The Dilemma of Indemnity Agreements – What Should an Appraiser Do?

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Indemnity

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.

John Torvi is the Vice President of Marketing & Sales at the Landy Insurance Agency. He has been in the insurance industry for 25 years with a focus on small business. He is a frequent speaker and contributor to many professional associations on risk management, insurance issues and business development. He can be contacted at j…@landy.com or 781-292-5417.

Image credit flickr - Max Barners
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5 Responses

  1. Jeremy Hall Appraisals - Colorado Jeremy Hall Appraisals - Colorado says:

    Great article.  As this issue relates to matters of legal engagement under the regulatory umbrella of the state, I think there should be a set of ready made or acceptable forms to select from, just like what happens with realty approved contract forms.   Insurers and state regulators need to jump on in the deep end of this issue, and put forth acceptable examples or ready made forms.  Sometimes I feel like the only appraiser left who refuses to include a copy of my EO insurance document into every report.  My insurance does not even remotely assist a borrower or an amc, so I think it’s a misleading report action to include that document within the report itself.  Amc’s are officially running ‘right out of the box’, like ready made franchise businesses for purchase.  You can always spot the ones who don’t understand their position well, by their over reaching engagements, requirements for EO within the report, and improper indemnity agreements. CO has a rule against such activity.
    You can read it here: https://legiscan.com/CO/text/HB1110/id/643699 /That would be page 12, section B (pg 13 if you click the pdf page number).

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  2. bubba jay bubba jay says:

    i wont sign any agreement that opens me up to more liability, but some appraisers do, and i am guessing its because they are fairly new and naive. being extorted to sign such an agreement only destroys this profession even further, and is another reason why many appraisers have gotten fed up with all the BS and are getting out. unfortunately, nobody cares, and thats why . . . . .

    the bleeding continues . . . . .

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  3. Appraisermorons says:

    The states can change that. If the AMCs were held liable for the product they provide their customers maybe they wouldn’t pick the cheapest appraiser anymore.

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    • Jeremy Hall Appraisals - Colorado Jeremy Hall Appraisals - Colorado says:

      Close but no cigar.  Keep on reading.  The lenders have been officially notified via various FNMA and registry notices, that they are ultimately responsible for all of the decisions they make regarding lending decisions.  That includes appraiser selection.  Utilizing an amc does not absolve the lender of their responsibilities regarding due process and proper quality verification.  So you’re close but no cigar.  Lenders are liable, but they continue to select unscrupulous middle managers.  Why that’s happening should be your main focus.  One might presume it has something to do with being backed by the taxpayer…

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  4. Jeremy and Bubba jay are 100% correct. DO NOT SIGN APPRAISAL INDEMNITY AGREEMENTS. PERIOD!

    I also agree with Jeremy re insurance E&O. I used to refuse them until a friend I WANETED to work for required it. I’ve since stopped putting it in.

    Placing E&O with a million or two million dollar coverage ceiling in a report is an invitation for someone looking for deep pockets to sue us!

    All of us need to insert language (as further limiting conditions) in our text that “notwithstanding the content of any boilerplate service agreements or engagement ‘letters’ transmitted after assignments have already been agreed to or accepted; or pre-printed appraisal form sections seeking to extend appraisal liability shall not be binding on the signing appraiser. The appraiser is not obligated to third parties not specifically named herein for any purpose; nor shall the appraiser be obligated to indemnify any party relying on this appraisal for any purpose. Management companies are agents for the client. The appraiser will not indemnify them for any purpose. Use of this appraisal report for any purpose constitutes acceptance of this/these condition(s).

    The numbers of appraisers are declining. We are approaching a point where we can resist unfair treatment.

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