F. Moore McLaughlin IV, Esq, CPA, of All States 1031 Exchange Facilitator, LLC, will be offering an important seminar for Real Estate Agents & Brokers on Tax Strategies for Real Estate Professionals at the MAR annual conference on September 14,2010. Here’s the link: http://www.allstates1031.com/news-events/news-events.php. All of Moore’s workshops and seminars are worth your time, no matter what part of the country you are in.
Join us at GTAR for an excellent update on today’s real estate appraisal industry followed by a question-answer session.
GUEST SPEAKERS
Francois (Frank) K. Gregoire, IFA, RAA
Joni L. Herndon, SRA
WHAT: Real Estate Appraisal Forum
WHEN: Thursday, September 9, 2010, 9:30 a.m. -11:30 a.m.
WHERE: Greater Tampa Assoc. of REALTORS—Auditorium, 2918 W. Kennedy Blvd., Tampa 33609
COST: FREE ADMISSION to GTAR– members
REGISTER at www.GTAR.org
Further information, email Rebecca@gtar.net
A PDF of this article can be downloaded here.
The target that seems to be on the back of real estate appraisers appears more real than imagined. Indeed, complaints and insurance claims against appraisers alleging an error or omission have steadily risen over the last few years, due in great part to turmoil in the real estate market. As property valuation is often at the center of many of the complaints and insurance claims, real estate appraisers have some justification in feeling that they are in “the line of fire”. Predictably, there are many cases where the appraiser has committed an error or omission (for the purpose of this discussion we will leave out intentional acts of unprofessional or unethical behavior).
In many other cases, however, the appraiser may have committed no error, yet must still respond to the complaint or demand. This is where confusion often develops about if and how to respond and whether an appraiser should notify their errors and omissions insurance carrier.
Letters from regulatory bodies or attorneys cannot be ignored, yet appraisers may be hesitant to respond for a variety of reasons. Perhaps they feel there is no justification in the complaint and it will “go away”. Maybe they are concerned about being sued and losing their license or their errors & omissions insurance, or at the very least seeing their premiums increase. While these concerns are real, a better understanding of real estate appraisers’ errors & omissions insurance and what constitutes a possible claim and the obligation to report it can help an appraiser avoid confusion, or worse.
Errors and Omissions Insurance – An Overview
Most appraisers are covered under an errors & omissions policy, whether they have purchased it on their own or are covered under a firm’s policy. E&O insurance can cover a broad range of actions or inactions relating to an appraiser’s professional obligations and duties, and can be stated in a policy as “any act, error, omission (and in some policies Personal Injury) in the rendering of or failure to render Professional Services”. A policy may go on to state that “the Company shall have the right and duty to defend any suit…even if the allegations of the suit are groundless, false or fraudulent” and that “the Company will pay on behalf of the Named Insured all sums which the Named Insured shall become legally obligated to pay as Damages for Claims”. (It is important to note that insurance policies from different companies may offer different wording, coverage or features, including exclusions from coverage, and this information should be used as an example only).
Errors & Omissions policies also contain important information and definitions of what and who is considered an “Insured”, what is a “Professional Act”, what happens if the policy is terminated and so on. Many policies provide what are called Supplementary Payments for certain expenses or fees related to disciplinary proceedings or regulatory hearings. Supplementary Payments provide payment or reimbursement for expenses in addition to or outside of a “Claim” and the limits of liability for the covered “Claim”. Supplementary Payments can also include payments for loss of earnings if the insured needs to attend a hearing, or protection against discrimination or personal injury accusations.
The distinction of a “Claim” being covered under the policies liability limit, and “Supplementary Payments” being applicable for disciplinary or regulatory proceedings is an important one, as we will note below. An Errors & Omissions insurance policy defines and responds to a regulatory or board complaint or hearing differently then it does for a claim. This does not mean in any way, however, that an appraiser who is notified of a complaint by a regulatory body or official board does not have obligations under their Errors and Omissions insurance policy, or that their insurance might not be impacted.
Important Policy Definitions Every Insured Should Know
Most insurance policies include a major section called “Duties and Cooperation of the Named Insured” and may have sub sections entitled “Duties in the Event of an Act or Circumstance” and “Duties in the Event of a Claim”. These sections can begin to help an appraiser understand how to respond should they receive notice of a complaint, hearing or claim. We can start with the definition of a “Claim”. According to the policy offered by the Herbert H. Landy Insurance Agency through General Star Insurance Company, a Claim means “a demand for money, receipt of a request to provide a recorded statement, the filing of a Suit…claiming Damages and alleging an act, error or omission resulting from the rendering or failure to render Professional Services”. It goes on to state that a Claim does not “include proceedings seeking injunctive or other non-pecuniary relief or administrative proceedings before any national, state, regional or local board”.
So then, a complaint in front of a board is not a claim, and my errors and omissions insurance is there to cover claims, right? So I don’t have to notify the insurance company if I receive a complaint letter because it’s not a claim, right? Wrong!
Remember the “Duties in the Event of an Act or Circumstance” section? It states that if an Insured “becomes aware of any act or circumstance…that may reasonably be anticipated to give rise to a Claim, the Named Insured must notify the Company in writing as soon as practicable”. According to Ted Gaisford, Vice President of Professional Claims at General Star Insurance Company, an “abundance of caution” should be used by any Insured receiving notice of a complaint or becoming aware of circumstances that could lead to such notification. Failure to notify an insurer could jeopardize coverage of the complaint or potential claim. Gaisford indicates there has been a marked increase in appraisers notifying insurers of complaints and hearings over the last couple of years. He further states that 75-80% of these complaints do not result in a formal claim, though payments from the insurer may still be paid under the “Supplementary Payments” section of a policy. With approximately 1 out of 4 complaints resulting in a formal claim, and supplementary payments often being made on the ones that are not formal claims, an appraiser must recognize their obligation to the insurance policy as a legal contract (and this includes properly disclosing information on applications for errors and omissions insurance coverage).
Claims, Liability Limits and Supplementary Payments
When an appraiser purchases an Errors & Omissions insurance policy, one of the most important decisions is choosing the liability limits. Briefly, the liability limit is how much coverage is available should a “Claim” be brought against the insured appraiser. Liability limits are split, and may look like this: $1,000,000/$2,000,000. This means that the insured has $1,000,000 per “Claim”, with an “Aggregate” limit of $2,000,000; the aggregate limit is the total amount of coverage available in a twelve month policy period should there be more than one “Claim” against the insured.
Note the emphasis on “Claims” and the way coverage is afforded for one, as we have already defined a “Claim” as not including “proceedings… before any national, state, regional or local board”. This is where Supplementary Payments” come in – to provide certain monetary payments or reimbursements outside of the liability limits. They can include payments for loss of earnings if an insured must attend a trial or hearing involving a “Claim against the Insured for Covered Damages”. As noted previously, Supplementary Payments may be available if there is no “Claim”, but the insured requires payment for attorney fees and other costs and expenses resulting from the investigation or defense of a proceeding before a licensing or real estate board or governmental regulatory body (note that commission disputes are typically excluded). Unlike the liability limits, there is usually no deductible to be paid by the insured if they receive Supplementary Payments under the policy.
What Do I Do Now?
Most policy holders would know what to do if they received a letter from an attorney, a client or another insurance company requesting damages or notification to collect damages because of an alleged error or omission on the part of the insured. Such notification would be an obvious indication of a “Claim” and the insured would be obligated to follow the notification and procedures as outlined in their policy and their insurance carrier.
What is less clear is what to do if an insured thinks there might be claim, or receives notice of a regulatory complaint. The policy states that the insured must notify the insurance company once they become aware of any “act or circumstance” that may “reasonably be anticipated” to give rise to a “Claim”. As at least one out of four complaints results in a formal claim, it is clear that such a complaint can be reasonably anticipated to give rise to a claim, and an insured must report it. The reporting is also important for an insured to benefit from the Supplementary Payments available through the policy.
With all of this, there still may be some grey areas or confusion about what an appraiser
should do to handle a situation. Appraisers insured with The Herbert H. Landy Agency through General Star Insurance Company have the benefit of a free and confidential legal hotline to consult with real estate lawyers familiar with claim, regulatory and policy issues for appraisers. Sometimes, the attorney might recommend a course of action that may help the appraiser avoid a claim or complaint and notifying the insurer, but if notification is suggested or required, the appraiser will have a much better understanding of the situation and be better able to work with the insurer’s claim staff to resolve the problem. With some policies, an appraiser may have the right to choose their own attorney to address a regulatory or board complaint. Mr. Gaisford from General Star suggests letting the insurer choose the attorney, however. The insurance company’s attorney may be much more experienced in resolving such matters, and can be instrumental in helping to avoid a civil complaint against an appraiser as well.
Recent Claim Trends
The majority of insurance claims against real estate appraisers are based on allegations of erroneous property valuations, and the huge increase in foreclosures has put property appraisals front and center. Many claims are still being filed over appraisals done three or four years ago when property values were at a peak. A common scenario is a home that was purchased with a mortgage made on the property and later the buyer defaults on the loan. The lender then goes back to the appraiser for damages, stating that the appraisal value was too high. A variation of this is the buyer, after buying at the top of the market, tries to sell after prices have softened and cannot regain their investment and sues the appraiser for the original “over valuation”.
More recently, the valuation-related claims show a new characteristic: instead of claims being made for an over-valued appraisal, many current claims allege the property was undervalued. Appraisals done in the recent past during the current market are showing much lower valuations and claims are being made against these “low” value appraisals as homeowners have difficulty refinancing or obtaining equity loans. An even more recent concern is a “strategic foreclosure” – a property owner calculating the financial benefit of walking away from an underwater property, as opposed to using a short sale or traditional foreclosure. As strategic foreclosures become a calculated financial move for some property owners, the effects on claims against appraisers for valuations on those properties could be substantial.
Summary
An Errors & Omissions policy purchased by a real estate appraiser can provide significant piece of mind as the appraiser performs his or her professional duties, but that policy can also appear confusing, especially if an insured receives a legal notice or letter alleging an error. Understanding the definitions and features of the policy will provide an advantage to any insured appraiser in responding properly to any complaint or claim and in working with their insurance carrier to maximize the protection afforded under the policy.
The terms, definitions and examples of insurance coverage are used here for demonstration only. Insurance policies and coverage can vary widely amongst insurance companies and you should consult an insurance professional and your policy for more information.
John Torvi is the Director of Marketing & Sales at the Herbert H. Landy Insurance Agency in Needham, MA. He has been in the insurance business for over 20 years, focusing on the insurance needs of business owners and professionals. He frequently contributes to professional and insurance publications and speaks to industry groups on insurance and risk-management issues. John holds a Bachelors Degree form Providence College and a Masters Degree from Springfield College.
The Herbert H. Landy Insurance Agency, founded in 1949, is a national leader in providing Errors & Omissions and Professional Liability Insurance to Real Estate Appraisers, Real Estate Agents and many other professionals.
John Torvi can be reached at johnt@landy.com or at 781-292-5417. Visit us at www.landy.com.
A PDF of this article can be downloaded here.
You can download a PDF of this article here.
When an agent evaluates whether to list a property that is under water, the agent must realize that the seller is looking to the agent as more than simply a real estate advisor. This is a very emotional time for the seller, as the seller is losing the property against his/her will. Further, the seller may be in the midst of other financial problems and the short sale can affect the seller’s overall financial situation in ways that are beyond the agent’s expertise. In this article we summarize the Do’s and Don’ts of a short sale transaction, based on problems, complaints and insurance claims that agents have been involved in.
Do: An agent must consider the likelihood that the transaction could be completed. For example, how quickly must the property be sold, how significant is the short fall that the lender must approve, and so forth.
Don’t: An agent should not advise the seller whether a short sale is an appropriate solution for the seller’s financial situation.
Do: An agent should recommend that the seller consult with an attorney and an accountant to assess alternatives to a short sale such as loan modification, deed in lieu, bankruptcy or refinancing. There may have been predatory lending involved in the procurement of the loan, which may have caused the seller to be in default. This should be analyzed by an attorney as a potential defense to keeping the house.
Don’t: An agent should never tell a seller that a short sale is better than foreclosure, that the seller has nothing to worry about or that a short sale releases the seller from the loan. A short sale is not a foreclosure. It is not affected by the anti-deficiency laws that protect a homeowner from a deficiency judgment for the difference in value between the value of the home and the amount of the loan. This means that a lender can pursue the seller after the short sale for the deficiency.
Do: The agent should evaluate ahead of time whether the seller will refuse to sell the home unless the seller receives a release from the lender for the deficiency amount.
Don’t: An agent should never attempt to review the loan documents and advise the seller whether the seller has a non-recourse loan or the loan has any other potential defenses or remedies.
Do: The agent should advise the seller to consult an accountant. There may be adverse tax consequences and the forgiven debt may be considered taxable income. There are tax reliefs to homeowners who are insolvent, but this analysis is beyond the expertise of the agent.
Don’t: An agent should not give the seller advice regarding timing and process of foreclosure and he/she should not refer the homeowner to foreclosure websites for evaluating the law in this area. The loan documents may be subject to interpretation of individual State laws and information provided on these websites may be wrong.
Do: An agent must do the research to support the likelihood of a successful short sale. Check MLS rules on how to list the property and review comparable sales for values.
Don’t: An agent should not suggest to a homeowner to default on the loan in order to get the lender’s attention. This may cause long term affects that the agent and the seller may not anticipate.
Do: The agent must evaluate the current title on the property. If the seller is not on the title or is not the only owner on title, proper approvals should be procured to list the property. The agent must also evaluate how many lien holders exist on the property. The seller must negotiate with all of them, and keep them all appraised with the status of the transaction.
Don’t: An agent should not ignore any lien holders, even if they are not the ones negotiating for a short sale.
Do: An agent must keep all lien holders apprised of the status of all negotiations, offers and approvals and obtain extensions and payoff demands from all of them, as applicable.
Don’t: An agent must not hold up negotiations due to the resolution of his/her own commission.
Do: The agent must get permission from the seller to communicate with the lenders directly, in order to expedite the process.
Don’t: The agent should not be involved in the preparation of any financial statement that the lender may require, especially since it may significantly vary from the financial statement prepared by the homeowner when he/she applied for the loan. Any preparation of financial statements should be done by the homeowner with the assistance of his/her accountant.
Do: An agent must be accurate on the math and provide the same information to all lenders. The agent should consider all possible costs including, potential repairs, smoke detectors and water heater bracing, HOA dues and moving expenses, if necessary.
Don’t: An agent should not get involved in making any representations to the lender about the borrower, as they may contradict prior information provided by the borrower to the lender. There may have been misrepresentations made by the homeowner, possibly even inadvertently, on issues such as, owner-occupied, assets, or citizenship. This is especially true where the original loan was stated income.
Do: The agent should be careful in representing the seller’s interests. The agent should put in the counter-offer that it is subject to lender’s approval and at seller’s discretion. The lenders may demand harsh conditions from the seller, including a promissory note, in order to agree to the sale price. A seller should have the option of rejecting the lender’s terms.
Don’t: The agent should be cautious about using middle men who sell themselves as negotiators and completely avoid using unlicensed negotiators. Those middle men may demand to be compensated by the buyers. Forcing the buyer to pay a commission may affect the agent’s fiduciary duties to the seller. Also, when the listing agent has a relationship with the negotiator, and the buyer is paying for the negotiator, an agency relationship may be created between the buyer, negotiator and listing agent, which may expand the listing agent’s duties to the buyer.
Do: An agent should properly document the short sale negotiations to avoid any misunderstanding and protect the agent in case of a claim.
Don’t: An agent should beware of a buyer who is trying to be creative, as he/she may be doing something illegal or unethical. Some investors may attempt to purchase the property by transferring title to themselves or obtaining power of attorney from the seller and then doing the short sale. The investor may violate the Home Sales Equity Law, which requires certain notices to be given to the seller when a Notice of Default has been recorded. The agent may also have a conflict of interest representing both the investor and the seller, who have different interests.
Do: An agent, title and escrow company should strictly adhere to all lender instructions and not allow any monies to be paid outside of escrow. This duty also extends to payments made after escrow had closed, that were not specifically stated on the HUD-1. Knowledge of fraud may subject the agent to liability for the entire deficiency amount, even if no duty was owed. An escrow company owes a duty to the lender, even if the lender is not a party to escrow.
Don’t: An agent should be aware of sellers attempting to “sell” their property to friends or family members and may even solicit other potential buyers to make a low offer, so that the seller’s relative’s offer will be accepted.
Do: In case any negotiators or other third parties are involved and there are referral fees or commissions, the agent must assure that these payments are specifically disclosed, paid through escrow, and payable to the broker of record.
Don’t: An agent should never allow for two different “final” HUD-1 to be created: one for the parties and one for the lenders.
Do: The agent should be familiar with all the available State mandated forms and use them as applicable. Attach a short sale listing addendum to the listing agreement and a short sale sale-addendum to the sale agreement.
Don’t: The agent must beware of red flags and not ignore them. If a buyer is not allowed to communicate with the lenders that suggests fraud on the lenders.
Do: An agent should explain to the escrow agent that the transaction is a short sale, and ask the escrow agent to constantly date-down the file so that any new recordings can be discovered by escrow and properly addressed by the parties.
Don’t: An agent shall not assist the seller or investor to de-value the property if he/she is asked to provide a broker price opinion. The agent should not consult an investor or seller to destroy a property in order to reduce its value.
Do: The agent should properly explain and submit subsequent offers and obtain instructions from the seller and lender as to how they want subsequent offers handled.
This article was prepared for informational use by Fredric Trester of the Law Firm of Manning, Marder, Kass, Ellrod & Ramirez LLP. Mr. Trester can be reached at 877-220-9282 or at FWT&mmker.com.
This article cannot be reproduced in whole or in part without permission of Fredric Trester or the Herbert H. Landy Insurance Agency, Inc.
You can download a PDF of this article here.
Your Preferred Source For Professional Liability Insurance for Real Estate Agents & Brokers, Real Estate Appraisers and Accountants, Tax Preparers and Bookkeepers
Important Update Regarding Real Estate Errors & Omissions Applications
Please note that your attention is requested regarding changes that have been made to both the Realty Express and standard Real Estate Errors and Omissions insurance applications. These changes involve the addition of, or modifications to underwriting questions on the applications. We are pleased to note that premiums on the Express applications are not affected by these changes. The Herbert H. Landy Agency, in conjunction with its A++ rated (A.M. Best) insurance carrier, continues to offer excellent coverage with extremely competitive premiums starting at just $429 in most states!
Please Note Changes and Information Affecting Our Real Estate Agents & Brokers Errors & Omissions Insurance Applications
Thank you for your attention to this important information. To view samples of the new applications, please click on these links:
REAL ESTATE ERRORS AND OMISSIONS INSURANCE APPLICATION
REAL ESTATE ERRORS AND OMISSIONS INSURANCE APPLICATION for Massachusetts
REALTY EXPRESS APPLICATION for all states except CA and MA
REALTY EXPRESS APPLICATION for California
REALTY EXPRESS APPLICATION for Massachusetts
As always, please contact us for further information or for any questions you might have. We appreciate your business and look forward to continuing to provide you with the finest service and professional liability coverage available.
Betsy A. Magnuson, President
The Herbert H. Landy Insurance Agency, Inc.
Personalized Assistance & Service: Call us, we’ll answer the phone!
Experienced and Prompt Underwriting and Policy Service!
For questions or information, contact Betsy Magnuson at 800-336-5422 x 108 or at betsy@landy.com, or John Torvi at johnt@landy.com or 800-336-5422 x117. Thank you.
On this edition of The Landy Law Letter, host John L. Torvi, from the Herbert H. Landy Insurance Agency of Needham, Massachusetts welcomes Attorney Kathy Farrell, owner and principal of a real estate law practice at the law firm of Deschenes & Farrell, P.C. John and Kathy discuss the unique issues in successfully managing a law practice focused on real estate law and the challenges of real estate law in today’s turbulent real estate market.
Click here to listen to the Podcast.
Special thanks to Legal Talk Network for helping with this Podcast.
On June 23rd, The Herbert H. Landy Insurance Agency will be sponsoring the Risk Management and Liability Class for the Realtor’s Association of Lake & Sumter Counties at their offices in Leesburg, Florida.
Joseph Flynn’s dates have been added to the Upcoming Events schedule for May/June 2010.
May 26: Realtors Association of Lake and Sumter County, www.ralsc.org Marketing Meeting, Continental Country Club, Wildwood, Florida. Speaker : Joseph Flynn, Topic “Why E & O Insuurance “
June 2-3: John Torvi attending and exhibiting at the New Jersey Society of CPA’s Annual Conference in Atlantic City.
June 2: Greater Tampa Association of Realtors, www.gtar.org, Tampa, Florida. New member orientation, Speaker: Joseph Flynn, Topic: Understanding your E & O Insurance, “Why it could become your most valuable asset.
June 3: Realtors Association of Lake and Sumter County, www.ralsc.org Marketing Meeting, Leesburg Florida Opera House. Speaker, Joseph Flynn, Topic: Understanding your E & O Insurance, “Why it could become your most valuable asset”
June 7-8: John Torvi attending and exhibiting at the CA Society of CPA’s Annual Conference in LA.
June 9-12: Joseph Flynn exhibiting at the Florida Justice Association Semi Annual Meeting, Grand Floridian Hotel, Walt Disney Resort, Orlando, Florida.
June 18: John Torvi attending and sponsoring the NH Assoc. for Justice Annual meeting and Dinner in Concord, NH.
June 24, 2010: West Pasco Board of Realtors, www.wpbor.com, Port Richey Florida, The survivor information series, It’s not if, But when.. Important Information for professionals involved in Real Estate Transactions. “Avoiding Litigation” Even if a claim is groundless, the long-term impact on your career could be devastating. Are you willing to risk your career on this possibility? Presented by Joseph Flynn. Joe has been recognized as a leader within the Insurance industry specializing in Errors & Omissions & Professional Liability insurance, managing national, regional and state Professional liability insurance programs for more than 25 years.
June 2-3: John Torvi attending and exhibiting at the New Jersey Society of CPA’s Annual Conference in Atlantic City
June 7-8: John Torvi attending and exhibiting at the CA Society of CPA’s Annual Conference in LA.
June 18: John Torvi attending and sponsoring the NH Assoc. for Justice Annual meeting and Dinner in Concord, NH.
Thank you to all of our friends and clients, as well as REALTOR association partners, who visited theLandy Agency booth at the National Association of Realtors Mid Year Conference in Washington, DC last week. We appreciate your support! We also look forward to assisting all the many Real Estate agents & brokers who are considering choosing the Herbert H. Landy Insurance Agency for their Errors & Omissions insurance
Pictured are Kathy Exson, Second Vice President at GenStar, and John Torvi, Director of Marketing & Sales at Landy.
