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As a professional real estate appraiser, you always try the best in providing the best services to clients. No doubt, every appraiser are striving to make a good living and a prosperous career in the appraisal field. However, we are in a world where client complaints and regulations tightening has become the norm.
To protect yourself from liability, not only you need a have a proper business practice, but you also need the Error & Omission insurance coverage (E&O). It is an essential protection in cases where clients are dissatisfied with your appraisal works.
How do you pick an appraiser E&O insurance policy? To choose an appraiser E&O insurance that is suitable for you, you must understand the potential liability that could occur in your business. You also need to know coverage conditions, exclusions, and premium.
Although I’m not an expert in liability coverage, I can share with you what I think as a small business owner. (So only use this piece for general understanding, then talk to an insurer afterward.)
In this article, I’ll go over some important features you should consider when selecting an appraiser E&O insurance.
10 Things You Cannot Miss When Choosing an Appraiser E&O insurance
1) What is being covered?
The first thing you need to find out is what kind of claim can you make from this appraiser E&O policy. Suppose a client loses money due to your negligence, will this insurance pay for the damages or settlement?
During the process, if you hire a lawyer to represent you, the legal cost could be significant. Depending on the fee structure of your lawyer, the hourly rate could easily be hundreds or even thousands of dollars. It could add up to a tremendous amount in a case. Will the legal fee be covered?
Since there is a client complaint, the regulator might also get involved to investigate your appraisal practice. If they discover any misconduct, there could be regulatory fine. Does your policy have coverage for that?
2) What are required conditions?
An E&O policy is a contract that bends between you and the insurance company. Even though it provides coverage to you, certain conditions need to be met to consider as a valid claim.
a. Lines of work
Some appraisers are holding the Certified General Appraiser license. They could work on both residential and commercial real estates. However, does your policy provide coverage limit to a particular line of work?
[On a separate note, if you are interested to know more about being a Certified General Appraiser, here’s an article for you.]
If you hold appraiser licenses in multi-states, chances are you will appraise properties in different regions. This situation is especially relevant for appraisers who locate close to the states’ border.
Does your appraiser E&O cover business activities in multi-states? Or do you need to get separate coverage for each?
c. Coverage period
We all want to save premium on our insurance coverage. Therefore, some appraisers would move to a different insurer from time to time. However, an important consideration is whether the new policy would cover the appraisal work that you have done in the past.
As you know, a compliant might not immediately occur once you have completed the appraisal work. It could happen at months or even years later.
Furthermore, if you are planning on retiring your appraisal business, will the E&O policy continue to protect you from the work that was done before your retirement?
If so, is there a requirement that the policy continues being in force? (In other words, you’ll need to pay ongoing premiums?) or will it automatically cover you in spite that you have terminated the policy?
d. Covered Entity
The coverage is relatively simple if you are the only sole-proprietor appraiser. But what if you incorporate the business, will the policy protects both you and the company?
Another scenario is that you hire an assistant to handle the admin work, or you take on an appraiser trainee. Since they could be involved in your clients’ work, does the appraiser insurance also have coverage for them?
e. No-fault condition
As I just mentioned earlier, if you are hiring an attorney to defend your case, the legal fees could seriously add up over time.
Although some E&O policy state that there is coverage for legal expenses, it could be subjected to a no-fault condition. In other words, the E&O will cover the legal counsel fees only if regulators cannot find any misconduct in your appraisal work.
3) How much coverage can the policy provide?
To my understanding, every policy has a specific dollar limit on the coverage they could provide. Some would impose a maximum claim amount on a per case basis. Also, there is a ceiling on the aggregate payout amount.
To give you an example, suppose a policy has a limit of $200,000 per claim, with an aggregate limit of $1,000,000. Therefore, the most the insurer could payout for a particular claim is $200,000. If there had been several claims, once the $1,000,000 aggregate limit is used up, then no more payout can be made.
Some policy might reset the aggregate ceiling yearly, while some are more strict, and they apply to the lifetime of the plan.
4) How will the claim amount be calculated?
Even though the policy covers a certain amount, the plan could be set up in a way where you still incur some additional costs.
For example, if there is a deductible, then you would be responsible for paying it before the claim kicks in. It’s important to find out whether the deductible applies to each case or only once annually.
Another clause is the co-insurance, where the insurer would pay a specific percentage of the claim. For instance, suppose the co-insurance is 80%. The appraiser E&O will pay $80 out of every $100 of eligible expenses, while you’ll be responsible for the remaining $20. However, this seems to be more common for health coverage. But it’s a good idea to double-check with your insurer about it.
Although having these clauses could reduce your overall benefits, it could also save you premium. Therefore, you need to weight out the pros and cons of each option.
5) How does the E&O insurer calculate the premium?
Most appraisers only look at the current premium. Although this is an important factor, you should also consider other variables.
For instance, is there a term that restricts the amount of premium increase for a period? (i.e., in the next one, three or five years).
Will your claim history influence the premium? In other words, will your insurance cost increase as a direct result of a claim? Or the insurer will look at the pool of insureds in calculating the rate as a whole?
Given that the coverage details are comparable, how is the premium rate compare with other insurance providers?
6) Continuity of the appraiser E&O policy
Since the appraiser E&O is essential to your business, you must ensure that you can continue in having the coverage. It is wise to find out whether it is guaranteed renewable or it is still subjected to underwriting. For example, can the insurance company stop renewing your policy due to high claim ratio?
Some insurers have underwriting questions about your practice at each renewal time. If your policy is not guaranteed renewable, then they have the right to cancel your coverage. Alternatively, they could increase the premium or impose exclusion on pre-existing conditions for any potential claims.
Furthermore, if a company employs you, they probably would set up the E&O coverage for you. If later on, you decide to leave the firm, can the policy be portable to a new firm? Or to your self-employed appraisal business?
7) Accessible to services
Even if two policies have identical covered conditions, their level of services could create a whole different experience for appraisers. If you have questions about the policy, can you easily find clarification from their insurance team? Or you are required to figure out all the terms and conditions yourself.
Furthermore, I always dislike when I send out an inquiry, and the service provider does not mention when they would get back to me. It leaves me hanging when they would respond to me. Sometimes, I even wonder if they have received my inquiry.
So before you enroll in an insurance plan, you could check out whether they have a standard turnaround time for customers inquiries. Are they available through the phone, email, or instant live chat system?
Also, should there be a claim, will the insurer provide you with the proper procedures to handle. Is there a specific staff from the claim department to assist you?
If you need to hire an attorney, can they introduce you to a trustworthy one? Or you need to find your own? Some lawyers are receiving a huge volume of referrals from an E&O insurer every year. Therefore, there could be a discount for policy owners.
8) Educational resources to reduce liability
As we all know, prevention is the best way to minimize potential damages. If you become more aware of conducts that could lead you to clients compliant, then it would save you from unnecessary disciplinary charges down the road.
A well established E&O insurer would have a wealth of educational resources to share with you. After all, they are the ones who handle insurance claims from appraisers every day. They should be able to educate you on the common claim scenarios and effective ways to avoid them.
[You could find other educational resources on this page]
9) Coverage for cyber security
When a client places an appraisal order, you probably will receive an email or text message notification. The information is transmitted to your email, or you’ll need to login to an appraiser’s portal to read it. After you complete the appraisal report, you would either send it to the lender or upload to the appraisal company’s server.
As you could see, many appraisers are moving toward digitalizing their practice. Although it does bring great convenience, a data breach could become a nightmare to business owners. Back in 2017, there was a data breach from Equifax, which costed the company $700 million in settlement. Therefore, cybersecurity insurance is becoming more essential than ever before.
Some policies automatically have it as a built-in feature, while some would require you to pay an extra premium in getting the coverage. However, you must review the terms carefully to see what is being covered.
Does it require you to take all necessary pre-caution before a claim can be made? For instance, having encrypted devices (i.e: laptop, smartphone, USB), software with strong security, and encrypted communication system.
10) Who is the insurance company?
Last but not least, you should find out who is actually the appraiser E&O provider. Always look for insurers with extensive experience in offering liability coverage to appraisers.
A good place to start is to check with your colleagues and see what they can recommend. Then you could do some research on these insurance companies. Many insurers would have clients testimonials on their websites. However, I often suspect that they might not display the full picture of their services. After all, they could filter out negative comments.
Therefore, I would look at the review section of their social media pages. For instance, their company page on Facebook, LinkedIn or Google. Another good source is to look at their profile on the Better Business Bureau website. It will show you the rating they got from customers, and whether there had been any complaint.
Final Thoughts about Selecting an Appraiser E&O insurance
Many appraisers focus only on growing their business but fail to safeguard it. Keep in mind that reducing potential liability is a critical component of business planning.
Start by brainstorming all the what-if scenario that could go wrong. Develop a standard appraisal practice that complies with the regulatory requirement.
If you have not been through a client complaint, it could be challenging to foresee the situation. Therefore, you should attend seminars provided by E&O insurers. They could give you a great insight into the common appraisers’ misconduct, which leads to complaint or litigation.
Now that you have a better idea about choosing an E&O coverage for your appraisal practice. I hope that you’ll have one less thing to worry about.
[Here’s a review of the Top 5 E&O Insurance Companies for Real Estate Appraisers.]
Disclaimer: The information in this post is for general information only, and not intend to provide any advice. They are subjected to change anytime without notice, and not guaranteed to be error-free. For full and exact details, please contact the Appraisal Board in your state, the education or service provider.