We are receiving many calls from our insured appraisers about AMC agreements. Most of our recent calls have concerned the TSI Appraisal Services Appraiser Agreement. This agreement is worth looking at because, though more extreme than others in its one-sided wording, it illustrates the typical legal problems for appraisers found in AMC agreements. Some of the language discussed below is verbatim the same as in other AMC agreements.With regard to the TSI agreement, appraisers are particularly concerned about the indemnity section. Indemnity provisions are a recurring issue with AMC agreements. The bottom line is they are usually an AMC's attempt to shift potential liability by contract from the AMC to the appraiser. Because of the current mortgage crisis, this attempted shifting of liability is occurring more than ever.
Section 7 of this agreement is entitled "General Indemnity." From our insurance and legal defense perspective, the main problems we see in this section (and in various other similar AMC agreements) are:
1. Indemnity Provision. The first paragraph of section 7 requires, in part, that the appraiser "indemnify, defend, save and hold harmless [the AMC] from and against any and all liability, claims, damages, penalties, losses, fines, judgments . . . [and] any other costs, fees and expenses . . . in any way related to . . . [among other things] any appraisal report submitted to [the AMC] by Appraiser pursuant to this Agreement." Simply construed, this means the appraiser is promising to pay [the AMC] for any cost or loss of any kind (including criminal or civil fines ordered against [the AMC]) for anything related to an appraisal submitted by that appraiser.
This is an unusually broad indemnity provision because the AMC here could conceivably take the position that the appraiser is required to indemnify the AMC for losses caused by the AMC itself in handling an appraisal or resulting from the AMC's own negligence. For example, if the AMC conveyed erroneous instructions to the appraiser which resulted in a problem with the appraisal and the lender client demanded that the AMC make up a resulting loss, the AMC could conceivably demand that the appraiser pay the AMC for the AMC's own mistake. As another example, class action litigation is becoming more common against lenders and their subsidiary AMCs, the AMC could, here again, argue that appraisers whose appraisals are the subject of such a lawsuit must indemnify the AMC for defending the lawsuit because it relates to their appraisals. There may be questions about whether such an overbroad indemnity provision like this one is enforceable under various states' laws, but that is a question that would only be resolved after an appraiser is embroiled in litigation by the AMC.
(As noted below, the agreement we are looking at here specifies that Michigan law will apply. Under Michigan law, an indemnity provision requiring indemnity of a party whose sole negligence caused certain types of damage is against public policy and unenforceable. It's beyond this short memo to fully analyze the outcome of a dispute regarding enforceability because resolution of the issue would depend on numerous hypothetical facts and whether Michigan law will even apply is itself subject to dispute. And again, this type of defense for the appraiser would only come out after the appraiser is sued by an AMC. It would be better if this legal mess was avoided entirely by not having overbroad language in AMC appraiser agreements.)
2. Mortgage Repurchases. Another significant issue is raised in the second paragraph of section 7. In this part, the appraiser "agrees that if a mortgage lender is required to repurchase a mortgage loan for any reason in any way related to [among other things] . . . any appraisal report submitted by Appraiser pursuant to this Agreement, Appraiser shall pay [the AMC] an amount equal to the repurchase price paid by such mortgage lender to repurchase such mortgage loan." The appraiser is further required to "pay the reasonable attorney’s fees of [the AMC] incurred in enforcing Appraiser’s obligations hereunder, including, with [sic] limitation, the obligation of Appraiser to pay [the AMC] an amount equal to the repurchase price of a mortgage loan as set forth above."
There are obvious problems with this provision. In particular, there could be many reasons why an originating mortgage lender might be contractually forced by a mortgage purchaser to repurchase a mortgage based on something in an appraisal that have nothing to do with any error by the appraiser. For example, what if the appraisal disclosed that the subject property was being used commercially and the originating lender was required to repurchase the mortgage based on the disclosure of this fact in the appraisal? That's not an error by the appraiser. Yet, under the language in the agreement, the AMC could conceivably argue that the appraiser is financially liable for the repurchase price. Aside from that unfairness, why should the appraiser be required to pay the AMC at all for a repurchased mortgage? The AMCisn't the lender and has not sustained any loss. (It's my guess that the AMC might be "warranting" their appraisals or guaranteeing repurchase demands to their lender clients and hoping to pass that cost on to appraisers). Finally, a repurchased mortgage does not even necessarily result in a loss to the originating lender or a loss equating to the full repurchase price. Yet, under the provision here, the appraiser is required to pay the AMC the full "repurchase price" paid by the originating lender. Like the first paragraph, there are serious questions as to whether this language would even be enforceable by an AMC -- one of the main issues being that the provision could be construed as an unenforceable penalty. Once again, however, this is a question that would only be resolved in court after the AMC has sued an appraiser.
3. Insurance Issues. The problems discussed above are compounded for appraisers because the potential liabilities they are assuming in some cases are beyond their insurance coverage. As to this issue, appraisers should understand, as I have pointed out before, that an indemnity agreement such as the one in the agreement here 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 AMC 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 a lender, borrower or AMC alleging a mistake by the appraiser in an appraisal (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, under the indemnity section of the agreement here, an appraiser is purportedly agreeing to pay all of the AMC's losses, damages, expenses, attorneys' fees, etc. which might result from an appraisal delivered to the AMC-- even if the loss or damage results from the AMC's own errors. 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 the AMC) and cannot cover liabilities forced on the appraiser by contract. But TSI is demanding that the appraiser agree to pay for losses not only due to his or her own mistakes, but also due to other parties' conduct. The AMC is further requiring appraisers to agree to pay monetary amounts for which an appraiser would never have liability except because of the agreement (such as paying to the AMC the repurchase price of a mortgage). In this way, the AMC's indemnity provision and similar provisions used by other AMCs expose appraisers to potential liability not covered by insurance. No one would reasonably expect that an appraiser's insurance would cover the AMC's or other parties' mistakes or pay the AMC for damages for which an appraiser would otherwise have no liability. Such insurance is simply not available.
4. Applicable Law. Aside from issues with the indemnity section, we feel it is important to note that the AMC agreement here requires the appraiser to agree that Michigan law will apply to any disputes between the appraiser and the AMC, and that any such disputes will be litigated in the courts of Oakland County, Michigan, where this AMC is located (regardless of where the appraiser lives or works). This is an obvious concern for an appraiser who lives outside Michigan. It is not unusual to see similar clauses in agreements with other AMCs.
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In the end, whether an appraiser signs an AMC agreement like the one above comes down to a business judgment: whether the benefit of doing business with the AMC (and receiving its appraisal orders) outweighs the potential risk it may cause, including potential liability beyond insurance coverage. Based on our claims experience, as of this date, we have not received a material number of claims affected by indemnity provisions in AMC agreements, but the future is uncertain and these liability shifting provisions may become more significant. An appraiser could also try to persuade an AMC to drop or amend its indemnity language. Obviously, the more that appraisers demand such changes, the more likely that AMCs will have to change their agreements and make them less one-sided.
In the end, whether an appraiser signs an AMC agreement like the one above comes down to a business judgment: whether the benefit of doing business with the AMC (and receiving its appraisal orders) outweighs the potential risk it may cause, including potential liability beyond insurance coverage. Based on our claims experience, as of this date, we have not received a material number of claims affected by indemnity provisions in AMC agreements, but the future is uncertain and these liability shifting provisions may become more significant. An appraiser could also try to persuade an AMC to drop or amend its indemnity language. Obviously, the more that appraisers demand such changes, the more likely that AMCs will have to change their agreements and make them less one-sided.
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