Appraisers Beware: Arizona Court Finds Appraisers Have Duty to Homebuyer
Appellate Litigation Alert 07/28/09 Brian A. Howie
Recently, the Arizona Court of Appeals held that, contrary to the rule in numerous other states, an appraiser hired by a lender also owes a duty to the homebuyer. In Sage v. Blagg, 209 P.3d 169 (Ariz. Ct. App. 2009), a buyer of a home agreed to the purchase, contingent on an appraisal by a lender's appraiser. The appraiser valued the home as having 2,440 square feet of livable space. Over a year later, when refinancing, the buyer obtained a second appraisal, which found that the home had only 1,871 square feet of space. The buyer then sued the appraiser for negligent misrepresentation, claiming that she would have exercised her right to cancel the purchase if the appraisal had been accurate. The trial court followed other decisions, holding that appraisers have no duty to homebuyers, and entered summary judgment for the appraiser.
On appeal, the Court of Appeals reversed. The Court began by distinguishing two cases relied on by the trial court, in which negligent misrepresentation claims against appraisers had been dismissed because, in those cases, the homebuyer could not have relied on the appraisal. In this case, however, the buyer's reliance could at least be inferred from the facts: First, she had the contractual right to cancel the contract if the property did not appraise at the purchase price. Second, the appraiser had reviewed the contract in preparing the appraisal and acknowledged that the buyer had the right to request a copy of the appraisal from the lender.
In its analysis, the Court of Appeals cited decisions from courts in six other states, all of which squarely held that appraisers owe a duty to homebuyer only if the appraiser actually knows that appraisal will be relied on by the buyer. Yet the Court declined to follow this precedent and instead followed a decision from the Washington Supreme Court, holding that homebuyers are within a "limited class" to whom appraisers owe a duty of care. In particular, the Court found that a professional - like an appraiser - owes a duty to a third party when the professional (1) intends to supply information for the benefit of the third party or (2) knows that the recipient of the information intends to supply the information to the third party. Though the Court found no evidence that the appraiser intended to supply the appraisal to the homebuyer, it still found that the appraiser knew that the lender intended to supply the appraisal to the buyer. Thus, unlike the law in numerous other states, the Court concluded that "knowledge" does not require proof of actual knowledge that the lender was certain to supply the appraisal to the third party. Rather, proof that the appraiser knew that the lender intended to supply the appraisal was enough, and such proof may be found from the fact that the lender must furnish the appraisal to the buyer if asked. The Court determined that its rule was consistent with "the realities of the loan/purchase transaction by which one typically acquires a home, and emerging industry guidelines recognizing that the buyer/borrower normally relies on the appraisal."
In the wake of Sage, appraisers - especially in Arizona - should be aware that they cannot assume their liability for an appraisal is limited to the lender that actually retains them. Instead, they may be liable to the homebuyers as well, even if they have no contract with the buyers and never interact with them.
If you have any questions about this Arizona Court of Appeals decision or any other matter involving homebuyer's rights, contact Brian A. Howie at 602-229-5405 or e-mail [email protected] or your Quarles & Brady attorney.