Publications

E&O Insurance Update 2022

COVID:

Despite lots of fears and concerns, we did not see that COVID had any impact on claims. Across the country, appraisers were considered to be “essential” and they were mostly keeping busy. The appraisers who were not working were those who chose not to do so, for instance people who were older or who had underlying health issues. They did not take on certain assignments or accepted exterior only or desktops.

LIA did not get any reports of an appraiser contracting COVID during an inspection, nor were there any claims that an appraiser infected a property owner.

Most foreclosure moratoriums have been lifted, but that did not cause a flood of REO properties to hit the market and it certainly has not caused a rush of lender claims.

LAWSUITS, CLAIMS, ETC:

Less than 15% of overall “claims” activity comes from lawsuits. There have only been 2 new lender lawsuits filed in the past year. Sometimes sellers sue when the buyer’s appraisal comes in below the contract price (this is a somewhat new phenomenon in this age of frantic bidding caused by low inventory that often results in contract prices that exceed list prices).

Most lawsuits are still filed by borrowers and borrowers sue most often claiming the appraiser (and other parties such as the sellers, agents, home inspectors, etc.) failed to disclose certain defective conditions present at the property. Borrowers also sue over square footage errors.

We have seen several claims involving alleged misrepresentations about utilities running to the subject property. For example, the appraiser reports the property is serviced by public water and sewer because that is what is stated in public records and MLS. It is later discovered that the home is serviced by a private water well and a septic system. In one case, the appraiser correctly stated the home was serviced by a septic system but the septic was installed when the home was originally built as a 2 bedroom home. Two additional bedrooms had been added, and the septic was no longer able to service a home of that size.

In another matter, the septic was located close to the home and, unbeknownst to the owners, it was beneath a newly constructed screened in sunroom. This was not discovered until the septic backed up and could not be accessed for service.

In all of these situations, the borrowers claim the appraisers are partly responsible for their “loss”. These claims can be defended because the appraiser does not owe a duty to the borrower and because the appraiser is not an inspector and is entitled to rely upon public records/third parties, etc.

SUBPOENAS

Appraisers are often served with subpoenas asking them to produce documents or to testify at a deposition or a trial. If you have experience as an expert, maybe you are comfortable handling this alone. If not, contact your E&O because you probably have coverage under your policy and can get an attorney appointed to help with this.

Sometimes the requests can be overly broad and objectionable. One recent subpoena asked for copies of all residential appraisals prepared within the past 10 years that were located within a 5 mile radius of a particular address. The appraiser would have had to map out the 5 mile radius and figure out what streets were located within this area and then search his records for any properties he had appraised that were located on those streets. That was far too much work.

The insurance company hired local counsel to help narrow the scope of the request to get it down to something more manageable and to negotiate some hourly pay for the appraiser during the time it took him to go through his records.

LICENSING BOARD COMPLAINTS

A vast majority of “claims” activity, about 65% of what is reported every month is licensing board complaints. In some states the investigations get resolved quickly...in less than 6 months. In other states it can take between 2 and 3 years.

Only 10% of these complaints result in discipline. The rest are either dismissed or there is some kind of "conditional dismissal" meaning the State tells the appraiser if they agree to take certain classes the complaint will be dismissed.

Most of the complaints have to do with value. Sellers and listing agents complain when the appraisal does not support an inflated contract price. Refinance borrowers complain when the appraisal does not come in with what they think their house is worth.

Sometimes complaints have nothing to do with value and they can be “personal”. The property owner might complain that the appraiser was “rude” because he or she showed up late for the appointment or because they did not answer questions during the inspection. One complaint criticized the appraiser’s “dirty” clothing and even attached a photo of the appraiser captured by their Ring doorbell camera. The appraiser responded that she never knows if she will be crawling around an attic or a crawlspace when going on inspections so she dresses accordingly.

Appraisers are angry that the State would even open a file when the complaint has nothing to do with value or with USPAP. In some states, the rules say every complaint has to be investigated, no matter the reason, and every report has to be reviewed for USPAP compliance, even if that is not the basis of the original complaint.

RESIDENTIAL V COMMERCIAL:

Percentage of claims arising from residential work is up to 90%...only 10% of all activity arises from commercial reports. BUT, commercial claims have more exposure because the properties are higher value. Highest settlements, to date, are all in claims involving commercial property appraisals.

Even simple errors (like a mistake measuring square footage) can result in a large loss if it involves a commercial property. A 10% error in a residential report (typical 2000 square foot home) could mean +/- 200 square feet, which, in some cases, might not even impact value.

A 10% error in a commercial warehouse property appraisal could have a significant impact on value.

WHEN DO APPRAISERS GET SUED?

It depends. Typically, within a year of the appraisal date because most often it is the borrower that is suing over some kind of defect or square footage error.

Statutes of limitation sometimes run from the date of the appraisal and sometime from the date of “discovery”. We assert a statute of limitations defense whenever possible. This past year (2021) the Court of Appeal in TN affirmed that an action against an appraiser must be filed "within 1 year of discovery of the act or omission giving rise to the claim but in no event more than 5 years from the date of the appraisal."

THINGS TO REMEMBER ABOUT YOUR PROFESSIONAL LIABILITY (E & O) INSURANCE:

• Make sure your insurance covers the work that you do. There is no point in paying for insurance that excludes the kind of work you do like reviews, arbitrations, right of way, or progress inspections. Read the policy and the exclusions and speak to your broker.
• Never make a misrepresentation on your application for coverage. The question asks if you have EVER had a claim made against you...answer truthfully! If you omit prior claims, the insurance company could rescind your coverage.
• Don’t let your insurance coverage lapse. You have to renew every year before your policy runs out. If there is a lapse in coverage you could lose your PRIOR ACTS, which means you lose your coverage history and you won’t be covered for the appraisals you have done in the past.
• If you are retiring, speak to the broker about TAIL COVERAGE. Just because you are no longer preparing new appraisal reports doesn’t mean you can’t be sued. You still have assets that need to be protected, so you should keep some E&O insurance in place.

HOW MANY LAWSUITS GO TO TRIAL?

Very few lawsuits go all the way to trial. It takes years to get there and it costs a lot in attorney’s fees. The cases that do go to trial typically result in a defense verdict for the appraiser but the winner still has to pay all of their own attorney’s fees.

Most lawsuits get dismissed prior to trial after a motion gets filed. The judge decides that there is not enough evidence.

Cases do get settled. It is not just the insurance company that want to settle cases. Many times, the appraiser does not want to wait for 2 or 3 years for a case to be finished. Most settlements are for amounts less than $50,000, which is far less than the attorney’s fees that would be spent to go to court.

Attorney’s fees are higher in cases involving commercial property appraisals. Expert fees are higher to review commercial reports.

DISCRIMINATION CLAIMS/HUD COMPLAINTS:

Borrower claims low value due to bias or discrimination. The appraiser needs to have well documented work file to support comp choice and to support value.

Investigators will request other appraisals of properties in the same area looking for patterns. Work needs to be consistent.

During property visit, avoid conversation of a personal nature with borrower/homeowner that could be misconstrued.

Carefully choose language to be used in report/neighborhood description, etc.

Consider Fair Housing training. Explore education offerings put on by local appraisal organizations. Be proactive.

BEST LOSS PREVENTION ADVICE:

Remember that most claims come from third parties/borrowers. Make sure reports have good disclaimer language.

Always have clear and specific INTENDED USE/INTENDED USER language.

"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."

Always state somewhere in the report that the appraisal is NOT a home inspection, etc.

"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."

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