Claim Alert: Why Do Claims Get Settled?
When an appraiser reports a new claim, one of the first
questions he or she asks is, "What happens now?" After we explain how
the litigation will be handled, and what will be expected of the appraiser
during the course of the lawsuit, we inevitably get into a discussion about
settlement. Many appraisers are afraid that the insurance company will pay to
settle just because a claim has been made. That is not the case [in our program]. There must
always be a strong reason for settlement to be an option. Most of the time, a claim
is settled because after careful analysis and review, it is determined that the
appraisal in question cannot be supported. If that is the conclusion reached,
then efforts from that point forward are designed to put the case into the best
posture for settlement. Sometimes a case is settled for other reasons, such as
economics or the personal desire or circumstances of the insured. In this
article we will look at some actual claims from the LIA archives and discuss
the facts and circumstances that made settlement the best, and sometimes only,
option.
It Does Not Help When You Appraise The Wrong Property
In a Nevada case, the insured was asked to appraise 5.75
acres of vacant land. He estimated value to be $1.68 million "as is"
in November of 2007. The bank agreed to loan $350,000 to the borrower to
acquire the property. At the time, this same borrower was in default to the
bank on another loan they had made to him in 2005. The bank agreed to loan this
borrower another $850,000, secured by the subject property, in order to give
him the capital necessary to repay the first delinquent loan. Not surprisingly, the borrower defaulted on
both new loans quickly. The bank foreclosed and determined that the value of
the subject property was much less than the insured's estimate had been in
2007. The bank's expert did a retrospective review and determined that actual
value, in November 2007, was only $350,000.
After some investigation by the defense, it was determined
that plaintiff's expert was probably right. The insured was only given a few
days to turn around this assignment. He went out to the general area where the
subject property was supposedly located, but he was never quite sure where the
boundaries were of the lot he was supposed to appraise. He looked at a lot that
had paved road access and utilities. The subject lot had dirt road access and
no utilities. The appraiser was in a rush, so he accepted comparable sales
provided to him by the borrower and did not have the time to verify those sales
or to look for any others.
The property was resold in 2009 for $300,000, so the bank
claimed a loss in excess of $850,000. The insured's policy had a limit of
$300,000. This was a case where settlement was the only option. If the
insurance company proceeded to defend the case there would have been little
left on the policy to pay any judgment at trial.
The defense was able to negotiate a settlement for under
$300,000, less than 1/3 of the bank's loss. It was pointed out that the bank
loaned money to a borrower who was already in default on another loan. That was
not a prudent lending decision and the bank had to accept a large percentage of
responsibility for its own foolish lending decisions... but the insurance
company also had to pay for the insured's mistakes.
Trainees Can Get You Into Trouble
An insured in North
Carolina allowed a trainee to do a substantial amount of work on an appraisal
of a single family home. The trainee went out to measure the property and found
square footage to be 2,130 square feet. Her estimate of value was $350,000, as
of May 2005. When the trainee went back to the office to prepare her report she
"manipulated the software" so that the footprint of her sketch
matched the square footage figures in her notes. While doing so, she
inadvertently inserted an additional 10 feet of wall space into the program,
which caused the overall square footage to be overstated. The trainee then
apparently provided a copy of the appraisal directly to the borrowers during
escrow, as was evidenced by a handwritten email address on a document found in
the file.
In January of 2009 the homeowners had a refinance appraisal
done. This new appraisal estimated value to be $250,000, based on 1875 square
feet. The owners sued the insured seeking damages of over $102,000. When
looking over the work file, the appraiser immediately saw her mistake.
Liability was clear. The borrowers had gotten a copy of the appraisal prior to
closing and said they relied on the appraised value to confirm they were not
paying too much for the home.
The defense did have some arguments to make as to damages.
The plaintiffs' own appraisal expert said that value of the home in May of
2005, assuming the lower square footage, would have been $335,000. That is only
$15,000 less than the original appraised value and the actual purchase price.
Plaintiffs were seeking to recover over $100,000 to compensate them for the
general decline in the market since their 2005 purchase. During mediation, the mediator
was able to convince the plaintiffs that their damage claims were unreasonable
and the case was settled for $15,000.
You Can’t Always Rely On The Work Done By Others
An appraiser in California was hired to do a review of an
appraisal of vacant land zoned for multi family dwellings. The original
appraisal had estimated value to be $2.5 million as of April 2006. The insured
concurred with this value. Plaintiff was a private lender who agreed to loan
$1,275,000 to a developer. There was a first payment default. Plaintiff got a
new appraisal that said the value of the property was only $1 million. The
property was ultimately resold in 2009 for only $250,000. Plaintiff sued both
the original appraiser and the review appraiser seeking damages in excess of
$1.2 million.
It quickly became obvious that neither the original
appraisal nor the review could be supported. The original appraiser used
superior comps and it was arguable that those were the best sales available at
the time. The problem was that the appraiser then adjusted those sales in the
wrong direction, thereby inflating his value. This mistake was not caught by
the reviewer. In addition, it was discovered that the property had been
"flipped". It had been purchased in February 2006 for $970,000 and
then sold only two months later to the borrower for $2.5 million. Neither
appraiser had found that prior sale. To further complicate matters, the
original appraiser had retired in 2007, shortly after the appraisal was done.
He had no insurance when the lawsuit was filed and threatened to file
bankruptcy if he was not dismissed.
The defense argued that the proper measure of damages was
the difference between the loan amount ($1,275,000) and the value at the time
of foreclosure ($1 million). It was not the fault of the appraiser that the
market for vacant land had plummeted and that the property could only be sold
for $250,000. Further, the defense argued that the first payment default showed
that the lender had done faulty underwriting, so the damages had to be reduced
by some percentage of comparative fault. After lengthy negotiations, the case
was settled for $150,000. The original appraiser paid $25,000 out of his
pocket.
Settlement Is Not Always The Carrier’s Idea
New York:
Settlements are often instigated, encouraged and even demanded by an insured,
even if the insurance company has other ideas and wants to defend. In one case
from New York the insured did a very high dollar appraisal of commercial
property. His value estimate was $8.6 million, as is, and $16.7 million, as
complete. The bank loaned $11 million and claimed a loss of over $5 million.
Before an answer had even been filed, the bank demanded that the company pay
the insured’s $1 million policy limit to settle. Before paying that amount, the
defense did some investigation. While there were some problems with the
appraisal, it became clear that the Bank had bigger problems and that their own
loan officers had clearly been involved in a fraud.
Despite mounds of exculpatory evidence, the bank continued
to demand policy limits to settle. The insured then jumped on the band wagon
and demanded, in writing, that the insurance company pay up to $1 million so as
to avoid him being exposed for anything beyond the limits of the policy. The
insured even hired his own personal counsel and this attorney sent a letter
demanding that the carrier pay. Defense counsel and the carrier believed in the
merits of the defense. While settlement was not ruled out, the claim was not
worth policy limits. All of the defense arguments were set out during mediation
and the mediator agreed that the defense arguments had merit and that the bank
had big problems with their case. The mediator placed the "value" of
the case at $200,000. The carrier quickly agreed to pay that amount and the
bank came on board soon thereafter. The carrier's patience and good defense
work saved a great deal of money.
California: In California, a lawsuit was filed by some
borrowers because they discovered that an addition to their home had been built
without permits. The appraiser had photos of the addition attached to the
appraisal. He commented that the additional square footage was finished in a
quality manner so it was given value. "The appraiser went on to note...
according to seller the addition was constructed with all necessary building
permits and to code. The appraiser has not verified this information..." The
defense expert fully supported what had been done by the appraiser and
supported the value stated in the report. It appeared that the buyers'
motivation for bringing the lawsuit had to do with putting pressure on the
seller to forgive a second/carry back loan that was soon coming due and
payable. The appraiser sat on the sidelines hoping that the buyer and seller
would work something out so that we would avoid the cost of trial. A short time
before trial was to commence, the plaintiffs wanted to depose the insured. At
this time the appraiser confessed that he had not done the inspection of the property.
He had sent a trainee to do the inspection and had signed the report as if he
had inspected. The trainee had not even been mentioned in the appraisal. The
appraiser was desperate to settle so he did not have to admit this in his
deposition. At a mediation that took place soon thereafter, the case did
settle. The seller forgave part of the outstanding loan balance and the
insurance company paid $7,500 to avoid the costs of completing discovery and
proceeding to trial. The Release of All Claims signed by the plaintiffs
included a promise they would not make any complaints to the state licensing
board.
Colorado: A Colorado insured was involved in a large
lawsuit involving 30 plaintiffs and more than 20 defendants. The plaintiffs had
all bought second homes within the same subdivision. They claimed that the
builder/developer fraudulently induced them to pay more for the homes than they
were worth, that he falsified their loan applications and that he secured
inflated appraisals to make the deals work. Throughout the course of the long
and arduous discovery, we confirmed that the insured had only done one
appraisal in this subdivision. His appraisal was done in connection with a sale
that had fallen out of escrow. The appraisal done by this insured was not used
in connection with any sale or with any loan.
Defense counsel tried for months to get a dismissal but
plaintiffs' counsel was unwilling to agree. The insured was livid about the
whole thing. He was ill and on oxygen. His appraisal business had fallen off
due to the economy and to his illness and he was about to close his doors.
Medical bills were piling up and he was speaking to counsel about possibly
filing for bankruptcy.
This case was defensible and we likely could have filed a
successful motion for summary judgment. However, the judge ordered that no such
motions could be filed until discovery was complete and that day was a long way
away. The carrier authorized settlement for $10,000 to avoid the cost of going
forward to buy the insured the peace of mind that he was so desperately
seeking.
Conclusion
The decision to settle any claim is never a decision made
lightly. Only after careful consideration of all factors involved does the
carrier agree to pay. If an appraiser has questions about settlement and why a
case would or would not be settled, he or she needs to raise those questions
with defense counsel.
Copyright 2011-12. LIA
Administrators & Insurance Services. All rights reserved.
It is not the intent of the article to establish an appraiser's standard of due care. Instead, the article makes suggestions about conduct that may be well above the standard of due care. This article is intended for general information purposes. It does not imply or warrant that implementation of suggestions will prevent claims. If you have specific questions after reading the article, you should consult an experienced local attorney to determine how applicable law relates to your specific facts or situation. No material contained in this article may be reproduced in any manner without written permission.
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