The Dilemma of Indemnity Agreements – What Should an Appraiser Do?
Burdensome indemnity language required by a lender or AMC
Appraisers are often required to sign lengthy contracts to obtain assignments from lenders or Appraisal Management Companies. These contracts outline the scope of work, when the assignment is due, how to transmit reports and other items that require review and understanding. Once the contract is formalized, the appraiser is then legally required to comply with its’ provisions. One important and often troublesome requirement is the Indemnity Provision. The concept of indemnity means “security against hurt, loss or damage”. Through indemnity, one party can shift the responsibility of loss to another party regardless of who is actually to blame or is at fault for the loss.
Most contracts contain some type of indemnity or Hold Harmless provisions, even every day ones like your cable TV or credit card contracts. However, in recent years appraisers have been asked to agree to indemnity provisions that may be considered overreaching and even harmful to the appraiser. In an AMC or lender service agreement, they are looking to shift varying degrees of responsibility to the appraiser. The most onerous not only want protection from the appraiser’s possible errors, but anything related to the appraisal, including their own errors that likely may have nothing to do with the appraiser. With these far-reaching clauses, the appraiser is essentially insuring the AMC or lender with all the requirements and obligations of the service agreement as well as potential USPAP violations, mortgage buy-backs or third party claims from a disgruntled buyer or seller.
An appraiser carrying errors & omissions insurance might mistakenly think that their E&O policy will protect them in this type of scenario. No insurance policy, including an E&O policy, allows the policy holder to transfer coverage to a third party. The insurance policy provides protection to the insured entity (which could include employees, owners, partners, independent contractors and others who act on behalf of the insured), but the exposure from the indemnity agreement would not be shared by the insurance company. Any indemnification agreed to by the appraiser becomes the sole legal and financial responsibility of that appraiser. Specifically, any E&O policy would exclude liability incurred by the insured by contract. So in the case of a mortgage repurchase for example, the financial consequences could be significant. An insurer might agree to defend the appraiser in this type of scenario, but has no contractual liability for damages assigned by the Court in favor of an AMC. Again, the coverage protects the appraiser for their own alleged errors or omissions, not any other party.
Some States have or are considering legislation that would place limitations on such burdensome indemnity language required by a lender or AMC. In most cases however, such legislation does not protect the party that voluntarily signs the agreement.
Faced with the dilemma of accepting an assignment and a paycheck but also accepting the risk of broad indemnity language, or refusing an assignment and income, what does an appraiser do? While weighing out these options, the appraiser must first understand what they are being asked to sign. Not all indemnity provisions are harmful, but the contact language can be confusing and full of legalese making it difficult to fully grasp the consequences. An attorney can and should be consulted to review any contract. An insured appraiser should also contact their insurance provider for assistance and clarification. Some policy holders, like those insured by the Landy Agency, have access to a risk management or legal hotline, which is typically staffed by attorneys who are well versed in such matters, and can help interpret the indemnity language and possible implications.
Service agreements and indemnity clauses may be a reality for many appraisers, but should be carefully reviewed and fully understood before they are entered into to avoid unfortunate, and potentially expensive, consequences.