Appraiser Decision Provides Lesson For “Updated” Reports

Often times, a consultant may be asked to make revisions to the first version of a phase 1 report that is provided to a client. It is not uncommon for the consultant to make the change but retain the original date of the report even when the change may be made several months later. A recent case involving an appraiser sheds some light on the dangers of issuing “updated” reports without changing the report date.

In FDIC v. Gen. Star Nat’l Ins. Co., 2012 U.S. Dist. LEXIS 22602 (C.D.Cal. 2/7/12) an appraisal was prepared in connection with two residential mortgage loans issued by IndyMac Bank that totaled $890K. The borrower eventually defaulted on the loans and IndyMac unsuccessfully attempted to recoup its losses through a non-judicial foreclosure.

The appraisal had an effective of October 3, 2006. It concluded that the property had a market value of $890K based on three comparable sales as of October 2006. On November 6, 2006, IndyMac requested additional information about the Property, including a correction of the square footage and further market support substantiating the value of the Property so that it could make its final underwriting decision.

On December 4, 2006, the appraiser issued a revised version of the Appraisal (the “Revised Appraisal”), which also had an effective date of October 3, 2006. In preparing the Revised Appraisal, the appraiser relied on and supplemented the information contained in her original Appraisal. The Revised Appraisal confirmed that the $890K market value. After receiving the Revised Appraisal, IndyMac funded the two loans.

IndyMac later failed and was placed in FDIC receivership. The FDIC determined that the market value of the property was significantly and materially less than represented in the appraisal, and that the loss IndyMac sustained on the loans was caused by erroneous appraisal. As a result, the FDIC sued the appraiser in 2009 alleging that the appraisal contained several misrepresentations that IndyMac had relied on in making the loans. The appraiser notified her insurance carrier who had issued her Real Estate Appraisers Errors and Omissions Liability Insurance Policy (Policy) and requested a defense and indemnity. The carrier denied coverage because the allegations indicated the appraisal was conducted before the November 20, 2006 Prior Acts Date in the Policy.

After obtaining a default judgment on the negligent misrepresentation claim for approximately $522K plus post-judgment interest, the FDIC requested the insurer reconsider its coverage position since the “final appraisal,” had been issued within the policy’s coverage dates. After the insurer refused FDIC’s demand to satisfy the judgment, the FDIC filed a lawsuit against the carrier alleging breach of contract (as third party beneficiary), bad faith denial of coverage, breach of the implied covenant of good faith and fair dealing as well as declaratory relief.

The FDIC alleged that appraiser’s representations were false because: (1) the value of the Property was significantly and materially less than $890,000 in October 2006 (2) the comparable properties used to value the Property were of superior quality and condition; (3) Coffman used an older, higher price for one comparable that was an active listing; and (4) the Property has no view.

The court held that the each of the alleged misrepresentations clearly occurred before the Prior Acts Date. The court said that although the same misrepresentations were repeated in the Revised Appraisal, this did not change the fact that they were originally made before the Prior Acts Date. The court said the Revised Appraisal simply restated verbatim the market value and that the alleged misrepresentation involving the use of improper comparables was substantially unchanged from the Appraisal. Moreover, the court said it did appear that the appraiser conducted any additional research on comparables after the Prior Acts Date but simply re-worded her discussion of comparables in the Revised Appraisal. Since the acts, errors, and omissions predated the Policy’s Prior Acts Date, the insurer was entitled to summary judgment on the breach of contract and declaratory relief claims.

Even assuming, arguendo, that a portion of the appraiser’s conduct occurred after the Prior Acts Date, the court said, any such conduct was interrelated to the work performed before to the Prior Acts Date. The court said the last page of the Revised Appraisal was entitled “Supplemental Addendum” and included multiple references to “additions,” “adjustments,” and “corrections”. Moreover, the “additions,” “adjustments,” and “corrections” were relatively minor and in direct response to IndyMac’s request for additional information regarding the Property. This court said this was evidence that the Revised Appraisal was intended to supplement or update her earlier work. Indeed, the court went on to say there was no evidence of any intent to create an entirely new, unrelated appraisal based on new and different research. The court said the Revised Appraisal merely confirmed that the initial assessment or opinion was accurate and it was her misrepresentation about the market value that IndyMac relied on in making the under-secured loans and that ultimately resulted in the losses for which judgment was obtained.

The court also held that the fact that the appraiser simply repeated and confirmed the misrepresentations in both the Appraisal and the Revised Appraisal demonstrated the interrelatedness of the work. Thus, court said the appraiser’s work in preparing the Revised Appraisal was interrelated with her pre-November 20, 2006 work in preparing the original Appraisal and any such acts, errors, or omissions were not covered because of the Interrelated Acts provision of the Policy.

Since there was no coverage for the negligent misrepresentation claim, the court held the insurer was entitled to summary judgment on the FDIC’s breach of contract claim and claim for declaratory relief. Moreover, because there was no breach the contract, the court held that the insurer could not be liable for bad faith or breach of the implied covenant of good faith and fair dealing

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