E&O - New Construction Payout Inspections - Claim Alert

According to Liability Insurance Administrators, "If you masquerade as an expert, be prepared to be judged as one." An LIA Claims Alert tells the story of a Montana appraiser that accepted a lender`s assignment to perform a "subject to completion" appraisal of a new construction, and also agreed to perform periodic construction progress inspections. During construction a disagreement started between the contractor and the borrowers about the manner in which the home was being finished, resulting in the contractor walking off the job. The borrowers and the contractor agreed to resolve the dispute by requesting the insured appraiser compile a list of incomplete items and estimate the cost to complete these items. The appraiser, with the consent of the lender, prepared his list and estimated the completion cost at $34,000. The lender consequently withheld 1 1/2 times this amount and deposited it into an escrow account; the remaining loan funds were paid to the contractor as his final disbursement. The borrowers then hired a new contractor to finish the construction; he estimated the cost to complete the home to be in excess of $80,000.

"The insured appraiser allegedly failed to include numerous unfinished items on his list and further failed to disclose defects in workmanship and the cost of repair or replacement."

The borrowers did not have sufficient financing left to complete the construction and filed a lawsuit against the original contractor (who was in bankruptcy at that time), the lender and the insured appraiser. The court determined that the insured appraiser had assumed a duty to the borrowers when he agreed to prepare a list of items still needed to complete construction and the estimated cost of completion. This report did not contain any additional language that described his scope of work, that he did not have the expertise of a contractor, that he could only include items that were visually apparent and that the figures were only an estimate and not a guarantee. The borrowers testified that the appraiser represented himself as an expert and they therefore relied upon his opinion. Liability Insurance Administrators settled the case for about $30,000, the difference between the loan funds held in escrow and the amount charged by the new contractor to complete construction. Appraisal , Real Estate, Appraiser , USPAP , RESPA , Regulation , Illinois , Home Inspection