Daily Development for
Wednesday, May 17, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

In response to recent traffic on the liability of appraisers and home inspectors, I offer these three "relatively recent" cases. They deal with appraisal and inspector liability issues, and waivers, but also with questions of liability of third parties who arrange for or forward negligent inspections or appraisals.

These cases are not quite so current as most daily developments, but I thought they were topical.

There is certainly some literature on negligent appraisal in the law journals. I haven't seen much that is well done on the liability of inspectors. In my experience, most home inspectors are "judgment proof" with respect to serious claims and use form reports so hedged with caveat and disclaimer that they are hard to use as a basis for a negligence claim.

APPRAISAL; APPRAISER'S DUTY OF CARE; WAIVER: An appraiser selected by a vendor and purchaser of property pursuant to a provision in a sales contract is not a third party beneficiary of the sales contract, and may be subject to a suit for negligence by the purchaser. Dressel Associates, Inc. v. John A. Welsch Real Estate Appraisers, Inc., 632 A.2d 906 (Pa.Super. 1993). The paragraph in the contract relied upon by the appraiser read as follows:

The appraiser's opinion of the fair market value shall be conclusive and binding upon Buyer and Seller and neither party shall have any right to challenge the appraiser's determination of the Property's fair market value, except upon proof of fraud or collusion between the appraiser and one of the parties hereto.

At the trial level, the court concluded that the appraiser was an intended third party beneficiary of this provision. On appeal the court disagreed, holding that a third party may enjoy the benefits of a contractual agreement only if both parties to the contract affirmatively state their intention to benefit the third party in the contract itself. The contract provision was merely an attempt by the parties to define their corresponding rights as between themselves. The language did not indicate an intention to relieve the appraiser of a duty to exercise care and diligence in making the appraisal or of liability for failure to use the skill employed by others engaged in a similar profession. Granting him immunity for negligence in making the appraisal was not necessary to further the intention of the parties, which was to reach a satisfactory price for the real estate being sold. Furthermore, there was no indication that eight party intended to provide a benefit to the appraiser by virtue of the agreement between the parties.

Comment: An increasingly common practice of real estate brokers is to include language in standard form agreements that waives claims against the broker for negligent acts of inspectors, appraisers or other service providers who are affiliated with the broker (and who likely have been selected by the broker to work on the project). In such cases, the apparent intent of the language is to benefit the broker, although the provision is entirely gratuitous insofar as the parties' basic purpose in executing the sale agreement is concerned. Does this case require that in New Jersey the language of such provisions must specifically benefit the broker? Perhaps more significant is the question of whether such agreements are consistent with the broker's fiduciary responsibilities to its clients.

BROKERS; SCOPE OF DUTY; MORTGAGE BROKERS: California mortgage broker is liable for defective independent appraisal that broker provides to prospective purchaser of mortgage loan. Barry v. Raskov, 283 Cal. Rptr. 463 (Cal. App. 1991) This case is based in part on a California statutory requirement that mortgage brokers provide to purchaser an estimate of the value of the security. The court suggests that such a statutory duty is non-delegable, and the mortgage broker cannot excuse defects in an appraisal by arguing that an independent appraiser prepared it. The case also holds, however, that in general a broker's fiduciary duty makes the broker responsible for injury to the principal due to misfeasance or malfeasance by independent parties the broker employs. The statute would not be necessary to establish a duty here. A stinging dissent criticizes the court's ruling as unecessary "evangalism," suggesting that in this case there was adequate evidence to base the decision on the fact that the appraiser was not truly "independent."

Comment: Although the case arises in a special context, involving a specialized kind of broker and a statutory duty, the principle establshed here clearly has far reaching implications. Brokers often retain independent parties to perform a variety of functions in connection with their marketing and evaluation of property. These include inspectors, escrow companies, and even lawyers and title examiners and insurers. Brokers do not always expect to be liable if the principle is injured by defects in the work done by such parties.

On first blush, one might conclude that it is relevant whether the broker actually pays the third party's fee, rather than passing the charge on to the principal. In the case at hand, it appeared that the broker actually paid the appraiser's fee. In many cases, the principle will pay the fee. But the court's analysis makes nothing of this distinction. It relies more on the fact that the broker selected the independent party in the course of the broker's carrying out his duties, and thus was in a position to insure that competent parties were so employed and that they performed competently. It further points out that the broker is in the best position to insure against losses. If these considerations form the basis for vicarious liability, then it may not matter whether the broker or the principle actually pays the independent party's fee.

VENDOR/PURCHASER; INSPECTIONS: Inspector may be liable for conspiracy to defraud or misrepresentation, negligence or breach of contract if it files an inspection report that, although accurate on its face, "underreports" defects of which inspector is aware. Rumford v. Valley Pest Control, Inc., 629 So.2d 623 (Ala. 1993). The case will reward study for those with concerns about the duties of inspectors. Here, a termite company had been conducting regular termite treatments for the sellers, and sent the sellers an inspection letter detailing certain problems of fungus and mildew. The sellers installed a french drain system, and then asked the inspector for a letter that did not mention these problems. Presumably because the inspector assumed that the problems would go away with the french drain installed, the inspector gave such a letter without reinspecting, knowing that the letter would be shown to prospective buyers. Held: On these facts, trier of fact could find the inspector guilty of conspiracy to defraud, negligence, and breach of its duties to buyer as third party beneficiary of the inspection contract.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260. Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items reported in the Daily Development and in the ABA publications are for general informatinon purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Items in the Daily Development are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.