Wednesday, February 29, 2012

A Refreshed Warning about Some Risky E&O Sold to Appraisers

We first warned appraisers about this problem almost a year ago, but many appraisers are still falling prey to the marketing for some "no frills" E&O insurance policies and their lack of coverage.  Advertisements for this product appear in some respectable appraiser publications -- fortunately, others have taken steps to protect their readers and members by providing information, e.g., the Appraisers Coalition of Washington published a warning for its members in April last year on the ACOW website and Ann O'Rourke also published a warning last year in her popular Appraisal Today newsletter.

The central problem is what might be called an "E&O ticket" marketed for the purpose of an appraiser fulfilling lender or AMC demands for a declarations page showing a certain limit of liability, without regard for what the policy actually covers.  The problem with the cheap E&O ticket is that it will not provide any coverage for the appraiser's "prior acts" -- in other words, appraisal work that the appraiser performed in the past -- even when the appraiser would qualify for prior acts coverage with reputable insurance programs because the appraiser has had previous uninterrupted insurance coverage in place.

The most common policy like this sold to appraisers is the Five Star Appraisers policy.  The ads undoubtedly offer coverage at very low rates. When an appraiser goes to the website for that insurance, there is a small warning on the opening page that the insurance will not cover an appraiser's prior appraisal work and that the insurance "may not be suitable for all applicants."  On the next page, however, appraisers are told "lenders do not require prior acts."  That's true but only because lenders and AMCs really have not yet caught on to insurance programs like this and the lack of coverage they provide.  The more important point that goes missing in the marketing is will this policy cover the real professional liability risks that most appraisers face?  The answer to that question for most appraisers is "no."

So, what happens to an appraiser who decides to move from a policy that properly covers their prior work to a policy like the one sold by the Five Star program? 

In most cases, the answer is that the appraiser loses insurance coverage for his or her prior work because the new policy they are buying will not cover it.  That means when a lender makes a claim against the appraiser about an appraisal delivered at the height of the mortgage bubble (2004-2008) or at any time before that new policy, the appraiser will not have insurance coverage for that claim under his or her new policy.  Appraisers usually don't understand this fact until that claim comes in.

That is the biggest problem for appraisers moving their coverage to these "E&O tickets," but there are other serious flaws in the particular policy used by the Five Star program.  These problems include an exclusion for "any economic loss" and an exclusion for claims arising out of an appraiser's negligence in the "preparation or approval of maps, plans, opinions, reports, surveys, designs, or specifications."  The policy also may not cover appraiser disciplinary proceedings with state boards.

If you are an appraiser who has been affected by the above and have now had a claim, please contact me and I will try to steer you in the right direction as to your next steps.