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Real Property Appraisal Licensing - Then and Now

Only one state requires appraisers to have Errors & Omissions (E&O) insurance – Colorado. Nevertheless, most appraisers who perform fee work for clients currently maintain E&O. Appraisers generally carry it for two reasons: either they want the legal defense and financial protection provided by E&O in the event of a professional liability claim, or they just buy it because their clients or AMCs require it.

Whatever the reason for having E&O, when a state disciplinary matter occurs, appraisers understandably worry about the impact that the disciplinary matter may have on their insurance. Common fears are that their insurer will not renew their policy or that the insurer will increase their premium. These fears do have a rational basis but they are sometimes excessive. The imposition of serious discipline against an appraiser – such as a license suspension based on significant violations of USPAP or intentional wrongdoing – almost certainly will result in an insurer's decision to not renew the appraiser's policy or a substantial rate increase. The insurer's reasoning is usually that, based on statistical experience, an appraiser with serious discipline is more likely to have a legal claim against them down the road and is a more risky financial bet on average for the insurer.

At the other end of the spectrum, the underwriting rules for a few appraiser E&O programs have resulted in the non-renewal of E&O (or denial of a new policy) even when no discipline is imposed after the filing of a complaint to the state. Under the rules that apply in these programs, the insurance carrier may non-renew a policy or deny new insurance coverage when only a complaint has been filed and no actual discipline has occurred.

It's important to understand, however, that underwriting rules vary widely among E&O programs. One insurance carrier's reaction regarding a disciplinary matter may be different than another carrier's – it all depends on the underwriting rules that each carrier creates for a particular E&O program.

"Should I report the filing of a complaint against me with the state to my E&O insurance provider?"

This question arises because of the fear that reporting the complaint will result in non-renewal or a higher premium. Regardless of those fears, however, and regardless of whether non-renewal or a higher premium may actually result, the safest course for an appraiser is always to report the filing of a complaint to his or her E&O carrier promptly upon receipt of first notice of the complaint. There are two main reasons for this.

The first reason is simply to secure the assistance and policy benefits that the appraiser may have under his or her E&O. Most E&O policies have some type of coverage for assistance in connection with defending a disciplinary complaint. Your policy may cover the cost of an attorney if legal assistance is needed in responding to the complaint or at a hearing. Some E&O programs also maintain legal departments that can help you informally by reviewing your correspondence with the state before you submit anything. This can be valuable assistance because it may come from legal counsel who have seen hundreds of other disciplinary matters and who have the experience to evaluate an appropriate response.

To be eligible for such coverage benefits, an appraiser generally must report the disciplinary matter to the E&O provider within a certain timeframe. This deadline will vary from policy to policy, but it generally will be within 30 or 60 days of when the appraiser receives first notice of the complaint. While a majority of disciplinary investigations opened against appraisers probably do not require any attorney assistance and can be handled by the appraiser directly, it is still important to report every matter upon receipt of first notice to preserve the availability of coverage. A complaint that doesn't seem serious at the beginning might escalate into something worse down the road.

If an appraiser fails to answer these questions accurately by omitting the mention of a disciplinary complaint to the state, and then receives a policy based on that application, the appraiser is jeopardizing the potential coverage under the policy not only for the omitted disciplinary matter (and any legal claim for damages in court that might be filed later) but is also potentially jeopardizing his or her coverage for any future claim. This is because the omission of the information from the application may give the insurer the right to rescind the policy if the omission is discovered later. As an attorney, I have seen heartbreaking instances (I'm not speaking about any claims handled in the E&O program for which I am general counsel) in which appraisers failed to report disciplinary matters on their applications and were later sued in serious lawsuits. When the appraisers reported the lawsuits for coverage and the E&O carriers discovered the omissions, the E&O carriers were within their legal rights to rescind the policies and deny coverage for the lawsuits. This is the reason why it's always safest for an appraiser to report a disciplinary matter to his or her E&O and include mention of it on the application – regardless of the potential impact on renewal or premium. Failing to do this creates the risk of having no coverage at all. It's important also to understand that this means reporting a complaint or investigation – regardless of whether it actually results in discipline or admonishment (whether public or private).

"What if my E&O provider non-renews me or raises my rate?"

This is not the inevitable result of reporting a complaint to an E&O provider. Even when an E&O application asks for information regarding disciplinary matters or disclosure of circumstances that may lead to a claim, the insurance carrier's response is not necessarily going to be non-renewal or a premium increase. As mentioned above, the underwriting rules vary in different programs, and some carriers actually look at the seriousness of the matter to evaluate whether it is something that should affect the issuance of E&O or the premium that is charged. A complaint filed by a borrower over a claimed "low value" or a complaint resulting in no sanctions or in a minor warning, for example, may have little or no consequence in some E&O programs. There is also no "blacklist" for insurance purposes – each determination legally must be made under an insurance carrier's own underwriting rules.

When an insurance carrier decides to non-renew a policy or quotes a much higher renewal premium, however, an appraiser can shop for alternatives with other E&O providers. The suggestion that I would have for appraisers in this circumstance is to start the shopping process early (at least 30 days before the end of the appraiser's current policy) and to engage in actual person-to-person discussions with E&O providers to get feedback on the application process and different options, rather than trying to handle it via on-line applications. Only the most severe disciplinary punishments will make an appraiser truly uninsurable or push the E&O premium beyond a realistic range.

This is an edited article that originally appeared in, and is reprinted from, Arizona Department of Financial Institutions (Sept 14, 2016). © 2016 by the Arizona Department of Financial Institutions