solid reason and why he didn’t simply pick up the phone and call the appraiser to discuss the call from the City attorney.

In the end, if the appraiser had simply confirmed his discussions about the prior appraisal in an email all of this might have been avoided.

4. Acting as an expert in licensing board matters can also subject the expert to future problems. In one case the insured really did not utilize good judgment when agreeing to act as an expert for another appraiser facing a hearing before an administrative law judge. Furthermore, she did not allocate a reasonable amount of time to fulfill her duties as an expert.

The licensing board had reviewed numerous appraisals prepared by an appraiser who had been licensed for nearly 11 years. These reports were riddled with various violations of the Uniform Standards of Professional Appraisal Practice (USPAP). In his defense, the appraiser shifted blame onto others for his mistakes, citing incomplete and inappropriate training from his initial mentor and limited oversight and instruction from appraisal management company clients. He portrayed the appraisal industry as a fast-paced free-for-all and claimed to be doing his best to keep up.

Considering the appraiser's prior disciplinary actions and the recurrence of errors in recent reports, it became evident that he did not seem to internalize the consequences of his past misconduct. Additionally, he showed no remorse, was evasive during the investigation, exhibited disrespect and disregard for the board's reviewer, and asserted that he was not adequately compensated to produce excellent work.

If the insured had looked into the history of the appraiser in question, she might have opted not to help him as an expert. She failed to do so because she was “short on time”. The insured had crossed paths with this appraiser because he had attended some classes she taught over the years. She had never worked with him and had no basis to judge his work. She simply said he seemed “like a nice young man”.

The appraiser appealed to the insured, claiming to be unjustly pursued by the board and desperately needing her help. Without reviewing any of his work or the reports in question, she agreed to act as his expert. Due to her own workload and the appraiser's attorney failing to provide necessary documents, the insured only received the documents three days before the hearing.

The insured was presented with 29 appraisal reports, 29 work files, and 29 reviews. Due to time constraints, she randomly examined three reports without conducting a technical review or thoroughly examining the corresponding work files.

When questioned at the hearing, the insured admitted to having spent a total of 6 hours preparing for her testimony. The testimony she gave was not a ringing endorsement of the appraiser’s work. She said she did not find any “egregious errors”, that the appraiser did, “an adequate job”, and that he, “discussed things that needed discussing”. She also said that his work, “demonstrated improvement”, but then could not explain what she looked at that showed any improvement, at all.

The Administrative Law Judge issued a 25 page Opinion and Order. He ordered that the Certified Residential Real Estate Appraiser license be revoked and that the appraiser pay costs in the amount of $15,000. The judge then went on to say that, “...cause also exists to impose discipline upon respondent’s real estate appraiser ‘expert’”, stating that her participation in this hearing rises to the level of “gross incompetence”. Not surprisingly, the insured “expert” received a letter from the licensing board a few weeks later stating that they had now opened an investigation file relating to her work in the matter. That investigation is still pending.

*****Things to Remember*****

  • Don't rely on the client to protect your interests; it's your responsibility. Ensure that you fully understand the nature of the assignment.
  • Clarify who exactly is the client. Is it the estate, the trustee, the beneficiaries, or all of them? This distinction can have a significant impact.
  • Make sure the payment terms are clear. If you're being paid to prepare an appraisal report, confirm if that's the extent of the assignment. Will you be compensated separately for reviewing other reports and providing opinions? Is it a flat fee or an hourly rate?
  • Be aware that you may be required to testify at a deposition or trial, possibly years after you completed your original report. Does the client expect this testimony without extra compensation? If you want to be paid for your time, ensure that this is explicitly stated in your written agreement.
  • Consider whether you are prepared for potential challenges. Not every assignment will face scrutiny or end up in court, but it is a real possibility. If you don't want to be deposed or serve as a witness in court, think twice before agreeing to be an expert.