In helping real estate professionals find the right professional liability (E&O) insurance policy, one of the most common issues we come across is whether someone you hire to help with your intermittent workload is an employee, a subcontractor, or an independent contractor.
The IRS perspective vs. the insurance perspective
This is often confusing because what you intended to do may not be what you actually end up doing. There are a number of reasons for this. First and foremost is the fact the IRS will view this question in a different way than the insurance industry will. So, even if you get solid tax advice about which is which and why, you may find your E&O provider looks at the same situation and reaches a different conclusion.
Next, an errors and omissions provider is not concerned with tax treatment or revenue sharing issues or even with whether someone does or does not share office space with you. E&O providers are only concerned about whether they might have to defend you and pay a loss on a claim even if someone other than you did most of the work on a project. Many people think this cannot happen if the person they give a project to has their own E&O policy in effect at the time they do the work. While it is true that you should never use someone on a project that doesn’t have their own E&O, the fact they have E&O at the time won’t necessarily save you or your E&O provider when a claim is filed years later.
Last, but not least, if you received any share of the fee from any appraisal, your E&O provider must know about it since you have potential liability for the work done, even if all you did was refer it to someone else.
Why the insurance perspective matters (a lot)
For example, let’s assume you are a very busy appraiser and ask another appraiser (who has their own E&O policy) to take an assignment from you because you are too busy to get it done on deadline. He or she finishes the report and you review it and add your signature before sending it to the client. Three years later the loan that the appraisal supported goes into default and the lender finds a reviewer who says the original value was wrong because the appraiser didn’t use the best comps available. You get a letter from the lender asking you to submit a claim to your E&O provider and you immediately call the other appraiser and discover (1) they are out of the business and do not have E&O any longer or (2) they are still working, but have a new E&O policy and the retro date is just two years ago. This means you are now the only one with active E&O coverage and your carrier will have to defend you while the other appraiser gets dropped from the case (since they have no insurance).
Since this happens all too often, the E&O industry says the risk they have in insuring you is the same whether any other appraiser you use is called an employee, a subcontractor, or an independent contractor. Unless you get named on their E&O policy as an additional insured and can verify they have retained their same coverage for at least 7-10 years after they did work for or with you, your E&O provider must charge you additional premium to cover situations like this where you are the last person standing with E&O insurance when the loan goes bad.
Now it's your turn
Now you know why your E&O provider treats every licensed appraiser you ever give work to the same, no matter what you or the IRS call them. So, the next time you're in a situation where you could use a fellow appraiser's help to meet a deadline, how will you respond? Leave a note in the comments and let us know!