Wednesday, February 28, 2024 | The Latest Buzz for the Appraisal Industry

An Inside Look at E&O

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There is no law requiring that real estate appraisers must have professional liability insurance – or E&O insurance as it is often called – except in one state. That state is Colorado, which requires that licensed or certified appraisers carry E&O in a minimum amount of $100,000 per claim. 

Nevertheless, most appraisers who perform fee work do maintain E&O, usually insuring them for at least $500,000 or $1 million per claim. Appraisers carry it for two reasons: First, many appraisers want the legal defense and financial protection provided by E&O in the event of a liability claim relating to their work. After all, mistakes happen, and even if your work is always perfect, there’s the risk of a frivolous lawsuit. And second, appraisers buy it because their clients or AMCs require it; they can’t get work without it. 

Whatever the reason for having E&O, when a state disciplinary matter occurs, appraisers worry about the impact it may have on their insurance. Common fears are that their insurer will increase their premium or decline to renew their policy. These fears do have a rational basis. When an appraiser gets slapped with a major sanction – such as a license suspension based on serious violations of USPAP or intentional wrongdoing – an insurer will almost certainly raise the rates substantially or opt not to renew the appraiser’s policy. The insurer’s reasoning is usually that, based on statistical experience, an appraiser with a history of serious discipline is more likely to have a legal claim against them down the road and is on average a riskier financial bet for the insurer.  

What about at the other end of the spectrum, when appraisers face complaints that don’t result in disciplinary action? In this case, the underwriting rules for a few E&O programs may result in non-renewal of E&O, even when no discipline is imposed after the filing of a complaint. But underwriting rules vary widely among E&O programs. One insurance carrier’s reaction regarding a disciplinary matter may be different than another carrier’s – it all depends on the underwriting rules that each carrier creates for a particular insurance program.

“Should I report the filing of a complaint against me with the state to my E&O insurance provider?” 

This question arises because of the fear that reporting the complaint will result in non-renewal or a higher premium. That fear is understandable. But the safest and best course for an appraiser is always to report the filing of a complaint to the E&O carrier promptly after receiving the first notice of the complaint. There are two big reasons for this.  

The first reason is simply to secure the legal aid and policy benefits that the appraiser may have under his or her E&O. Most E&O policies have some type of coverage for assistance in defending a disciplinary complaint. Your policy may cover the cost of an attorney if you need legal assistance in responding to the complaint or at a hearing. Some E&O programs also maintain legal departments that can help you informally by reviewing your correspondence with the state before you submit anything. This advice can be extremely valuable because it may come from legal counsel who have seen hundreds of other disciplinary matters and have the experience to evaluate an appropriate response. 

To be eligible for such coverage benefits, an appraiser generally must report the disciplinary matter to the E&O provider within a certain timeframe. This deadline varies from policy to policy, but it’s generally within 30 or 60 days of when the appraiser receives first notice of the complaint. While most disciplinary investigations opened against appraisers probably do not require any attorney assistance and can be handled by the appraiser directly, it is still important to report every matter upon receipt of first notice to preserve the availability of coverage. A complaint that doesn’t seem serious at the beginning might escalate into something worse down the road.

The other reason to report a complaint to your E&O provider is critical. Virtually all applications for new E&O or for renewal of E&O have variations of two questions. One question addresses the existence of past or pending disciplinary investigations and asks something like this: “Have you been disciplined or investigated by any state licensing, administrative or regulatory board as a result of appraisal activities?” The other question addresses existing or potential legal claims and asks something like: “Are there any pending facts or circumstances which could result in a claim being made against you?”  

If an appraiser fails to answer these questions accurately by omitting mention of a disciplinary complaint to the state, and then receives a policy based on that application, the appraiser is jeopardizing the potential coverage under the policy — not only for the omitted disciplinary matter (and any legal claim for damages in court that might be filed later) but is also potentially jeopardizing coverage for any future claim. This is because omitting information from the application may give the insurer the right to rescind the policy if the omission is discovered later.  

As an attorney, I have seen heartbreaking instances in which appraisers failed to report disciplinary matters on their applications and were later sued in serious lawsuits. When the appraisers reported the lawsuits for coverage and the E&O carriers discovered the omissions, the E&O carriers were within their legal rights to rescind the policies and deny coverage for the lawsuits. 

This is why it’s always safest for an appraiser to report a disciplinary matter to their E&O carrier and include mention of it on the application – regardless of the potential impact on renewal or premium. Failing to do this creates the risk of having no coverage at all when you really need it.  

“What if my E&O provider non-renews me or raises my rate?”  

This is not an inevitable result of reporting a complaint to an E&O provider. Even when an E&O application asks for information about disciplinary matters or disclosure of circumstances that may lead to a claim, the insurance carrier will not necessarily respond with non-renewal or a premium increase. As mentioned above, the underwriting rules vary in different programs, and some carriers actually look at the seriousness of the matter to evaluate whether it should affect the issuance of E&O or the premium. A complaint filed by a borrower over a claimed “low value” or a complaint resulting in no sanctions or in a minor warning, for example, may have little or no consequence in E&O programs. There is also no “blacklist” for insurance purposes – each determination legally must be made under an insurance carrier’s own underwriting rules. 

When an insurance carrier decides to non-renew a policy or quotes a much higher renewal premium, however, an appraiser can shop for alternatives with other E&O providers. The suggestion that I would have for appraisers in this circumstance is to start shopping early. (It’s best to start 30-45 days before the end of the appraiser’s current policy) Engage in actual person-to-person discussions with E&O providers to get feedback on the application process and different options, rather than trying to handle it solely via online applications. And remember that only the most severe sanctions will make an appraiser truly uninsurable or push the E&O premium beyond a realistic range. 

Tom Armstrong, MAI

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