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Interesting article on E & O Insurance

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Joe McDonnell

Freshman Member
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Mar 1, 2003
Saw this article on Appraisal Buzz and thought it was interesting...

Our interview today is with John Matternas, President of Intercorp, Inc., in Ephrata, Pennsylvania. Intercorp manages a Real Estate Appraisers Errors & Omissions Insurance Program. For more information, you can contact Diane Beans or Kate Ginder at 800-640-7601, [email protected], or you can get an application at www.intercorpinc.net.


Buzz: I remember when I was a field appraiser it was always confusing to get several quotes to find that the premiums ranged rather dramatically. Why is that?

Different companies can use a different rating basis. For example, our program rates primarily by number of appraisers and types of appraisals being done. Another company might rate by sales or income.

Also, a program that is designed specifically for real estate appraisers will probably have premiums that are more competitive than what is known in the insurance field as a "miscellaneous" professional liability policy. Our program is written through a risk purchasing group, so you have the purchasing power of the group working for the appraiser when it comes to rates and policy features.

Buzz: How does one compare apples to apples? What are the features of a policy that an appraiser should be comparing as opposed to just the cost?
Primarily you want to compare coverages and exclusions. Will you receive prior acts coverage if you are eligible for it? Does the deductible apply to claims expenses, or just to a settlement or judgment? Does the policy cover you in all states where you are licensed to do business?
Is there an extended reporting option available to you? What are the policy exclusions?

Buzz: What is prior acts coverage?

Prior acts coverage applies to a claims-made policy, and indicates whatever date prior to the inception of the policy that coverage is available under that policy. Without going into a lengthy discussion here, your readers may want to contact us, and we can send them an article on this subject. It also explains the difference between a claims-made and occurrence policy.

Buzz: You often hear from appraisers that they should not have E & O because that encourages a law suit. How do you respond to that objection?
We don't feel that is the case. Professional liability policies, like all insurance policies, are available to protect you. While it is possible that someone might be looking for a deep pocket, as a general rule, if someone wants to sue you, they will sue-whether you have insurance or not.

As for not carrying E&O, just ask that question of an appraiser who did not have coverage when he or she was sued! Without E&O, you would be totally on your own when it comes to hiring a lawyer to defend yourself or even finding the right lawyer. Not every lawyer is equipped to handle this type of lawsuit. With our program, we employ a claims management firm that has years of experience in the real estate E&O field. We use only attorneys who have extensive experience in this area. If you were on your own, you might go out and hire a local attorney who-although a good attorney-might not have this type of experience, and you would end up educating him or her at your expense.

Errors and omissions insurance is just plain good business sense. It protects you and your assets from what could be a potential financial disaster.

Buzz: What are the usual types of claims that you see?

A number of claims come into play when a lender has to foreclose on a property, and they are looking for a scapegoat. In this case, they may sue the real estate agent, mortgage broker, appraiser, and almost anyone connected with the transaction. Although the appraiser may not be at fault in any way, he or she must still provide a defense even if it is to get dismissed from the suit. That is where the value of a good E&O policy is worth its weight in gold. It is easy to rack up several thousand dollars in legal fees to defend a claim-even one that has no merit.

Other claims are what you might expect: The appraiser made an error or omitted an important fact, whether in the calculation or usage of space, lot size or restrictions, information about adjacent properties, flood zones, general zoning, property characteristics such as underground tanks, and the like.

Buzz: What is your claim frequency?

Frequency is not as important as severity. Claims in this field may be less frequent than auto fender benders, for example, but they are generally more costly.

Buzz: Does E & O insurance protect the appraiser when he commits fraud?
Our E&O policy does not cover fraud. You will find that most E&O policies exclude coverage for fraud, or for any willful violation of the law.

Buzz: Do you ever turn down appraisers? What circumstances would cause you not to write a policy?

We do reject certain applicants for coverage, primarily if we see a pattern of claims or disciplinary actions. If an appraiser has one claim or disciplinary action or maybe even two--and if the appraiser can provide a reasonable and logical explanation of the circumstances, it is likely that we can offer coverage in most cases.

What concerns us more is a pattern of errors. We also look at the information provided to us. Is the claim explained clearly and concisely? Is the information complete? If an applicant gives a long, rambling tirade about his or her claim, we would probably take a second look.

Buzz: Do you cover both residential and commercial appraisers?

We do indeed. Our policy covers all types of real estate appraisals.

Buzz: Given that you are aware what the types of claims are, is there any advice you can offer to appraisers to avoid claims?

Follow the rules! Establish clear, consistent work habits, and don't deviate from them. Document your files. Don't cut corners. Keep up to date with everything that is going on in your field. Read. Be knowledgeable. Use disclaimers for items that you are not qualified or hired to perform, such as termite inspections, mold, or other property characteristics.

Be absolutely attentive to detail. You are working in a field that requires accuracy at every step. Develop a method for double-checking your work. If you work by yourself, set up a system whereby you put a report aside for an hour or two or from morning to afternoon, and then give it a second reading. Oftentimes, just ask yourself: Is this logical? Does it make sense? Don't get so bogged down with plugging numbers into a formula that you can't see the forest through the trees.

I worry when we receive an application from an appraiser that is full of typographical errors, or one that says he or she completes 200 appraisals a year but has income of only $20,000. What do his or her appraisals look like?

Carefully select the people with whom you do business. Are they reputable? Honest? Trustworthy? Do they pressure you to stretch the rules?

Buzz: Who is making the claims? Lenders? Homeowners? Sellers or buyers?

Lenders are a primary source of claims, because they like to pass the buck. Buyers on occasion might file a claim.

Joan N. Trice, SRA
Appraisal Buzz
6908 Turpin View Drive
Suite A
 
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