Wednesday, October 16, 2013

Appraisal Management Company (AMC) License Bonds. Are They Working?

Current AMC Bond Requirements

Eighteen states now require AMCs to carry surety bonds to be properly registered to operate in those states.  The required bond amounts vary from $10,000 in New Mexico to $100,000 in Washington.  A list at the end of this post shows the required bond amounts in each state.
Are AMC Bonds Working?

The requirement for AMCs to carry bonds serves two purposes.  First, the bond assures that if an AMC fails to comply with its financial obligations under a state's AMC law, there will be funds available up to the limit of the bond to pay those obligations.  The types of obligations covered by the bond will depend on the state's AMC law.  In all states regulating AMCs, these obligations will include penalties owed to the state in connection with disciplinary matters; in some states with AMC laws that address the timely payment of contractor appraisers, the bonds may also cover unpaid appraisal fees.  With the failure of some AMCs operating in multiple states, there have been many claims and payouts on AMC bonds -- which is why surety companies are now more carefully underwriting the bonds.  The frustration for some claimants on AMC bonds is that the bond amounts set by the states may not be sufficient to cover all of the financial obligations of a failed or delinquent AMC.  A $25,000 bond for a small AMC may be sufficient to cover that AMC's obligations, but is certainly not going to be sufficient to cover the obligations left by the failure of a very large AMC handling thousands of appraisals in one state.  No states currently impose bond requirements based on the volume of an AMC's business in the state.  The bottom line is that with respect to providing a financial guaranty, AMC bonds are working up to the financial limits established by the states.
The second purpose served by AMC bonds is financial gatekeeping.  To obtain a bond from a surety company, AMCs generally have to submit a credit application and may also have to submit financial indemnity agreements under which their principals promise to repay amounts covered by the bonds.  When AMCs or their principals do not have acceptable credit, have prior judgments against them or are thinly capitalized, they will not qualify for bonds and will be prevented from doing business in those states with bond requirements.  In states with higher bond requirements, only very stable, financially sound companies will be able to qualify.  Also, when AMCs plan to operate in multiple states requiring bonds, those AMCs have to demonstrate to the surety company that they are financially strong enough to cover the total financial risk presented by all of the bonds.  In practice, as providers of AMC bonds, we see the gatekeeping function working effectively on a daily basis.  Now that some AMCs with bonds have failed and surety companies are aware of the risk, AMCs with financial or legal problems usually cannot qualify for bonds (especially in states with higher bond amounts) and thus do not begin operating in states with AMC bond requirements (they do operate in states where bonds are not required).
Recent Changes and Challenges with AMC Bonds
Pennsylvania: In June, Pennsylvania introduced a $40,000 bond requirement.  The PA board adopted antiquated language for its bond form which poses serious concerns for responsible bond carriers.  This has resulted in bonds for PA being difficult to place for all but extremely well-qualified AMCs.   The Surety & Fidelity Association of America has written directly to the PA board about the problem but the board has not yet acted (as of this date). 
Washington: Effective July 1, WA increased its required bond amount from $25,000 to $100,000.  A significant number of AMCs have difficulty qualifying for a bond in this amount.
Kentucky: Kentucky enacted legislation earlier this year (KRS 324A.155) which eliminates a $25,000 bond requirement and replaces it with a “recovery fund” into which AMCs make an annual payment.  The current recovery fund payment is set at $300 and will paid by AMCs directly to the state with an AMC’s annual registration.  AMCs are not required to show any financial qualification for the recovery fund -- i.e., the recovery fund requirement does not have a gatekeeping function that will keep AMCs with financial or legal problems from operating in Kentucky.
Did You Know?
AMC license bonds are not like E&O insurance.  They are guaranties by the bond carrier to pay the covered financial obligation of the AMC.   Unlike under an insurance policy, if a bond carrier pays out on a bond claim, the AMC is then legally obligated to repay the bond carrier for the loss payment.  That is why bond companies will often require the principals or officers of an AMC to sign agreements promising that they will reimburse the bond carrier for loss payments — this indemnification is secondary assurance that a paid loss can be collected by the bond carrier if the AMC itself cannot pay.

Important Compliance Tip for AMCs:

Every AMC required to maintain license bonds should create a calendaring system for its bonds to assure that each bond is continued or replaced upon expiration. After continuing or replacing a bond with the surety company, an AMC should then take the time to verify directly with each state regulator that the state has received a copy of the new bond document and that the AMC is in compliance.  At this time, states are completely reliant on receiving paper evidence of AMC license bonds and the documentation can be lost quite easily and other foul-ups can occur. A small amount of diligence by AMCs can prevent bigger problems from occurring. 

States Requiring AMC Bonds

The following states currently require AMCs to carry valid surety bonds -- bond premiums shown are for AMCs with acceptable credit and backgrounds.

State                                     Amount                  Premium

                                                            1-Year   2-Year

Alabama:                            $25,000                 $250       $450

Arizona:                               $20,000                 $200       $360
Arkansas:                            $20,000                  $200       $360
Colorado:                            $25,000                  $250       $450
Georgia:                               $20,000                 $200        $360    
Illinois:                                 $25,000                  $250       $450
Louisiana:                            $20,000                 $200       $360    
Mississippi:                          $20,000                 $200       $360
Missouri:                              $20,000                 $200       $360
Nebraska:                             $25,000                 $250       $450    
New Mexico:                        $10,000                 $100       $180
North Dakota:                      $25,000                 $250       $450    
Oregon:                                 $25,000                 $250       $450
Pennsylvania:                       $40,000                 Call         Call
Tennessee                            $20,000                 $200       $360    
Utah:                                     $25,000                 $250       $450
Washington                         $100,000               $1,000    $1,800
Wyoming:                             $25,000                 $250       $450

For assistance with AMC or other types of bonds, please contact Dave Schnell at 800-334-0652, ext. 105 or

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