Peter Christensen is an attorney and general counsel to LIA Administrators & Insurance Services in Santa Barbara, Calif. The company provides E&O coverage to more than 20,000 appraisers in the U.S. He can be reached at firstname.lastname@example.org.
One-sided clauses may increase appraisers’ liability, potentially hurting real estate sales.
November 1, 2011
A letter about a seemingly obscure issue from NATIONAL ASSOCIATION OF REALTORS® President Ron Phipps to federal regulators received a lot of attention in residential appraiser circles. Phipps’ Aug. 11 letter urged regulators to prohibit the use of indemnification clauses by appraisal management companies in their independent contractor agreements with appraisers. This is an important issue for not only appraisers but also sales associates and brokers. The fuss here is about the fact that AMCs—which now control 70 to 80 percent of appraisals for home purchase loans—are increasingly using one-sided indemnification clauses in the contracts they require appraisers to sign to receive appraisal work.
An indemnification clause is a contractual promise by one person or business to reimburse or pay for the monetary losses or damages incurred by another person or business. In the context of a typical AMC contractor agreement, an indemnification clause usually requires the appraiser to pay for any losses or damages incurred by the AMC or lender relating to an appraisal—the most unfair go so far as to require the appraiser to indemnify the AMC or lender even for things that may be the AMC’s fault, like instructing the appraiser to appraise the wrong property. (Sales associates performing broker price opinions for AMCs are likely to be agreeing to similar terms.)
Most current liability claims against appraisers by lenders and their AMCs stem from accusations that the appraiser overvalued a property for a loan that is now in default months or years later. The lender or AMC typically claims that the appraiser’s alleged overvaluation caused a loss on the loan or led to a mortgage repurchase. When AMCs throw a one-sided indemnification clause into the mix, the appraiser’s potential for liability increases—as does the fear of that liability.
Unfettered financial liability for a mortgage loss or repurchase is a lot of personal risk for an appraiser in exchange for the typical fee of a few hundred dollars being paid by an AMC. Thus, it’s understandable that some appraisers have the reaction that Phipps identified.
Because of the combination of unfair contractual provisions and low fees, experienced and highly trained appraisers frequently choose not to work for the large AMCs. I see this happening on a daily basis. This means that the appraiser panels of some AMCs suffer from lower quality, which can put up roadblocks to transactions.
If you’re an appraiser faced with contractor agreements containing indemnification clauses, I’d suggest a few commonsense steps to protect yourself:
- Read and understand the provisions; they are not all the same. While some clauses may obligate the appraiser to indemnify for any and all claims relating to appraisals, others more fairly tie indemnification to actual negligence of the appraiser.
- If you’re being asked to sign a new agreement for an AMC you’ve already been working with for years, find out if the indemnification clause will apply to your prior work or just future work.
- Call the AMC and ask a decision-maker if he or she will agree to modify or strike the language. Explain your objections professionally. A few actually do listen and will agree.
- If you feel the risk isn’t worth it, say “no” to AMCs with the worst clauses—those with the most egregious provisions will likely lose many of the best and brightest appraisers.
Learn more about NAR’s call for a ban on AMC indemnification clauses at http://appraisalinsight.blogs.realtor.org.