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Why Report a State Board Investigation or Complaint?
by Isaac Peck, Senior Broker at OREP.org
To say there is a high volume of state board complaints filed against appraisers is an understatement. Fannie Mae has admitted to filing more than 1,000 complaints (they call them “tips”) with state boards and licensing commissions in a single calendar year. Even if we consider that Freddie Mac is filing slightly fewer complaints, the government-sponsored enterprises (GSEs) are easily filing over 2,000 complaints against appraisers per year.
If you take into account complaints filed by the general public, real estate agents, appraisal management companies (AMCs), lenders, and other appraisers, the true number of complaints filed against appraisers may be closer to 4,000 per year. Though not every complaint filed is investigated or even taken seriously by the state appraiser board or real estate commission, that’s still a lot of heat facing appraisers.
All of this raises an important question. What exactly should you do if you do receive notice from your state regulator that a complaint has been filed against you or that they are investigating you?
Here is some straightforward advice:
- Don’t try to go it alone. Seek an experienced appraiser, Uniform Standards of Professional Appraisal Practice (USPAP) expert, or attorney who can view your appraisal and the complaint against you independently. You can also have them review your response prior to firing it off to the state board. Many appraisers are quick to respond to a notice and may be emotional when writing their response letter. This is a mistake. It pays to take a few days (or a week!) and approach this with a level head. Seek professional help in reviewing your appraisal and your response.
- You must immediately report the complaint or investigation to your insurance carrier. This is absolutely key. In some cases, the state might send a letter indicating that they’re “inquiring” about an appraisal or perhaps simply requesting a copy of an appraisal. Many appraisers think this isn’t something they need to tell their insurance carrier (“Why do I need to report such a simple inquiry? It’s not even a complaint yet!”), but you certainly should.
Here is wording from one of the main policies offered by OREP Insurance Services:
The Company will reimburse the Named Insured for reasonable attorneys’ fees, costs and expenses incurred resulting from the investigation or defense of a disciplinary action first received by the Named Insured and reported in writing to the Company during the policy period by reason of an act or omission in the performance of Professional Services. The maximum amount payable, regardless of the number of disciplinary actions, shall be $10,000 per Claim and $25,000 per policy period. The Company shall not be obligated to defend any disciplinary action, or pay any fine, penalty or award resulting from any disciplinary action.
In other words, the policy will reimburse you up to $10,000 of reasonable expenses, but you have to report the “investigation” during the policy period. If the state sends you a letter “inquiring” about an appraisal or asking for a copy, that is an investigation.
You might think this is harsh, but it drives home the point of how important it is to report any investigation or complaint to your insurance carrier right away.
This type of policy language is not specific to OREP either. The requirement is present in the vast majority of appraiser errors and omissions (E&O) policies. One of OREP’s largest competitors actually requires that appraisers report the investigation within 60 days of receiving notification for coverage to be offered!
So, if you want coverage and support from your insurance carrier with a state board complaint (and you should), then report it when you receive it. We’ve seen plenty of cases in which appraisers report these matters six months, or even years, later and wind up upset when coverage is declined. I encourage you not to go it alone when the state board comes knocking.
As an aside, this advice also applies to claims as well. If you receive a demand letter, or if a real estate agent, buyer or seller threatens to sue you, or if anything happens that you think might be a claim, it pays to report it to your insurance carrier. Getting a potential claim on the record with your insurance carrier is the surest way to ensure that you will have coverage down the road if it does turn into a full-blown claim. Especially when it comes to claims, you don’t want to wind up in a questionable coverage position.
Here’s one final word of advice about state board complaints and investigations. The recommendations here apply even if the state is simply sending you an “inquiry,” a request for your workfile, or is performing any kind of scrutiny into you or your appraisals. Note that the policy wording quoted above references an “investigation.” The word “inquiry” is found in the definition of the word “investigation.” If the state is inquiring about your appraisal, asking you questions, or requesting a copy of your workfile, that is an investigation, and it needs to be reported to your insurance carrier right away. Every appraiser E&O policy I’ve ever read has very similar language and a similar position.
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Impact on Insurance Premiums?
Many appraisers do not report board complaints or investigations because they are concerned that their insurance carrier will increase their premiums. This fear is not unfounded. In the years following the 2008 real estate crash, I have worked with insurance carriers that used to non-renew an appraiser’s insurance policy for reporting even a frivolous complaint!
Here’s the best way I can answer this concern: It depends on the insurance carrier. Some carriers continue to penalize appraisers for simply reporting a state board investigation—regardless of whether the complaint was frivolous or if it required a professional defense before it was dismissed.
As the appraisal insurance market has softened over the last decade, some insurance carriers have adopted more liberal approaches—increasing an appraiser’s premium only when more than $2,000 is spent on their defense, for example.
With OREP’s primary program (the one that we have underwriting authority for), we do not penalize appraisers for reporting a state board investigation. In the vast majority of cases, our insureds are able to receive professional support and assistance—with no increase to their premiums.
Of course, our underwriters review the legitimacy and allegations of each complaint. For example, we don’t like allegations of fraud. But our general rule is that if the cost of your defense is less than $5,000, you will not experience an increase to your premium. If the cost of your defense exceeds $5,000, then it’s likely your premiums will increase by $100-$200 per year. In my experience, more than 90 percent of board complaints do not reach this threshold.
Conclusion
You don’t have to go it alone if the state board comes knocking. Seek help and report it to your insurance carrier. Even if you’re working with a carrier that will increase your premiums at the mere mention of the word “investigation,” it’s better than having your coverage denied if the state digs in and comes after your license. Don’t risk it. Sticking with an insurance carrier like that might not be a good idea anyway.
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