Appraiser Liability

Real Estate and Title Insurance News

Appraiser Liability

Originally published in August 2001 issue of the ATG concept.

Property appraisal is an important step of purchasing real estate. Most people do not know how to evaluate property and therefore must rely on professionals. The lender needs to know the value of the property to determine how much money the buyer may borrow. The real estate and savings and loan crises of the late eighties revealed how important appraisals are to the real estate industry. In response, the federal government passed the Financial Institutions Reform & Recovery Enforcement Act of 1989 (FIRREA). The Act requires appraisals to be in writing, establishes uniform standards for appraisal reports, and requires appraisers to demonstrate their competency. Kenneth M. Block and Jeffrey B. Steiner,Appraiser Liability: Lender May Be Third Party Beneficiary of Appraisal Prepared for Borrower, 222 NY L J 5 (Nov 17, 1999).

Third-Party Beneficiary to a Contract Theory

Usually a mortgage broker will obtain an appraisal. However, the purchaser, seller, and lender all rely on the appraisal in the real estate transaction. When an appraisal turns out to be wrong, all of the parties suffer. This raises the question of appraiser liability. When the appraisal is made for a governmental loan program such as the Federal Housing Administration or the Veterans Administration, an appraiser is liable only to the government; the appraiser does not have a duty to third parties who may rely on the appraisal. Theresa H. Waller, Neil G. Waller,Real Estate Appraisal: The Legal Liability, 18 Real Est L J 233, 237 (1990). The only exception is Wisconsin. InCostas v Neimon, appraiser Neimons conducted an appraisal for a real estate transaction that required a loan from the Veterans Administration. The purchasers later discovered that the appraisal was too high and sued the appraiser for their loss. The court considered the issue of the case to be whether a third party could hold an appraiser liable for negligent misrepresentation.Costas v Neimon, 123 Wis 2d 410, 412, 366 NW2d 896, 898 (Wis App 1985). The court determined that an appraiser may be held liable to a third party.Costas, 123 Wis 2d at 414, 366 NW2d at 899. The fact that a loan from the Veteran's Association was involved did not factor into the decision of the court.

When government-backed loans are not involved, a third party may attempt to enforce a contract. Illinois, Indiana, and Wisconsin all have similar requirements when a third party attempts to enforce a contract. In general, only the parties to the contract may enforce the contract's rights. To enforce contract rights, a third party must show that the contracting parties specifically intended the contract to benefit the third party. The benefit must also be direct; an incidental benefit arising from a contract will not establish third-party beneficiary rights. Courts will generally attempt to determine the intent of the contracting parties when deciding whether another party qualifies as a third-party beneficiary.Cahill v Eastern Benefit Systems, Inc, 236 Ill App 3d 517, 520, 603 NE2d 788, 792-793, 177 Ill Dec 718, 721-722 (1st D 1992),Barth Electric Co v Traylor Brothers Inc, 553 NE2d 504, 506 (Ind Ct App 1990),Goossen v Estate of Standaert, 189 Wis 2d 237, 249, 525 NW2d 314, 319 (Wis Ct App 1994).

Negligent Misrepresentation

In tort, a third party may sue an appraiser for negligent misrepresentation for an inaccurate appraisal. Waller, 18 Real Est L J at 244. Negligent misrepresentation exists when an appraiser had a duty of care, the appraiser supplied inaccurate information, and another party relied on the information to his or her detriment. Laurence M. Landsman,Appraisers May Owe Duty to 3d Parties, 143 Chicago Daily Law Bulletin 5 (May 1, 1997). In the majority of states, privity is not required for a buyer to bring a negligent misrepresentation claim. Waller, 18 Real Est L J at 244. However, third party liability is limited in other ways. The moderate approach to third party liability is the adoption of the Restatement (Second) of Torts &§ 552. The Restatement limits liability to those who justifiably rely on the information and to those the supplier intended to receive the information. Waller, 18 Real Est L J at 245. The appraiser does not need to know the third party that used the information; it is sufficient that the party belongs to a group who might reasonably be expected to access the information.Id.

In Illinois, theMoormandoctrine provides that a person may not recover in tort for a purely economic loss; the correct recourse in that situation is contract law.Moorman Manufacturing Co v National Tank Co, 91 Ill 2d 69, 81, 746 NE2d 443, 448, 61 Ill Dec 746, 751 (Ill 1982). However, the doctrine creates an exception for defendants in the business of supplying information for others. A claim for negligent misrepresentation brought against a party in the business of supplying information must show that the party made a misrepresentation and that the party supplied the information to guide the plaintiff in his or her business dealing.Tolan and Son, Inc v KLLM Architects, Inc, 308 Ill App 3d 18, 27, 719 NE2d 288, 298, 241 Ill Dec 427, 435 (1st D 1999).

Furthermore, Illinois adopted the Restatement approach for third party liability inCahill v Eastern Benefit Systems Inc, 236 Ill App 3d 517, 521, 603 NE2d 788, 792, 177 Ill Dec 718, 722 (1st D 1992). Cahill was an employee who filed a complaint against his employer, his health insurer, and a medical review organization. The employee claimed the medical review organization negligently reviewed his son's medical records when it determined his son should only remain in the hospital for fourteen days. In addition, the employee claimed the health insurer negligently relied upon the review organization's wrong recommendation. The court ruled that a person is liable for negligent misrepresentation "to only those persons for whose guidance he knows the information is to be supplied and to them only for the loss incurred in the kind of transaction in which the information is expected to influence them."Id.The court did not permit the negligent misrepresentation claim since the medical review organization provided the information for health insurer and the employer, but not the employee.Id.While the Restatement limits negligent misrepresentation liability to people a party knows will use the information, the 1995 Uniform Standards of Professional Appraisal states that the people expected to rely on an appraisal report are the client and its intended users. Laurence M. Landsman,Appraisers May Owe Duty to 3d Parties, 143 Chicago Daily Law Bulletin 5 (May 1, 1997).

Wisconsin's third party liability is more liberal. InCosta, the court confirmed that privity is not a requirement for liability.Costas, 123 Wis 2d at 413, 366 NW2d at 899. In addition, a person has a duty to prevent foreseeable harm, even if the nature of the harm or the identity of the person harmed is unknown at the time of the act. A person has a duty if it is foreseeable that the action will harm someone.Costas, 123 Wis 2d at 413 - 414, 366 NW2d at 899. The Costas needed a Veterans Association mortgage to secure the purchase of real property. Their mortgage company hired defendant Neiman to appraise the property. The mortgage was approved based on the appraisal report, but the Costas later discovered the appraisal was about $8,000 above the fair market value. They lost the property in a mortgage foreclosure and sued the appraiser for their loss. The court noted that obviously a negligently performed appraisal might cause harm to others. While the lender was the party most likely to suffer, the buyer was also a foreseeable victim of an inaccurate appraisal. Therefore, the court determined that an appraiser might be liable to third party for negligently performing an appraisal.Id.

Indiana takes a more conservative approach. Indiana does not recognize negligent misrepresentation for rendering professional opinions.Emmons v Brown, 600 NE2d 133, 135 (Ind Ct App 1992). A professional owes a duty to a third party if there is privity (contract) or the professional had actual knowledge that the third party would rely on the information.Id.In this case, the buyers could not show that appraiser Emmons knew they would rely on his appraisal. The fact that the buyers chose Federal Housing Administration financing because they knew it required an appraisal was not relevant in determining liability; the buyers had to show the appraiser knew they would rely on the appraisal.Emmons, 600 NE2d at 136. In another case, the court determined that actual knowledge did not exist although the buyer's name was on the purchase agreement and he paid the appraisal fee. The court held that the buyer failed to prove the appraiser had actual knowledge the buyer would rely on the appraisal.Block v Lake Mortgage Company, Inc, 601 NE2d 449, 452 (Ind Ct App 1992). Both theEmmonsandBlockcourts declined to adopt the Wisconsin rule established inCosta.Emmons, 600 NE2d at 135 andBlock, 601 NE2d at 452.

The Opinion Defense

A claim of negligent misrepresentation requires the misstatement of a material fact. Appraisers often claim their reports were merely opinions when defending a negligent appraisal charge. However, in recent years, the courts have looked less kindly on the opinion defense, but the effectiveness of the defense depends on the jurisdiction.

In Wisconsin, theCostacourt rejected the opinion defense. It held that an appraisal "carries with it an implied assertion that the speaker knows that the facts exist which support his opinion" and therefore a jury may consider an appraisal a representation of fact.Costa, 123 Wis 2d at 415, 366 NW2d at 900. The evidence inCostaindicated the appraiser based his evaluation on facts such as the square footage, depreciation, and the cost to rebuild. Therefore, it was appropriate to consider the appraisal a fact.Id.

Indiana adheres to the opposite conclusion. InBlock, the court rejected appraisals as the basis for actual or constructive fraud claims. While both claims require the "material misrepresentation of past or existing fact" (constructive fraud may also be based on a failure to speak if a duty to speak exists), neither claim may be based on an opinion.Block, 601 NE2d at 451. An appraisal "is not the result of a scientific analysis, but is ... a subjective opinion which can and does differ from the next appraisal even though ... based on current real estate market trends." Therefore, it cannot be the basis for a fraud claim.Id.

Illinois also requires a party to base a negligent misrepresentation claim on the misrepresentation of a past or existing material fact as opposed to an opinion.Buzzard v Bolger, 117 Ill App 3d 887, 892, 453 NE2d 1129, 1131, 73 Ill Dec 140, 142 (2nd D 1983). However, an appraisal may be the basis of a negligence claim depending on the facts of the situation.Sampen v Dabrowski, 222 Ill App 3d 918, 920, 584 NE2d 493, 495, 165 Ill Dec 314, 316 (1st D 1991). An appraiser can successfully raise the opinion defense if he clearly indicates his statements were opinions and did not represent them as facts.Buttitta v Lawrence, 346 Ill 164, 173, 178 NE 390, 393 (Ill 1931). InSampen, the appraiser overvalued property by more than $200,000. The appraiser arrived at the figure using data the sellers of the property provided. The appraiser included the results of three different approaches to valuing the property and the report repeatedly described his conclusions as estimates. Based on these facts, the court determined that the appraisal was indeed an opinion and was therefore not an actionable misrepresentation.Sampen, 222 Ill App 3d at 924 - 925, 584 NE2d at 498, 165 Ill Dec at 319.

Illinois Consumer Fraud and Deceptive Business Practices Act

In addition to negligent misrepresentation, the victim of a negligent appraisal may file a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act. The authors intended the Act to provide a consumer with more protection than common law.Harkala v Wildwood Realty, 200 Ill App 3d 447, 453, 558 NE2d 195, 199, 146 Ill Dec 232, 236 (1st D 1990). To recover under the Act, a plaintiff must show: (1) A deception, including concealment or omission, of any material fact. (2) The defendant intended for others to rely on the deception. (3) The deception or concealment occurred in the course of trade or commerce. 815 ILCS 505/2. Once again, the court will have to determine whether the deception was a material fact or an opinion. Although a plaintiff does not have to show reliance on the information in order to recover, the Act only applies if the real estate sales agent or broker "knows of the false, misleading or deceptive character of such information." 815 ILCS 505/10(b)(4). Therefore, a broker is not liable for latent or hidden defects.Harkala, 200 Ill App 3d at 453, 558 NE2d at 200, 146 Ill Dec at 237. InSampen, the court determined that real estate brokers and appraisers both engage in trade and commerce as required under the Act.Sampen, 222 Ill App 3d at 926, 584 NE2d at 499, 165 Ill Dec at 320.


A plaintiff may bring breach of contract or negligent misrepresentation claims to recover for a negligent appraisal. In most cases, a party cannot sue for a negligent appraisal if the government requested the appraisal since the appraiser only has a duty to the government. The one exception is Wisconsin. When the government is not involved, a third party may recover for a negligent appraisal under a breach of contract claim if the third party can show the contracting parties intended the third party to benefit directly from the contract.

A party can most easily recover for negligent misrepresentation in Wisconsin where the state established a foreseeable harm standard. Illinois reduces the scope of liability to those parties a person knows he or she will be supplying information. However, it will likely not be difficult to convince a court that an appraiser knew a buyer or seller of property would rely on the report. Indiana sets stricter standards. An appraiser will be liable only if there is a contract or if he or she had actual knowledge that a particular party would rely on the information. The strength of the opinion defense varies among the states with Wisconsin nearly rejecting the defense while Indiana uses it to bar any actual or constructive fraud claims. Illinois considers the defense on a case-by-case basis. However, even if duty and negligence is established, a party must still show reliance on the misstatement and damages to recover for negligent misrepresentation.

Illinois passed the Consumer Fraud and Deceptive Business Practice Act to provide more protection to consumers. The courts have recently held that the work of appraisers falls within the trade and commerce requirement of the Act. In addition, a plaintiff must show that the real estate broker or appraiser knew the statement was false to recover under the Act.

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Posted on: Sat, 08/18/2001 - 9:28am