Friday, July 27, 2012

Should I Attach My E&O Declarations Page to My Appraisal Report?

Because some AMCs continue to 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.)

It's a wrongheaded practice:

Let's start with this basic fact: the insurance policy that the appraiser has at the time of performing an appraisal -- and thus the policy that the appraiser would attach to a report -- will most likely be irrelevant to insurance that the appraiser may have if a claim by a lender or AMC later arises.  The reason for this is that all appraiser E&O insurance -- like almost all other professional liability insurance -- is issued on a claims made basis. This means that the policy that will cover the appraiser is not the policy that the appraiser had in place on the date of the appraisal but rather the policy that the appraiser has in place years later when the lawsuit is filed or the claim asserted.  Since almost all claims by lenders or AMCs arise years after delivery of the report, whatever policy may be attached to the report is almost always irrelevant.  (Note: for appraisers and AMCs, the more critical issue for them to look out for regarding appraiser E&O insurance coverage is to make sure that appraisers are not losing coverage for prior appraisal work by moving to policies which will not cover prior acts.  See "A Serious Warning for Appraisers and AMCs About Some Risky E&O Insurance.")

It's a bad idea from a risk point of view too -- for both appraiser and AMC:

The main reason why we advise against attaching E&O information to reports is that it results in more claims being asserted by property owners and borrowers against both appraisers and AMCs.  These parties, of course, are neither clients nor intended users. Attaching E&O information to an appraisal report simply invites a few more of these parties to threaten or bring claims. I don't want to overstate the problem because the existence of insurance does not have anything to do with most claims -- most lenders and borrowers will sue regardless. But for a few people, seeing insurance information attached to a report will spark the idea of making a claim. We've seen many claims reported directly to us by borrowers when they are a disappointed with the value and cannot refinance.   We've also received claims from homeowners who've alleged things as petty as square footage being off by 2% and then expected a payment as if an appraiser's E&O were a manufacturer's warranty.  Many of these claims reported directly to us probably would not have been sparked except for the insurance information that the borrower saw attached to the report.  (Claims like these, of course, are defended and rarely result in any recovery to the claimant but all claims cost money to defend.)

We realize that some AMCs and lenders nevertheless require appraisers to attach their E&O to reports. There's no law or regulation against that, but we suggest that the appraiser try to reason with them and explain:

  1. You are happy to supply the AMC or lender with a copy of your E&O declarations page that they can keep on file.
  2. Attaching your E&O to your report not only exposes you to unnecessary risk of claims by third parties but it also makes it more likely that the AMC or lender will be dragged into a case filed by a homeowner or borrower.  (Yes, we've seen AMCs themselves dragged into lawsuits as a result of problems that arose in connection with E&O being attached to a report.)
If those lines of reasoning don't work, we suggest attaching your E&O information only when required for a specific client.  Don't make it a general practice.

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Appraisers can learn more about ways to reduce their liability risk at www.readimember.org -- a free resource created by LIA Administrators & Insurance Services.

Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance.  He serves as general counsel to LIA Administrators & Insurance ServicesHe can be reached at peter@liability.com.