Peter Christensen is a frequent speaker at Valuation Expo and Collateral Risk Network compliance events. He is an attorney and serves as the general counsel of LIA Administrators & Insurance Services (www.liability.com).
Buzz: Peter, you work on the “bleeding edge” of legal issues affecting the appraisal business community. What trends are you seeing?
With respect to appraisal liability claims, the overall environment is very calm — compared to five years ago when we were seeing a high frequency of lawsuits relating to appraisals performed at the peak of the last real estate bubble. However, as both an insurance provider and lawyer to appraisal firms and AMCs, there are some trends that I’m watching. The first is that while claims against appraisers are very low, claims against AMCs are becoming more frequent. What seems to be happening is that the parties who sue over appraisals – mainly borrowers — and their lawyers are figuring out who AMCs are in the process and rationalizing how to bring claims against them. We are actually seeing lawsuits with claims entitled “appraisal management malpractice.” So, if a borrower (or a lender) files a lawsuit these days, it’s becoming more common for that plaintiff to name both the individual appraiser and AMC as defendants.
A second trend I am seeing is in the relationship between appraisers – both residential and commercial – and a few of the large national lenders. A few lenders seem to be piling on new appraisal requirements that are sure to produce liability for appraisers down the road. The worst of the requirements I have seen include very broad “reliance language” that two national bank lenders recently required commercial appraisers to use in their reports. In such provisions, appraisers are required to give permission for a broad array of parties other than their client to use and rely on the appraisal. These parties usually include investors in pools of loans and subsequent purchasers of loans, but sometimes the language required by the lenders is so poorly written that it will be susceptible to arguments by borrowers that the appraiser gave permission for them to use and rely on the appraisal as well. Provisions like these are sure to produce new liability for appraisers in the future.
Another trend continues to be something that we actually started warning appraisal firms and AMCs about at Collateral Risk Network meetings in early 2013. The trend involves lawsuits by employee appraisers for unpaid overtime against their employers – whether the employers are banks, appraisal firms or AMCs. What happened is that economically successful class action lawsuits on behalf of staff appraisers against JP Morgan and Landsafe Appraisal filed a few years ago spawned the interest of lawyers in filing similar lawsuits against other employers of appraisers. Their ability to succeed in these lawsuits has been fueled by a federal judge’s ruling in one of the cases against Landsafe that appraisers – in that case, it was residential appraisers – were not exempt from required payment of overtime when they work more than 40 hours in a week. The judge ruled that appraisers were not “professionals” for purposes of overtime exemption under federal and state rules. As a result, we’ve seen a steady stream of new overtime cases being filed, particularly after one law firm did a mailing to appraisers advising them of the overtime issue and asking to represent them in new lawsuits against their past and present employers.
Buzz: What is the most common disciplinary complaint against appraisers?
As compared to a few years ago, on a national basis the number of disciplinary complaints against appraisers is way down. Complaints, however, continue to come most commonly from borrowers contending the appraisals for current loans they want are too low (that doesn’t stop borrowers from later claiming the appraisal was too high when they can’t afford the mortgage and are underwater). Most of these borrower complaints don’t go anywhere but they still cause heartache for appraisers. Unfortunately, what we are seeing very lately is that because appraisers have been very busy with a high volume of recent refinance work, some appraisers have let their standards slip a bit in a rush to complete reports. When this kind of rough shod, poorly supported work gets before a state licensing board, that’s where we see actual discipline most often occurring, with the most common real problems involving inaccurate observations about the subject property (square footage, condition or other attributes), relying on third party information about the property without verification, and poorly selected or adjusted comparable sales.
Buzz: I understand you also write E & O policies for AMCs. What types of claims are you seeing against AMCs?
LIA does write insurance for AMCs – more than a 100 of them in all sizes, and that gives us a good perspective. As an insurance program manager, we’re actually more worried about the risk of insuring AMCs than we are about appraiser risk. This is because claims against AMCs in the last 2-3 years have become noticeably more frequent. Their claims come principally from three sources – from lenders who say appraisals were botched and the AMC is responsible for loan losses either because the AMC should have caught the deficient appraisals or simply because the AMC contractually promised to accept liability regardless of fault; from borrowers who claim they were hurt by high, low or late appraisals; and from appraisers who contend they were unfairly or illegally treated, such as in a situation where an appraiser has been dropped from an AMC’s panel due to perceived problems with the appraiser’s work. As I mentioned earlier, AMCs are also be sued by employee-staff appraisers in cases about unpaid overtime.
Buzz: What types of claims against appraisers and AMCs are not covered by their E&O insurance?
The most common reasons I see claims denied for appraisers under their E&O policies don’t have anything to do with exclusions in their policies. I see this happen in my role as lawyer when appraisers outside LIA’s insurance program call me for help because they’ve been sued and their past or present E&O company has denied coverage to them. The reason is usually one of two things – either the appraiser the appraiser doesn’t have a current policy in place or has a policy for which the retroactive date, also known as, prior acts date does not go back to the date when the appraisal was performed. Appraisers and AMCs need to understand that all E&O insurance sold to appraisers and AMCs as well is “claims made” insurance coverage.
This means that even if they had E&O insurance at the time they did the appraisal, it’s the current E&O policy they have that is relevant to a claim. If they don’t have a current policy (or tail coverage extended under an old policy), they will simply have no coverage when a claim is filed.
Here’s an example of how this works: an appraiser performs an appraisal for a lender in 2006. The appraiser is sued by the lender over that appraisal in 2017. The appraiser had E&O insurance in place in 2010 and continues to have coverage in 2017, when he is sued. It’s not the policy that the appraiser had in 2010 that will cover the lawsuit. The policy that responds to the claim and that needs to cover his defense is the E&O policy that the appraiser has in 2017, when the lawsuit is filed against him and he reports it to the insurer — in other words, it’s the policy in place at the time the claim is “made” that applies to the lawsuit. This is where the concept of “retroactive date” (or “prior acts date”) comes in. The appraiser’s 2017 policy will cover the appraiser’s work as far back as the “retroactive date” on the policy. Without coverage dating back to at least 2010, however, the appraiser in this claim example would not have coverage for the claim under his 2017 policy. In general, the prior acts date in an appraiser’s current E&O policy should go as far back as the appraiser can show to his insurance provider at the time he or she applies for coverage that the appraiser has had continuous, unlapsed coverage in place.
Appraisers need to be careful about maintaining coverage for their prior acts. Many appraisers purchase their E&O in some programs by on-line “easy” applications without interaction with an insurance underwriter (this is not the case in our program), and appraisers too often lose coverage for their prior acts by not understanding these basics; as result, the appraiser either accepts a policy that does not carry over the prior acts date from the appraiser’s earlier policy or actually chooses a policy without prior acts coverage because it may be cheaper. Either way, the result is the same when a claim is made about an older appraisal — no coverage for the appraiser’s defense. Appraisers changing from one insurance provider to another should always make sure that if they have had prior continuance coverage in place, the new policy that they purchase includes coverage back to the prior acts date in their old policy. Appraisers also sometimes lose coverage by allowing their policies to lapse or by cancelling them without considering their options for “tail” coverage.
It’s not just mom-and-pop appraisers who don’t understand these insurance details. I see the same misunderstandings with many large firms and AMCs – they don’t understand how their own insurance works and also don’t understand how their panel appraisers’ E&O works.
Buzz: What advice do you offer to appraisers? To AMCs?
As far as quick advice, that’s tough – because I’ve been known to teach 7-hour seminars about these topics. But here are two points. We are currently seeing strong, even frothy, real estate prices in some markets for both residential and commercial properties. In some places, we might even have passed over a recent peak and are seeing signs of cooling. It’s the appraisals being done right now as the market turns that are most likely to be the subject of future claims if prices deflate even slightly or if mortgage default rates tick upward again – just as it was that the appraisals done in 2007 and 2008 were at the heart of difficult claims during the last downturn. So, be prudent in performing and managing current appraisal work.
For AMCs, they need to pay better attention to the service agreements they are signing with lender clients. What liabilities are they accepting? Did they just agree with their lender client to be responsible for all losses flowing from appraisals that result in buybacks? I see agreements being signed like this all the time – and I expect I’ll be seeing them again in the future at the heart of claims and lawsuits.