USFN | Appraisers Liable to Third Parties for Negligence or Negligent Misrepresentation

Appraisers Liable to Third Parties for Negligence or Negligent Misrepresentation

by Scott Lundberg
Lundberg & Associates - USFN Member (UT)

In a case that could have far-reaching consequences, the Utah Court of Appeals has ruled that independent fee appraisers are not protected by the “economic loss rule” and may be liable to third parties for economic damages as a matter of law.

The case of West v. Inter-Financial, Inc., 2006 Ut. App. 222, involved a suit by the purchasers of property based on an error in an appraisal report that was originally prepared for the seller of the property. The appraisal report erroneously overstated the square footage of the property by 18 percent. The purchasers sued the appraiser, demanding $40,000 in damages. The trial court granted the appraiser’s motion for judgment on the pleadings and the purchasers appealed.

The appellate court held that the “economic loss rule,” which prevents a party from claiming economic damages in negligence absent physical property damage or bodily injury, is not applicable to appraisers. The economic loss rule is frequently invoked in construction cases where the parties have contracted to protect against economic liability. In those cases, the courts have held that contract principles override tort principles found in the Restatement of Torts.

In the West case, however, the court stated that the rationale for applying the economic loss rule is not present in the situation involving the appraiser. The court indicated that real estate appraisers are similar to real estate brokers and agents, who have a statutory duty to the public and are expected to be honest, ethical, and competent. Following decisions in other jurisdictions that real estate appraisers may be liable to non-contracting buyers for negligence or negligent misrepresentation, the Utah court reversed the trial court’s decision and remanded the matter for trial.