Should I Attach my E&O?
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Should I attach my E&O Declarations Page to My Appraisal Report?
Because some AMCs still wrongheadedly insist that appraisers do it, we are asked this question a lot: “should I attach my E&O declarations page to my appraisal report?” The answer is always the same: it’s a bad idea. It’s bad for both the appraiser and the client/AMC. It is perfectly reasonable for a client or an AMC to ask for proof of E&O insurance and ask to receive updated insurance information each year. That’s common to many professions, but there is no good reason to require that the information be included within or attached to appraisal reports. (Lawyers like myself certainly don’t attach proof of insurance to our opinion letters or legal briefs.)
Why is it a wrongheaded practice?
Let’s start with this basic fact: the insurance policy that the appraiser has at the time of performing an appraisal and thus the policy that the appraiser would attach to a report will most likely be irrelevant to any insurance that the appraiser may have if a claim later arises. The reason for this is that all appraiser E&O insurance — like almost all other professional liability insurance — is issued on a claims made basis. This means that the policy that will cover the appraiser is not the policy that the appraiser had in place on the date of the appraisal but rather the policy that the appraiser has in place years later when the lawsuit is filed or the claim asserted. Since almost all claims relating to appraisals arise years after delivery of the report, whatever policy may be attached to the report is usually irrelevant. (Note: for AMCs, the more critical issue for them to look out for regarding an appraiser’s E&O insurance coverage is to make sure that their panel appraisers are not losing coverage for prior appraisal work by moving to policies which will not cover prior acts. See “A Serious Warning for Appraisers and AMCs About Some Risky E&O Insurance.”)
So that makes the practice wrongheaded. Why is it a bad idea from a risk point of view?
The main reason why we advise against attaching E&O information to reports is that to some degree it does result in more claims being asserted against both appraisers and AMCs. A majority of claims these days are filed by property owners and borrowers. These parties are neither clients nor intended users. Attaching E&O information to an appraisal report simply invites a few more of these parties to threaten or bring claims. I don’t want to overstate the problem because the existence of insurance does not have anything to do with most claims — lenders and borrowers will generally sue regardless. But for a few people, seeing insurance information attached to a report will spark the idea of making a claim. We’ve seen claims from homeowners who’ve alleged things as petty as square footage being off by 2% and then expect a payment as if your E&O were a manufacturer’s warranty. (Claims like this, of course, are defended and rarely result in any recovery to the claimant.)
We realize that some AMCs and lenders nevertheless require appraisers to attach their E&O to reports. There’s no law or regulation against that, but we suggest that the appraiser try to reason with them and explain:
- You are happy to supply the AMC or lender with a copy of your E&O declarations page that they can keep on file.
- Attaching your E&O to your report not only exposes you to unnecessary risk of claims by third parties but it also makes it more likely that the AMC or lender will be dragged into a case filed by a homeowner or borrower. (Yes, we’ve seen AMCs themselves dragged into lawsuits as a result of problems that arose in connection with E&O being attached to a report.)
If those lines of reasoning don’t work, we suggest attaching your E&O information only when required for a specific client. Don’t make it a general practice.