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FHA Appraisal Liability: A Case Study

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Julio E. Sune Jr. (FL)

Senior Member
Jan 16, 2002
Professional Status
Certified Residential Appraiser
SOURCE: workingre.com

FHA Liability: A Case Study Editor’s Note: When the FHA increased responsibilities for appraisers a few years ago – making their duties more like a home inspector’s, many predicted increased liability exposure for appraisers and a flood of lawsuits. This is one appraiser’s story. As it takes a few years for problems to surface and turn into lawsuits, this may be a sign of trouble to come.

For appraisers there are several lessons: First, learn all you can about appraising FHA properties and be mindful: anyone can make a mistake. Second, make sure to report complaints to your insurance carrier when they happen…or else. And third, not having insurance is no defense against being sued (many appraisers and inspectors believe that having E&O makes them a target, so they reason, not having it somehow removes the bulls eye from their back).

It can be stated unequivocally that appraisers and home inspectors are sued every day – whether they have insurance or not. Finally, this story illustrates the mess FHA created when they allowed the line between appraisals and inspections to become blurred in the minds of home buyers. It also highlights why there is talk of FHA mandating inspections on every property. If this happens, it will mean a sharp increase in demand for inspections all across the country and may possibly remove some of the liability from the shoulders of appraisers. (Story Below.)

We All Make Mistakes The mistake is so obvious, this appraiser can’t believe she made it. But she did. When filling out the FHA checklist she failed to indicate that the subject property had a “flat roof.” (FHA requires additional inspection for flat roofs.) “Part of the roof was flat and part was pitched,” she said. “It was my fault. I just missed it. I really can’t believe I made this mistake. I take appraising very seriously and it is totally unlike me to miss something like this. I guess it’s true that we all make mistakes.” One year later, the home buyer complained to the FHA that the roof leaked “like a sieve” and blamed the appraiser. FHA notified the appraiser about the complaint. The appraiser immediately forwarded a written response to FHA. One year later she was served with a lawsuit from the homebuyer.

It doesn’t matter that the appraiser included a written disclaimer indicating that she is not a home inspector and the appraisal report is not intended to be used as a home inspection.

It doesn’t matter that the appraisal report recommended a home inspection or that FHA also urges every homebuyer to get an inspection. (Despite the warnings, this homebuyer waived the inspection.)

It doesn’t matter that the homebuyer committed to make any and all repairs to the home as required by FHA prior to the appraisal even being conducted. To add salt to the wound, the insurance carrier (not OREP) is refusing to defend the claim saying that the appraiser failed to notify them of the complaint on her renewal application. “After I responded to the FHA by letter and didn’t hear anything back, I assumed the matter was closed so I didn’t mention it on the application. I’ve been a nervous wreck worrying about this ever since,” she says.

Finally, it doesn’t matter that she has no insurance in force- she is still being sued. She has hired an attorney and is digging in for a fight – at her own expense. Repercussions This appraiser has not heard further from FHA regarding the complaint. She is still on the Fee Panel and remains in good standing, as far as she knows. She is having trouble obtaining E&O insurance, however. She has been turned down by several carriers because of the open suit and is uncertain whether she will be able to obtain coverage at any price.

(According to many long-time insurance professionals, our recessionary, post 9-11 world has created the most difficult insurance market in memory - with no end in sight. This is evident in sky rocketing insurance rates all across the board: from home owners insurance to professional liability/E&O.)

Epilog Many appraisers and home inspectors believe that having insurance increases their likelihood of being sued, yet many with no insurance are sued and face the financial nightmare of fighting a legal battle at their own expense. Many appraisers insist that increasing their knowledge in related fields – such as taking courses in environmental/indoor air quality or housing construction, also increases their liability and potential for a lawsuit. Experience indicates the opposite.

The more knowledge an appraiser has about the systems of a home, indoor air quality and other related issues, the more able they are to do a thorough and complete report. Increased education and training is also a way to expand services and increase income.
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