Appraising your clients and assignments for the liability risks they may pose to you
Canadian Property Valuation Magazine
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By Peter Christensen, general counsel and chief compliance officer of BBG, Inc., a commercial appraisal and assessment firm in the US. Peter also serves as a board member of Eval.com, a company that provides real estate evaluation services to financial institutions. For 14 years, he was general counsel to LIA Administrators & Insurance Services, the Appraisal Institute’s endorsed E&O provider for appraisers.
As an attorney, I have been involved with professional liability matters affecting real estate appraisers in the United States for over 20 years. During my time as general counsel for the largest E&O insurance program for US appraisers, I observed more than 5,000 claims and disciplinary matters against appraisers. I have dipped my toe far enough into Canada, however, to realize there are some key differences between the liabilities that Canadian appraisers face versus US appraisers. Here is one difference that might surprise you: appraisers in the US are not required by any professional organizations or licensing bodies to carry professional liability insurance (except in Colorado which has a minimal requirement). While many lending and governmental clients may require E&O insurance in the US, it is not universally required to perform appraisal services for fee-paying clients. Would I suggest that a US appraiser provide services without insurance coverage in place? No.
While other differences certainly exist in the legal realm of our two countries’ appraisers and in our legal systems, there is one common theme that I have consistently heard from both US and Canadian appraisers when they are telling me about a legal claim or disciplinary complaint against them. It is a version of this: “I had a feeling that this assignment was going to be a problem – I wish I had never taken it.” Or, “I just knew this was going to be the one.”
At the outset, the appraiser’s survival instinct had told them that the assignment posed a risk to them and wished they had followed that instinct. Perhaps it was a pushy client with unreasonable expectations or a property owner known to be a problem in the community. Whatever it was that gave them that feeling, they wished they had followed it. Based on the data of 5,000+ appraiser claims and disciplinary matters, I can confirm that your personal survival instinct is a valuable tool in managing your risk, regardless of what side of the border you are appraising on. Follow that instinct. Be aware of the context into which you are offering an appraisal.
The need to follow your survival instinct exists regardless of the type of assignment. Assignments posing higher risk exist in lending work, estate work and certainly in litigation.
Here are some basic questions to consider about a potential engagement:
- Are the client’s deadlines realistic?
- Are the client’s expectations realistic?
- Does the client show disregard for your professional standards and your responsibility as an appraiser to remain objective and unbiased?
Consider hidden ‘users’ – whether intended or not. Are there other parties on whose behalf the appraisal is being obtained or to whom your report may be given? For example, an appraisal for an estate might turn into an appraisal being used by five feuding family members. Or, is your client an investment promoter who will be providing your report to dozens of prospective equity investors in a property or investment entity?
Be careful of the appraisal on a napkin. I saw that claim happen – not literally – it was an ‘appraisal’ contained in a short email. An attorney for several property purchasers sent another appraiser’s report to the appraiser and asked the appraiser for an informal review: “I don’t want you to do any heavy lifting, but does this appraisal look ok to you?” The appraiser responded with a simple note saying that it looked like a good appraisal with a supported value. After the property was acquired and the economics didn’t work out for the purchasers, they sued the appraiser over the review in that email, contending they had relied on it in making their purchase decision.
Is the potential client complaining about other appraisers (illegitimately or unfairly)?
Be wary of the client who is complaining about the fee upfront.
Finally, it can also be important to do a little self-reflection. An appraiser with a good ‘bedside manner’ is much less likely to be sued than a discourteous or abrasive appraiser.
A tell-tale claim…
A cranky appraiser-borrower files both a disciplinary complaint and a lawsuit. The defendant appraiser wishes he had followed his gut. In a small community in a western US state (bordering Canada), with only a handful of local appraisers, a mortgage lender had sent an appraisal request by email to several appraisers who each turned the assignment down. The appraisal was for a re-finance of a home owned and occupied by another appraiser. The other appraisers in town had come to know that he was very difficult to get along with and that he had threatened legal actions against a variety of local people. Of course, none of the appraisers were telling this information to the prospective client trying to get an appraisal; they were simply not accepting the emailed appraisal request. Finally, the lender reached out to one, pleading to get the assignment accepted. When he got the call and heard about the lender’s difficulty getting any appraiser to take the assignment, he felt sorry for the appraiser-borrower, despite his reputation. Against his own survival instinct, he agreed to accept the assignment, thinking he would be extra-careful, dot his ‘i’s’ and cross his ‘t’s.’ Sure enough, when the value he developed and reported was not sufficient for the cranky appraiser’s desired loan, that appraiser both filed a disciplinary complaint against him and sued him for negligence. His appraisal stood up to the licensing board’s inquiry after getting the complaint, and he eventually won the court case too. However, it was a long, miserable process to go through, and he definitely wished that he had followed his own survival instinct in the beginning.