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Indemnification Clauses: What Appraisers Should Know
by Isaac Peck, Editor
It’s a tale as old as time.
When adding an appraiser to their appraisal panel, a lender or an appraisal management company (AMC) will present the appraiser a 5-15 page long “Appraisal Services Agreement” or “Appraiser Engagement Agreement” for the appraiser’s signature.
Inside these service agreements is an often discussed and disputed clause: the indemnification clause.
These indemnification clauses were popularized in the years that followed the 2007/2008 real estate crash, as AMCs took over market share after the passage of HVCC and the Dodd-Frank Act.
Today, the vast majority of lenders and AMCs are asking appraisers to sign an agreement that contains an indemnification clause.
OREP helps over 10,000 appraisers with their E&O insurance every year—and a question that many appraisers routinely ask is: “Do I need to be worried about this indemnification clause?”
What Appraisers Should Know
Here is a sample indemnification clause:
Appraiser shall indemnify, defend and hold harmless AMC from and against and against any and all claims or legal actions which arise out of or relate to the following: (a) any negligent act or omission or willful misconduct by Appraiser; or (b) any breach in a representation, covenant or obligation of appraiser contained in this Agreement.
To unpack this, let’s start with what it means to “indemnify” someone. The Merriam-Webster Dictionary defines “indemnify” as:
- To secure against hurt, loss, or damage;
- To make compensation for incurred hurt, loss, or damage.
In other words, the appraiser is agreeing to defend the AMC (or lender) and make them “whole” in the event the AMC is sued or held liable for mistakes that the appraiser makes.
The good news for appraisers is that most of these clauses are simply restatements of common law indemnification principles, i.e. that when one party (in this case the AMC) is harmed by the actions of another (the appraiser), there is an implied obligation on the part of the wrongdoer to reimburse the harmed party.
These types of clauses are now incredibly common amongst the construction trades, real estate professionals, wedding services, financial services, and more. For example, if you are a general contractor hired by a wealthy patron to build a house—you likely are going to hire a framing company to frame the house, an electrical company to run the electrical, and so on. In each case, a smart risk management practice would be to have these subcontractors sign indemnification clauses where they agree to take responsibility for any property damage, mistakes, or errors that they make. After all, even though you are the general contractor, if your subcontractors make mistakes, you want them to take responsibility and pay for it, not you.
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Here’s a story from an adjacent industry that highlights why these clauses are so important. OREP also serves mortgage field professionals with insurance and risk management. These professionals help banks and other large property managers manage their inventory of bank-owned properties (REOs) and their services include boarding up windows, mowing lawns, property maintenance and even property clean-outs—where a firm will go into a home and empty it of all furniture, belongings, and trash.
The relationship between these professionals is structured in a similar way as the appraisal industry: typically, there are larger vendors that service big contracts with a lender. They then sub out the jobs to smaller firms across the country. Just like with appraisals, lenders try to avoid administering their own panel of thousands of vendors across the country.
In one claim OREP has seen, a local mortgage field firm was hired by a larger vendor to perform a “clean out” on a particular property that had been foreclosed on. However, the smaller firm pulled up to the incorrect property address, kicked in the front door, and cleaned out the wrong house—putting all of the current homeowner’s current belongings out on the front lawn!
As you can imagine, this resulted in a BIG claim. However, the problem for the larger vendor was that they didn’t have an indemnification clause in their service agreement and had difficulty forcing the liability onto the smaller subcontractor who was the one who made the mistake. As a result, the larger vendor ended up defending and settling a serious claim.
The problem here, for the larger company, is that their insurance covers them for claims that they face, but doesn’t pay for any recovery efforts that they might want to engage in to sue the smaller subcontractor for their own damages (this is standard). Furthermore, even if the smaller subcontractor was carrying their own insurance, without a clear indemnification clause in the agreement signed between the parties, the result is that the larger vendor and the smaller subcontractor’s insurance companies end up arguing about who is responsible for the claim!
After taking on several claims because of the volume of their business and their faulty contracts, the larger vendor ended up in a precarious position facing mid-six-figure insurance premiums and having very few carriers willing to even quote their business. In fact, the only insurance carrier that was willing to quote their business DEMANDED that they start including indemnification clauses in all their service agreements as a condition of coverage.
I tell this story to appraisers and AMCs alike when they ask me about indemnification clauses. Common law indemnification theory dictates that the party responsible for the mistake should pay for it. From a practical standpoint (especially when it comes to insurance), indemnification clauses make all the difference.
In other words, from a risk management perspective, any business that is working with subcontractors, or even businesses that allow subcontractors on their properties (like builders or wedding venues, for example), should be asking those subcontractors to sign an agreement with an indemnification clause. This is true for AMCs and appraisers as well. It is common sense and it is now a widely adopted practice across many industries.
What to Watch Out For
While indemnification clauses that have the appraiser take responsibility for errors that the appraiser commits, there are still things for appraisers to look out for when evaluating an engagement letter or services agreement.
Specifically, you never want to sign any agreement where you agree to indemnify any third-party for their mistakes or errors.
After HVCC and the Dodd-Frank Act were passed in 2010 and 2011, AMCs had disproportionate bargaining power and often tried to force appraisers into signing one-sided indemnification agreements where the appraiser actual agrees to indemnify the AMC for the AMCs own errors and mistakes!
The popularity of such one-sided indemnification clauses has since waned, as several states have passed AMC laws and regulations that specifically prohibit this practice. Here is an excerpt of the AMC regulation passed in Massachusetts listing AMCs’ “prohibited activities”:
Require an appraiser to sign an indemnification agreement that would require the appraiser to defend and hold harmless the appraisal management company or any of its agents, employees or independent contractors for any liability, damages, losses or claims arising out of the services performed by the appraisal management company or its agents, employees or independent contractors and not the services performed by the appraiser;
Thankfully, many other states have adopted similar language and this issue is much less of a concern today. However, it is still something that appraisers should be on the lookout for when evaluating a new service agreement.
How Can I Help?
If you ever have any questions about liability or risk management in your appraisal business, please reach out to me directly at firstname.lastname@example.org or give OREP’s office a call: (888) 347-5273. We are now open 12 hours a day to better serve appraisers across the country! (8 a.m. ET – 8 p.m. ET)
Stay safe out there!
About the Author
Isaac Peck is the Editor of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of CE at no charge for OREP Members (CE not approved in IL, MN, GA). Visit OREP.org to learn more. Reach Isaac at email@example.com or (888) 347-5273. Calif Lic. #4116465.
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