you to millions of dollars in personal
liability. In any event, the law generally
favors that people be legally accountable
for their wrongdoing—which is why
limitation of liability clauses in professional
agreements are strictly construed by courts
or sometimes even unenforceable.
Using a Liability Cap
On the other hand, aside from an appraiser’s
desire to save his or her own hide in the
event of a lawsuit, there are legitimate
policy considerations for appraisers
seeking to cap their liability. Is it fair for an
appraiser to act as a financial backstop on
multimillion-dollar transactions? The fees
charged by appraisers are generally modest
in comparison to the value of the properties
and transactions. Moreover, it is the client
that stands to gain the most economically
from a transaction, be it a loan on which
the lender collects fees and interest, or
a transaction such as the donation of a
conservation easement for which the owner
seeks a multimillion-dollar tax deduction.
And appraisers’ clients—whether lending or
non-lending—usually are in a better position
than the appraiser to gauge the overall risk
of a particular transaction. For example, the
lender knows the borrower’s credit standing
and ability to pay, and sets the loan terms
and interest rate accordingly. The lender is
also able to spread its risk among hundreds
or thousands of loan transactions. The
appraisal fee, on the other hand, probably is
not adjusted for the risk of a transaction and
almost certainly is not based on anticipation
that an appraiser may be demanded to act as
a financial guarantor for an opinion of value.
Choosing to use liability caps is
nevertheless an individual business decision
made in light of an appraiser’s own practice
and whether their clients will object.
When I advise my legal clients, I generally
consider the commonly held notion that
limitations of liability are not enforceable
to be irrelevant. For most states, that is not
true. When liability caps are well drafted in
consideration of individual state intricacies,
there is a good chance they will be enforced.
Even when not wholly enforceable, limited
liability clauses can still lower the probability
of an actual lawsuit or, at least, reduce the
severity of lawsuits actually filed. Some
lawsuits are avoided because parties will read
the terms of engagement and decide against
taking legal action after seeing a liability
cap. In other situations, when a lawsuit
has been filed, the liability cap will have
to be litigated and may cause the plaintiff
to resolve the case for less than might
otherwise be recovered. Thus, my general
advice to clients is usually to include a
limitation of liability in agreements unless
doing so would hurt a client relationship at
the outset.
A Sample Clause
Consider using a limitation of liability
clause such as the one below, but only after
discussing it with your own counsel:
Mutual limitation of liability. Appraiser and
Client agree that the following mutual limitation
of liability is agreed to in consideration of the
fees to be charged and the nature of Appraiser’s
services under this Agreement. Appraiser and
Client agree that to the fullest extent permitted
by applicable law, each party’s and its Personnel’s
maximum aggregate and joint liability to the other
party for claims and causes of action relating to
this Agreement or to appraisals or other services
under this Agreement shall be limited to the
higher of [$25,000] or the total fees and costs
charged by Appraiser for the services that are the
subject of the claim(s) or cause(s) of action. This
limitation of liability extends to all types of claims
or causes of action, whether in breach of contract
or tort, including without limitation claims/causes
of action for negligence, professional negligence
or negligent misrepresentation on the part of
either party or its Personnel, but excluding claims/
causes of action for intentionally fraudulent
conduct, criminal conduct or intentionally caused
injury. The Personnel of each party are intended
third-party beneficiaries of this limitation of
liability. “Personnel,” as used in this paragraph,
means the respective party’s staff, employees,
contractors, members, partners and shareholders.
Appraiser and Client agree that they each have
been free to negotiate different terms than stated
above or contract with other parties.
This clause is responsive to several
issues that often impede enforcement. It is
mutual, limiting not only the appraiser’s
Peter is General Counsel
at LIA Administrators
& Insurance, a firm
specializing in Error &
Omissions insurance
and loss prevention to
the appraisal profession
since 1977. Visit www.
liability.com for more
information.
...limited liability clauses can still lower
the probability of an actual lawsuit or,
at least, reduce the severity of lawsuits
actually filed.”
liability to the client but also the client’s
liability to the appraiser. This is not
considered as a weakness for most
appraisal firms because the only common
harm clients can inflict is failing to
pay the appraiser. The clause also sets
a liability cap that is meaningful and
higher than the appraisal fee (unless the
fee exceeds $25,000) to overcome legal
arguments that the cap is unreasonably
low or that the appraiser has no liability
risk for their negligence. The sample
clause also clearly extends the cap to
the appraiser’s negligence, which is a
matter that must be spelled out under
certain state laws. Finally, the clause
seeks to extend protection of the cap
to each party’s “personnel,” because,
yes, there have been cases where courts
found that a liability cap only applied
to the firm itself and not the individual
professionals within the firm who
were not parties to the agreement or
specifically mentioned. J
©2015 Reprinted with permission from the
Appraisal Institute, Chicago, Illinois. All Rights
Reserved. This article was originally published
in Valuation Magazine’s 2015 1Q issue. (Note:
This article is not intended as legal advice to be
acted upon, rather it is to encourage discussions
with the appropriate legal professional.)
