Professional real estate appraisers face a number of risks, critical among them the potential for errors in determining property values, which are then used for mortgage lending, tax assessments, buyer-seller negotiations, business mergers, and foreclosures. One small error can have huge consequences for the interested parties – and ultimately for the appraiser, who can be sued for professional error or negligence. These parties include borrowers/purchasers, lenders, sellers and others.
For example, let’s say a property was appraised for $350,000. A retrospective review says the appraisal should be between $325,000 and $335,000. While the difference is not enormous the lender maintains that it would not have made the loan in the first place, if the appraisal had not supported the value of the loan. Now in foreclosure, the claimant is seeking relief for considerably more than the $25,000 or $15,000. Or, let’s say an appraiser fails to disclose the existence of land use restriction that severely reduced the value of the property, and also failed to use the proper appraisal form or to disclose that the structure was a manufactured home. The claimant files suit.
To protect against these and other types of risk, it’s important for professional appraisers to understand the value of carrying Professional Liability or Errors & Omissions (E&O) coverage. Clients must also understand that their Commercial General Liability (CGL) policy will not cover lawsuits related to the professional services they provide. E&O insurance is needed for these types of claims in order to pay for defense costs as well as any settlements or judgments rendered against the client.
Some states mandate that licensed real estate and commercial property appraisers obtain and maintain active E&O policies, while other states only recommend coverage be purchased. In addition, many large, commercial lenders require any appraiser they use to maintain sufficient levels of E&O insurance. This protects the lenders, who rely on the appraiser’s assessments, from any possible lawsuits filed by dissatisfied current or prospective loan recipients.
It’s important for clients to understand that an E&O insurance policy should be tailored to fit their profession. Due to the wide variation in the types of businesses or professions that need E&O coverage, there is neither standard policy language nor a one-size-fits-all solution. Every type of professional or professional services firm has a unique risk profile, and their E&O policies should reflect that. For example, E&O coverage can be purchased for real estate appraisers who work at a larger firm or for individual appraisers who act as contractors or sole proprietors. It’s important for clients to work with professionals that understand their needs and unique exposures to provide the right coverage.