What is an Appraisal Management Company Bond?
Appraisal Management Company bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating real estate appraisal activity in the appraiser’s jurisdiction as a condition of licensure for most appraisal firms. Born out of the housing crash and financial crises of 2008, many states have enacted legislation requiring new rules and regulations for appraisers, often including licensing and bonding.
Appraisal management company bonds must be issued by insurance carriers admitted in the state where the appraiser does business. The insurance carrier issuing any surety bond, such as an appraisal management company bond, will also be referred to as the “surety company” or the “bond company”. Appraisal management company bonds refer to the appraisal firm as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is an appraisal management company bond required?
Appraisal Management companies are required to purchase license bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from an appraisal firm breaking real estate law. The surety company provides the government a guarantee (the surety bond) that lenders and borrowers party to a real estate transaction will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the real estate appraiser’s license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, appraisal management companies are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Appraisal management company bond violations triggering a bond payout may include a company’s dishonest or fraudulent acts in regards to the appraisal process and/or violation of specific state statutes.
How much does an appraisal management company bond cost?
Appraisal Management Company bonds generally cost 1% of the bond amount. For example, a $10,000 bond will cost $100.
Example: $10,000 Appraisal Management Company Bond Cost
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Is a Credit Check Required for Appraisal Management Company Bonds?
Credit checks are not required for appraisal management company bonds.
How does the wording in the bond form impact the cost of an appraisal management company bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and appraisal management company (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the appraisal management company via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an appraisal management company bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 appraisal management company bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Appraisal management bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the appraisal management company and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the appraisal management company failing to pay premiums due and/or claim payouts. Appraisal management company bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Appraisal management company bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.