What's hot in valuer claims: part I
In the current economic landscape lenders are increasingly suffering significant shortfalls from the sale of their security.
In cases where the valuation on which the lender relied was negligent, pursuing a claim against the valuer is a key part of effecting a full recovery.
In November, December and January Gadens Lawyers is publishing e-updates on current issues affecting claims against valuers.
In Part 1 of the series, we look at tips and traps for lenders when engaging valuers, and the importance of having in place a panel valuer agreement with a meaningful indemnity which can be relied upon when a valuer gets it wrong.
In Part II of our series, we look at notification of claims and the position of insurers. In particular, we review the circumstances in which lenders can bring a claim directly against a valuer's insurer. We also examine the principles arising from a recent Full Federal Court decision involving a negligent valuation in which Gadens acted for the lender.
Our final valuer claims instalment will look at strategies for effecting an early resolution of claims and maximising recoveries.
Do I need a panel valuer agreement?
Most lenders have in place service level agreements (SLAs) with their mortgage intermediaries, solicitors and other service providers.
A good SLA should provide the lender with a clear avenue of recourse if the service provider fails to meet the agreed standard of service delivery.
A panel valuer agreement is an SLA with a valuer which imposes obligations on the valuer to ensure that valuations provided to the lender conform to a standard of basic competence.
It is possible for a lender to sue a valuer without having a panel valuer agreement in place. However, the danger is that a valuer whose obligations are not clearly defined can more easily 'muddy the waters' or attempt to 'shift the blame'.
To avoid valuers seeking to deflect responsibility for negligent valuations, we recommend that lenders ensure they have panel valuer agreements in place, and conduct a critical review of their existing panel valuer agreements on a regular basis.
Is my panel valuer agreement working effectively?
The content of a panel valuer agreement will depend on the specific needs of an individual lender.
However, we recommend that all panel valuer agreements include the following as a minimum:
- an acknowledgement by the valuer that all of the relevant lenders of record and trustees can rely on valuations provided by the valuer, and that the valuer's obligations under the panel valuer agreement are owed to each of those entities. This should prevent any argument by the valuer that the lender has sued in the wrong name
- an obligation for the valuer to maintain a policy of professional indemnity insurance acceptable to the lender. The valuer should also be required to submit certificates of currency each time the policy is renewed and a copy of any new policy if the valuer changes insurer. In Part II of our series we will review some of the features of policies of insurance commonly held by valuers
- a clear statement of what matters valuers are required to address in their valuations, and to what standard. For example, where the comparison method of valuation is used, a lender might require that all sales used as evidence be within 6 months of the date of instruction
- an express incorporation of any industry standards the valuer is required to meet in their valuations. For valuations of residential property, the API PropertyPRO® supporting memorandum is often incorporated. However, these standards should not be incorporated uncritically. They frequently impose obligations on the lender as well as the valuer which can lead to allegations by the valuer that the lender contributed to its own loss
- a provision requiring the valuer to indemnify the lender for 100% of any loss which arises from any act or omission of the valuer in preparing a valuation. A meaningful indemnity provision is a key element in preventing valuers from seeking to 'shift the blame' for negligent valuations (see below)
- in New South Wales, it is prudent for lenders to also seek to exclude the operation of the Civil Liability Act 2002 (see below). However, it should be noted that the corresponding Acts in Queensland, Victoria, the ACT and Western Australia prevent lenders from seeking to exclude their operation.
Valuers' attempts to 'shift the blame'?
Until 2004 lenders could look to valuers to make good 100% of their loss, even where other parties (such as brokers or the borrowers themselves) may have misled the lender.
Legislation introduced in 2004 at both state and federal level means that a valuer will only be found liable to a lender to the extent that the valuer's negligence was causative of the lender's loss.
This legislation is often referred to as 'the apportionment legislation' because it requires the Court to apportion responsibility for the lender's loss between all parties whose conduct contributed to the lender's loss in the transaction.
The apportionment legislation disadvantages lenders in valuer claims because:
- cases in which lenders can look to a valuer for 100% of their loss have become the exception rather than the rule
- other parties (such as brokers, panel solicitors or the borrowers themselves) will often be found to have contributed to a percentage of the lender's loss
- if a portion of the lender's loss is apportioned to an insolvent or deceased third party (eg a broker or borrower) the lender cannot recover this portion of their loss.
What can a lender to do avoid the apportionment legislation?
Unlike its equivalents at federal level and in other states and territories, the NSW apportionment legislation currently permits 'contracting out'.
To restrict the ability of valuers to 'shift the blame' a lender could therefore include the following provisions in its panel valuer agreements:
- a clause which obliges the valuer to indemnify the lender for 100% of its loss, without any reduction for contributory negligence or for the negligence of other parties
- a clause which specifically excludes the operation of the NSW apportionment legislation.
It should be noted that many valuers will be reluctant to agree to clauses which amount to a waiver of their rights to 'shift the blame' and which may also be inconsistent with the terms of their policies of professional indemnity insurance.
Practical issues: insurance
Our experience is that valuers are unlikely to be able to meet claims unless they are insured for the full amount of the claim, particularly where there are multiple claims.
Policies of professional indemnity insurance will typically only provide cover up to the extent of the valuer's contribution to any loss suffered by a lender.
In other words, from the insurer's perspective, the apportionment legislation will still apply, even if the valuer itself has 'contracted out' of the apportionment legislation.
A typical scenario might look like this:
- the lender obtains judgment for 100% of its claim against a valuer – say $1,000,000 – because the valuer 'contracted out' of the apportionment legislation
- the Court makes a finding – on the application of an insurer – that the valuer was responsible for only 20% of the lender's loss
- the valuer's insurer would only be liable to indemnity the valuer for $200,000
- the lender may be unable to recover the remaining $800,000 because the valuer does not have sufficient assets to meet the judgment.
Take outs: how does this affect me?
Having an effective panel valuer agreement in place is a key element in simplifying valuer claims litigation and restricting the ability of valuers to deflect responsibility.
However, ensuring that valuers are engaged on terms favourable to the lender is not a total solution.
As well as periodically reviewing their panel valuer agreements, we recommend that lenders critically examine the terms of their panel valuers' insurance policies to ensure that there is meaningful cover to respond to any claim.
In part II of our series on valuers claims we look at some practical strategies to ensure that lenders can access the benefit of their valuers' insurance cover. Stay tuned ...
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