AppraisalPort User Agreement

We were recently flooded with calls from our insured appraisers about the proposed AppraisalPort/FNC user agreement that FNC planned to put into effect on September 13, 2008. FNC’s proposed new agreement caused a storm in the industry. But, for now, it appears that FNC has decided it will shelve the new user agreement while it obtains industry input. The result of this is that the old user agreement – also referred to as a “Subscription Agreement” on AppraisalPort’s website – remains the effective agreement purportedly governing appraisers’ use of AppraisalPort. The problem here is that the old agreement contains provisions that are essentially the same as in the abandoned version.

At the outset, appraisers should understand that an agreement such as this does not change an appraiser’s E&O insurance coverage or "void" the policy. The E&O policy will still provide the same degree of protection and coverage as if the user agreement did not exist and still provide the same level of defense set forth in the policy for claims against the appraiser alleging professional negligence. This means, for example, that an appraiser would still be defended under the policy against claims by lenders or borrowers alleging a mistake by the appraiser in an appraisal even if he or she used AppraisalPort to deliver the subject report (assuming that the appraiser maintains current insurance and that all other regular terms and conditions of the policy are met and no regular exclusions in the policy apply, etc.).

However, from the legal and insurance viewpoint, we believe that appraisers are legitimately concerned about the existing AppraisalPort agreement because of the indemnification provision contained in paragraph 6. Under this provision, an appraiser -- or any user subject to the agreement -- is purportedly agreeing to pay all of AppraisalPort's losses, damages, expenses, etc. which might result from an appraisal delivered through AppraisalPort -- even if the loss or damage results from AppraisalPort's own conduct or even its own "sole negligence." In doing so, the appraiser is agreeing to pay potential costs and damages that are broader than can be covered by the appraiser’s insurance. An appraiser’s E&O policy can only cover mistakes or damage caused by the insured appraiser (not a third party such as AppraisalPort) and cannot cover liabilities forced on the appraiser by contract. But AppraisalPort is demanding that the appraiser agree to pay for losses not only due to his or her own mistakes, but also due to AppraisalPort's own negligence (for example, if a lender alleged that AppraisalPort was negligent in providing a service that chopped up appraisal reports or deleted important information). In this way, AppraisalPort's terms and conditions expose appraisers to potential liability that cannot covered. No one would reasonably expect that the insurance an appraiser buys to cover his or her own mistakes would cover AppraisalPort's mistakes.

Whether an appraiser ultimately decides to accept the terms of using AppraisalPort will have to come down to a business judgment based on weighing the economic need to use AppraisalPort in order to obtain certain business against the risk of AppraisalPort sustaining a legal demand for which it turns around and comes after the appraiser. I’m afraid this decision puts the appraiser in a difficult position because it’s FNC that can better measure that risk than the appraiser.