Three Dangerous Insurance Mistakes Appraisers Should Avoid

Insurance! It’s definitely not a topic that makes one the life of the party. But if you ever need it, having a good understanding of how your insurance works pays off in spades.

Here at OREP, I regularly speak with boots-on-the-ground appraisers about the challenges they are facing (read: claims, complaints, and investigations), listen to their stories, and share risk management and liability advice (when I can) to help put them in the strongest possible position in the event that trouble comes their way.

OREP works with over 10,000 appraisers every year—primarily helping with their E&O insurance—and over time I’ve observed several common E&O insurance missteps that end up being very costly for appraisers.

To help save you the heartburn and the potentially financially disastrous costs associated with such problems, here are the most dangerous and costly mistakes to avoid with your appraiser E&O insurance.

1. Prior Acts: Coverage for Past Work
This is easily one of the most important aspects of your appraiser E&O policy. All appraiser E&O policies will include a “Retroactive Date” (also referred to as your Prior Acts) which is the date you purchased your first E&O policy and it is the first date where coverage is effective for your operations and activities.

Appraiser E&O insurance is written on a “Claims Made” basis. This is an insurance term that basically means you must maintain continuous coverage until you either retire or get out of the business, at which time you will need to purchase Extended Reporting Period (ERP) unless you qualify for free ERP (Many OREP Members qualify for free ERP when they retire).

So as long as you (1) maintain continuous coverage and (2) insure with companies that honor your Retroactive Date, you have coverage going back to the date when you purchased your first E&O policy.

There are two main ways things often go wrong here.

First, if you fail to renew your annual policy or let it “lapse,” you will lose coverage for all your past work. Even if you have carried E&O insurance for five, ten, or even 20 years, letting your policy lapse or expire can lead to years and years of past coverage going up in smoke. If you don’t have current coverage with a Retro Date going back to your original start date, you don’t have coverage for your past work.

Secondly, there are some “low cost” or “insurtech” E&O providers that actually offer appraiser E&O insurance without Prior Acts! This type of insurance is practically worthless since over 90 percent of claims against appraisers occur years after the appraisal was performed. If you purchase a policy that doesn’t provide Prior Acts (Retro coverage), you are basically only covered for appraisal work you do in that 12-month policy period. The appraisals you performed last year, or five years ago, are not covered.

Appraisers are sometimes afraid of shopping their insurance of switching providers for fear of losing their past coverage. OREP (and any reputable provider) will always honor your Retroactive Date. So, the lesson here is to be careful when you’re shopping and make sure any quote includes coverage for your past work and that your original Retroactive Date is listed on your new insurance Declarations Page. Remember that the lowest price is often the lowest for a reason.

And don’t let your insurance lapse either. That’s one of the reasons OREP is so fanatical about reminding our insureds many, many times about their insurance renewal dates. We don’t want you to lose coverage for past work.

2. State Board Complaint Coverage
State Board Complaint coverage, also referred to as Disciplinary Proceeding coverage, is a separate coverage item within your policy that provides for defense and payments associated with defending you from an investigation or complaint from your state appraisal board or another regulatory body (as well as settlements).

This is a situation where it helps to read your policy carefully and scrutinize the coverage being offered when you are shopping insurance.

Last year, I spoke to an appraiser who was facing a state board complaint and was appalled to learn that his insurance policy didn’t provide any coverage for it! He was then left defending the matter without any legal or risk management support and ultimately had to come out of pocket many thousands of dollars to defend himself properly. (He switched to OREP right after!)

OREP’s primary individual appraiser policy includes $10,000 of Disciplinary Proceeding coverage at no extra charge and our firm policies include up to $25,000 per incident.

With real estate agents, home sellers, buyers, AMCs, and lenders able to easily file state board complaints against you with nearly no credible justification, as well as the HUD discrimination complaints being filed against appraisers, this is not a coverage you want to go without.

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3. No (or Limited) Discrimination Coverage
This one is a problem that has only developed recently—within the last two years—as more and more appraisers are facing discrimination complaints and claims.

In the same way that fraud is excluded in almost every insurance policy you can think of, the majority of professional liability (E&O) policies exclude discrimination.

This is a problem for appraisers given the sheer volume of HUD discrimination complaints and claims appraisers are seeing. Facing a discrimination claim in open court or being called to the carpet by HUD without insurance would likely be incredibly very costly for an appraiser.

While some E&O policies simply exclude discrimination, others offer a significant reduced sublimit, such as only providing $50,000 for “Discrimination Claims.” (A sublimit is a limit within the policy that reduces or limits coverage associated with particular claims.)

OREP’s primary individual appraiser policy provides $200,000 of discrimination claim coverage and our firm policy provides up to $500,000 for those appraisers that want to ensure they are properly covered. (Ask your OREP agent for details).

Conclusion
I hope these tips have been helpful and I encourage you to send me an email if I can be of service. My email is isaac@orep.org.

Here is my final bit of advice: In an environment where real estate prices have begun to fall (which we’re in presently), we typically see claims and complaints against appraisers begin to rise. Add to that a Molotov cocktail of discrimination allegations and HUD complaints, and we can see that liability and risk for appraisers is increasing.

It pays then, to take a second look at your E&O insurance and make sure you’re properly covered. In addition to verifying that the coverage is there, I would encourage you to purchase insurance with a program that has deep expertise in defending appraisers and a network of professionals available to assist—if trouble comes knocking.

If you do ever face a claim or complaint, who you take advice from on these issues is tremendously impactful as to their outcome. If your license or livelihood is on the line, you don’t want to be taking advice from a claims adjuster or attorney who can’t tell a real estate appraiser from a home inspector. You don’t want to be trying to educate your “assigned attorney” on what an appraisal is and what USPAP says. Appraisers are a specialized professional field and they need specialized defense and legal support.

That’s one of the reasons OREP has partnered with trial attorney Craig Capilla, who is a former prosecuting attorney for the IL Real Estate Commission who has been working specifically on the defense side for over a decade—defending nearly 1,000 appraisers in cases across the United States. In addition to being on OREP’s litigation panel in several states, OREP Members a free one-hour consultation with Mr. Capilla when facing a state board investigation, HUD discrimination complaint, or any other regulatory matter.

We’ve put in the work to build a network of attorneys and USPAP experts that we can rely on to defend our insureds. The goal of the coverage we provide and the support we offer is simple: to defend you and your livelihood.

Please let me know if I can be of service.

Stay safe out there!

About the Author

Isaac Peck is the Publisher 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 free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465