For many appraisers and also some AMCs (appraisal management companies), the only reason they purchase professional liability insurance (E&O) is because a client requires them to show coverage in order to receive work. The fact that some appraisers and AMCs only look at insurance as an "E&O ticket" leads to some unfortunate examples of fraud, which appraisers, firms, AMCs and clients should be aware of.
Before I get to the fakery, however, I'll explain that our purpose in providing E&O, and also the reason that most of our insureds purchase it, is because E&O first serves the insured by providing a defense for covered professional negligence claims against the insured and, then, if legal damages are established or resolved against the insured, paying those damages for which the insured is liable. A big part of the value in this equation is providing access to knowledgeable, experienced legal counsel in connection with appraisal claims. In other words, E&O insurance exists for the primary benefit of the insured appraiser or AMC.
Outright "Fake" E&O
Nevertheless, the reality is that because an "E&O ticket" is required just to get work from many clients, every year hundreds of appraisers and even a few AMCs fake their E&O coverage. We see the evidence of this fact when clients, regulators or law enforcement contact us to inquire about an appraiser's or AMC's supposed coverage. Most of this fraud, however, goes undetected because most lenders (and also most AMCs) perform no upfront diligence of E&O coverage, either regarding its actual existence or what a particular policy covers. Thus, the fakery is usually not discovered until a claim situation arises -- unless the lender has had another reason to be suspicious.
The regular situations of fakery that we see are:
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Because some AMCs still wrongheadedly insist that appraisers do it, we are asked this question a lot: "should I attach my E&O declarations page to my appraisal report?" The answer is always the same: it's a bad idea. It's bad for both the appraiser and the client/AMC. It is perfectly reasonable for a client or an AMC to ask for proof of E&O insurance and ask to receive updated insurance information each year. That's common to many professions, but there is no good reason to require that the information be included within or attached to appraisal reports. (Lawyers like myself certainly don't attach proof of insurance to our opinion letters or legal briefs.)
Why is it a wrongheaded practice?