“Fake” Appraiser E&O Insurance and Shady Things from AMCs Too
Outright Fake E&O
For many appraisers and also some AMCs (appraisal management companies), the only reason they purchase professional liability insurance (E&O) is because a client requires them to show coverage in order to receive work. The fact that some appraisers and AMCs only look at insurance as an “E&O ticket” leads to some unfortunate examples of fraud, which appraisers, firms, AMCs and clients should be aware of.
Before I get to the fakery, however, I’ll explain that our purpose in providing E&O, and also the reason that most of our insureds purchase it, is because E&O first serves the insured by providing a defense for covered professional negligence claims against the insured and, then, if legal damages are established or resolved against the insured, paying those damages for which the insured is liable. A big part of the value in this equation is providing access to knowledgeable, experienced legal counsel in connection with appraisal claims. In other words, E&O insurance exists for the primary benefit of the insured appraiser or AMC.
Outright “Fake” E&O
Nevertheless, the reality is that because an “E&O ticket” is required just to get work from many clients, every year hundreds of appraisers and even a few AMCs fake their E&O coverage. We see the evidence of this fact when clients, regulators or law enforcement contact us to inquire about an appraiser’s or AMC’s supposed coverage. Most of this fraud, however, goes undetected because most lenders (and also most AMCs) perform no upfront diligence of E&O coverage, either regarding its actual existence or what a particular policy covers. Thus, the fakery is usually not discovered until a claim situation arises — unless the lender has had another reason to be suspicious.
The regular situations of fakery that we see are:
- Some appraisers will take an expired or non-renewed E&O policy and change the dates of coverage on it. This particularly occurs when appraisers have had severe negligence claims and can longer obtain insurance coverage. In one memorable situation, a lender had an appraiser on its panel who had extended the expiration date of his coverage by three years — that saved him the effort of creating a new forgery every year.
- A few appraisers will create their own E&O declarations page by using another appraiser’s declarations page and changing the name and address. That’s one of the reasons why appraisers with real insurance shouldn’t post their insurance information on their websites.
- The most common scenario is that an appraiser or AMC will purchase an E&O policy and cancel it immediately or in the middle of the term to obtain a refund, but then keep using the declarations page as evidence of current coverage. Or, similarly, an appraiser will not pay for his or her policy during the term, and the coverage will be cancelled, but again the appraiser will keep using the declarations page.
- Some appraisers and also a few AMCs who want to be less directly dishonest will give a client a copy of a different type of insurance they may have besides E&O — such as a very cheap general liability policy (which does not cover professional negligence). Or, a small AMC will commonly provide a policy to a lender that only covers individual appraiser E&O but does not cover professional services as an appraisal management company or work performed by subcontractors.
The reason these tricks work is because most lenders and their AMCs do no verification, don’t understand what they are looking at when it comes to appraiser and AMC insurance, and/or are satisfied just to see a piece of paper in the file or attached to a report. Of course, this lack of due diligence falls apart when a claim is made — fake coverage doesn’t work out so well at that point. The insurance carrier knows who’s covered or who’s not. Aside from the lack of coverage for a claim down the road, however, a lender’s due diligence regarding the existence of proper coverage is also important because those parties who commit fraud about their E&O coverage are also more likely to put their unsuspecting clients at risk.
Fake E&O insurance and related problems are relatively easy to prevent with just a few steps. We’re available to discuss the measures that should be used by diligent and responsible lenders and firms concerned about protecting themselves from fraud.
Other Appraiser E&O Problems
Beyond truly fake E&O, there are still problems. Even when an appraiser or an AMC has a valid E&O policy, an inappropriate policy may not actually cover the work performed. Here are just three current examples to demonstrate that diligence needs to go further than looking at a declarations page — for both insureds and clients:
1. An E&O Policy “Designed to Meet Your Lender’s Requirements.” One popular program for appraiser E&O markets what it calls a “no frills” policy to appraisers on the basis that it “meets your lender’s requirements.” The program dangles a very cheap rate. There’s a gigantic void of coverage created, however, when an appraiser moves from having prior appropriate E&O coverage to this “no frills policy.” The void is that the new policy will not cover the appraiser’s prior acts — i.e., won’t cover their prior appraisal work. For a lender (or its AMC), this means that when their appraiser makes this move, there will be no coverage under his or her new policy for all of the prior appraisal work done for the lender. Well, that’s no problem for the marketing of this insurance to appraisers because the insurer explains: “Lenders do not require prior acts coverage.” This marketing angle works because most lenders and AMCs are not aware of this issue and don’t have the proper diligence measures in place to prevent it.
The same policy also introduces a number of critical new liability exclusions that will leave many appraisers without coverage for many claims about appraisal work actually falling within the time period covered by the policy. Among exclusions no one would ever expect for an appraiser are:
- Exclusion of coverage for “any economic loss”
- Exclusion of claims arising out of an appraiser’s negligence in the “preparation or approval of maps, plans, opinions, reports, . . .”
- Exclusion of claims relating to “municipal zoning or code” issues
- Exclusion of claims relating to mold
- Exclusion of claims against the appraiser relating to the appraiser’s misuse of a client’s data.
2. Exclusions for claims by regulatory agencies and government sponsored entities. Some popular appraiser E&O policies contain exclusions and limitations which apply to claims brought by the FDIC, the Federal Housing Finance Agency, and similar regulatory or supervisory entities. As of the date of this article, for example, the following exclusion is contained in a popular appraiser E&O policy when the policy is sold to appraisers who have coverage for “prior acts” before 8/1/08:
This exclusion will mean that the appraiser has no insurance coverage for any claim brought not only by the FDIC but also by by the Federal Housing Finance Agency (FHFA), which oversees the GSEs and which is currently engaged in extensive mortgage repurchase and securities litigation. This lack of coverage is relevant not only to the appraisers who did the allegedly deficient appraisals behind defaulted mortgages but also to the hundreds or thousands of appraisers currently doing review work used by FHFA. Yet, the AMCs and law firms ordering those review appraisals routinely make the mistake of hiring appraisers with this gap of coverage because they are simply satisfied by seeing a declarations page.
3. Policies Covering Only 1-4 SFRs. There are several appraiser E&O policies that will only cover an appraiser for appraisals of 1-4 single family units. Yet, we see many appraisers take such policies even when their work pertains to other types of appraisal services. In a recent situation, we saw a commercial appraisal firm (not only did they appraise commercial real estate but they also appraised oil and gas) buy such a limited coverage policy (not from our program, of course). They knew this limitation but simply wanted the cheapest piece of paper they could get to satisfy their clients.
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