COMPETENCY RULE or SCOPE OF WORK RULE: Which Rule Rules? (part 2 of 2)
(by William M. Novotny, AQB Certified USPAP Instructor. This is the second part of a two-part article focusing on the generalist appraiser and the issue of competency. For Part One, go here.)
This article builds upon the competency issues developed and discussed in Part One, and it explores those issues further by means of two hypothetical appraisal assignments performed by John Morgan, a hypothetical, experienced generalist personal property appraiser. In these two mini-case studies John must deal with critical competency issues for an insurance total loss appraisal assignment and for a separate equitable distribution appraisal assignment.
Hypothetical Insurance Assignment: A Competency Disclosure or a Scope of Work Disclosure?
In this hypothetical insurance assignment fictional appraiser John Morgan was contacted by Rachel Barnes, a senior insurance adjuster, to appraise some items of personal property involved in a fire loss claim.
The insured in this case owns specialized items of personal property including some antique furniture, decorative art, a Japanese folding screen (Byobu) and a very large HO brass scale model train collection with an extensive tabletop model train layout. John Morgan is asked to appraise the property that suffered damage as a result of exposure to fire, smoke and water, and by subsequent asbestos contamination caused by a remediation crew removing drywall and accidentally distributing asbestos-laden insulation.
The claimed items were a total loss and are covered under a standard homeowner’s replacement value insurance policy. According to the policy, in case of total loss appreciating items of property are covered up front at their replacement value, but for depreciating property the insured is only entitled to the item’s actual cash value up front until such time as the property is actually replaced and a purchase receipt is submitted. At that time the insured is paid the difference between actual cash value and the actual replacement cost.
John has handled similar assignments for this client, adjuster Rachel Barnes, in the past. The client again came to John because of his demonstrated knowledge and experience with many different property types. But upon examining the damage claim, John recognizes two properties which may present competency issues: the model train and the Byobu.
Train: Disclosure is Required
John discloses to the adjuster that he lacks the requisite knowledge and experience to perform the appraisal of the HO scale model brass train collection and tabletop model train layout. These two properties each require a different approach to value and different types of knowledge and experience.
John has bought, sold and appraised other types of model trains on numerous occasions, but he is much less familiar with HO scale model brass trains of which there are scores of examples in the subject collection. He recognizes that he lacks the knowledge and experience to properly name or describe each type of car. He also does not feel competent to value the model train layout which requires the cost approach to valuation.
John concludes that he will need to rely upon a specialist dealer who is experienced not only in pricing brass trains for sale but also in constructing model train layouts. He knows of such a highly-experienced dealer who agrees to serve s a consultant.
John discloses to the adjuster that he will need to rely upon a specialist expert. He informs the adjuster that the expert will provide object identification and will be responsible for developing the final value opinion. He discloses that he will oversee the expert to ensure that he follows and applies the proper appraisal methodology.
The adjuster agrees to proceed as John suggests and agrees to pay for the additional consultation cost that will be required. John will include the expert’s opinions in his report and attach the expert’s report to the appraisal.
Japanese Screen: Is Disclosure Required?
While John recognizes that he is not an expert in all Japanese screens, he does feel that he is capable of conducting the inspection as well as the necessary market research and analysis for the subject screen. However, since he knows that some Byobu may be beyond his current knowledge and experience, John tells the adjuster that he will consult with a Japanese screen specialist appraiser in order to obtain corroboration of his final value opinion. Does this consultation require a competency disclosure, or is it simply an extension of the assignment’s scope of work and a demonstration of John’s due diligence?
The author would argue that informing the client of his intent to get corroboration from a Japanese screen specialist appraiser is merely intended to inform the client of the expanded scope of work that will be required and of possible additional costs that may result. Given his past experience with screens and with the assistance anticipated to be provided by the screen expert consultant, John feels that he can complete the appraisal of the Japanese screen competently (Such consultations with experts are commonly undertaken by the generalist personal property appraiser). Since John has determined that he is competent to appraise the Japanese screen, there is no need to make a competency disclosure to the client. Advance disclosure to the client of the consultation with the screen expert is not required by USPAP but is advisable since the expanded scope of work will incur an additional cost that the client will need to approve.
John does as he proposes. He inspects, identifies, photographs and measures the screen, He then conducts research, analyzes his findings and develops his final opinion of value. He then meets with the screen specialist appraiser to review his analysis and opinion.
The byobu specialist appraiser consultant reviews John’s descriptions, value opinion, work file and photographs. The specialist informs John that he disagrees with John’s findings. The specialist appraiser feels that the comparable sales on which John based his value opinions are of exceptional, collector-grade screens that are more desirable than the subject property (which is merely of tourist or decorative quality.) As a result, the consulting appraiser suggests that John’s value conclusion is too high. John concurs with the consultant. John conducts additional research to gather appropriate comparables. Subsequently, he lowers his value opinion so that it is now consistent with the decorative, tourist quality Byobu comparable properties.
Some might be tempted to argue in this hypothetical scenario that John misjudged his competency. They would argue that the outcome demonstrates John’s incompetence, and that he should have made a competency disclosure. Many would argue that he did not properly understand the relevant property characteristics and that, of and by itself, demonstrated his lack of knowledge and experience.
However, as it turned out, John was, at the end, fully capable of developing credible assignment results. John properly determined that a consultation would be a necessary component of his opinion development process. Despite his initial inappropriate choice of comparable sales, his final scope of work actually performed was sufficient and resulted in credible assignment results.
John must recognize at this point, however, that he did benefit substantially from the consultation with the Oriental objects specialist appraiser. The assistance that was provided by the consultant was “significant,” therefore, the requirements of SR 8-3 regarding disclosure of significant appraisal assistance applies.
As required by USPAP SR 8-3, John discloses in the report’s certification statement the name of the specialist appraiser who provided significant appraisal assistance with the byobu. John also describes the assistance provided by both the train expert as well as the byobu expert in the appraisal report. Note that both the COMPETENCY RULE as well as the SCOPE OF WORK RULE require the appraiser to describe in the report the assistance provided by others.
A very important point should be noted here. There is no connection in USPAP between the fact that significant appraisal assistance was provided and a lack of competency. In other words, merely because an appraiser obtains significant appraisal assistance from another does not equate to an admission that the appraiser lacks competency.
The COMPETENCY RULE states that competency requires the appraiser:
- To have ability to properly identify the problem, and
- To have the knowledge and experience to complete the assignment competently, and
- To recognize and comply with laws and regulations that apply to the appraiser or to the assignment.
By conducting additional research or by consulting with experts when encountering properties about which he or she has only limited knowledge and experience, the generalist appraiser can often satisfy the above requirements of the COMPETENCY RULE and obviate the need for making a competency disclosure to the client.
Hypothetical Equitable Distribution Appraisal Assignment: Competency and Record Keeping
In this second mini-case study generalist appraiser John Morgan is tasked with appraising the contents of a home for equitable distribution purposes. While inspecting the contents, John discovered some 20th century firearms that appear to be ordinary and common examples with which he has had some experience. John feels that his experience and knowledge is consistent with or even exceeds that of the typical market participant; however, John knows that he is no firearms expert.
John is of the opinion that he can properly identify the objects and develop his own value opinion using his typical methodology for firearms valuations. Accordingly, he feels that he has the experience and knowledge to complete the assignment competently so has no need to make a competency disclosure to the client.
During his inspection, John identifies the firearms and their relevant characteristics (model, maker, finish, size, condition, characteristics such as engraving, checkering and attached telescopic sights, etc.) Using his typical appraisal techniques and methodology, John finds and analyzes comparable sales of firearms made by the same maker, having the same model numbers and with the same or similar characteristics. John then develops his final value opinions using the sales comparison approach to value.
To confirm his opinion while at the same time exercising due diligence, John contacts a specialist firearms appraiser/dealer with whom John has consulted with in the past. John hopes that the expert will either confirm John’s opinions of value or point out shortcomings in John’s identification or in his analysis of the market data regarding the firearms.
The specialist appraiser reviews John’s firearm descriptions, value opinions and photographs. He reports that he does not think John has overlooked any significant facts or market related issues relating to the firearms. Having this input, John feels confident that his value conclusions regarding the firearms are credible.
Would such a consultation be regarded as resulting in significant appraisal assistance, and therefore require that the name of the appraiser by identified in the certification statement as providing “significant appraisal assistance”? The answer is No. Though USPAP does not define the term “significant appraisal assistance,” there is an important discussion provided in 2010-2011 USPAP FAQ 219 which states that in order to be considered significant the contribution should be related to the appraisal process, and:
“the contribution must be of substance to the development of the assignment results. In other words, the individual must contribute to the valuation analysis in a noteworthy way.”
In the above scenario the expert appraiser’s comment that “he saw no facts or market issues of significance that were overlooked” did not constitute significant appraisal assistance.
What if, however, in the above example, the firearms appraiser had said:
“Gun #1 is a rare prototype of an important gun that was released as Model #XXX the following year. It is a very important and sought-after collectible gun.”
Such a comment would be regarded as significant, because it would alter the appraiser’s opinion of the nature of the subject property. It would cause John to expand his scope of work and, consequently, would cause John to alter his value opinion. So, such appraisal assistance would most definitely be regarded as “significant.”
Since the consultant appraiser identified the firearm as an important prototype, the assistance should be regarded as “significant.” And since it was provided by an “appraiser,” John would be required to identify the firearms appraiser (as he did the byobu appraiser) in the report’s certification. John would also be required to disclose the extent of the assistance provided within the appraisal report.
But even though the expert appraiser’s opinion plays an important role in John’s assignment, the assistance would not constitute an “appraisal” or an “appraisal review. As a result, the comments would not cause there to be a workfile requirement for the consultant firearms appraiser.
It is important to note one final point regarding the disclosure of significant appraisal assistance in the reports certification statement (see SR 8-3). The disclosure of significant appraisal assistance would only apply to assistance provided by an appraiser.
If the assistance was provided by a collector or retail specialist (as is the case with the HO scale model train expert), then the assistance should not be disclosed in the appraisers certification statement since the assistance was not provided by an appraiser. However the assistance was provided as part of the scope of work determination, and thus, the assistance of the HO model train specialist dealer/collector, should be disclosed in the report narrative as required by the SCOPE OF WORK RULE.
Competency Disclosure Requirement
Competency disclosures to the client are not necessary unless the appraiser deems he or she does lack the knowledge and experience to complete the assignment competently. As noted earlier, there is no USPAP requirement that reports include a statement that the appraiser is competent.
In the above examples, John had determined that he had sufficient knowledge and experience to appraise the Byobu and firearms. The purpose of his consultations with the experts was not because John thought that he lacked sufficient knowledge of experience to perform the assignment. The purpose of the consultations was to obtain confirmation of his assignment results from a more knowledgeable and experienced appraiser or other expert. Specifically, John wanted to ensure that he had considered all the relevant facts and had not overlooked any important issue.
Consulting with an expert for corroboration is routinely done by personal property appraisers, but mere consultation is not an immediate indication of a lack of knowledge or experience that would trigger a competency disclosure.
USPAP provides the appraiser with significant freedom regarding whether or not and at what point in the appraisal process to disclose a lack of knowledge and experience to the client. But with that freedom comes the responsibility for appraisers to always be alert to limits in their knowledge or experience that could prevent the assignment from being completed competently.
But what happens if the appraiser’s research fails to uncover useful information and the appraiser cannot answer the valuation question? What if the appraiser becomes stumped? If the appraiser determines that he or she lacks the knowledge and experience to complete the assignment competently, it is at that point in the appraisal process that a competency disclosure is required.
Here are some typical examples that would cause an appraiser to have lingering doubts:
- The subject property could have characteristics that are inconsistent with the characteristics of the comparable sales found during the appraiser’s research.
- The appraiser may remain unsure of whether the subject property was of a common type or was rare and potentially of great value.
- The appraiser may continue to have doubts that he or she has properly identified the object and its relevant characteristics.
- The appraiser may have been able to locate only minimal data that turned out to be insufficient to conclude a credible value opinion.
- The appraiser may have been unable to locate any relevant market data at all.
- The appraiser may feel that the client can be best served only by retaining the services of an independent specialist appraiser.
For reasons such as the above, the appraiser continues to have uncertainty and might very well conclude that he or she lacks the necessary knowledge and experience to perform the assignment competently. Should that be the case, the appraiser must make a competency disclosure to the client. Any of the following might follow:
- The client could withdraw the troubling property from the assignment
- The appraiser could omit the item from the report and disclose that he or she was unable to appraise the property
- The client could agree to permit the appraiser to retain the services of a specialist to assist with the assignment (at an additional cost)
- The client could retain the services of the specialist to do an independent appraisal of the property
Note that if there is a deficiency in competence, it is seldom necessary to reject or abandon the entire assignment. If the valuation of a specific property type cannot be completed competently, it would be necessary to disclose that fact to the client, and if remediation is not possible (with the client’s concurrence) to then omit that particular property from the assignment. It would not be necessary to reject the entire assignment.
Some appraisal assignments become adversarial. An appraisal can be challenged for many reasons including failure to make a competency disclosure or for making use of an inadequate scope of work. The appraiser must be able to defend against such challenges. While important, a discussion of these issues is beyond the scope of this article. However, related issues are thoroughly discussed in USPAP’s AO-28 Scope of Work Decision, Performance, and Disclosure and in AO-29 An Acceptable Scope of Work.
Generalist personal property appraisers lacking the requisite knowledge and experience must remain vigilant for the possible need to:
- Disclose or remediate any lack of knowledge and experience regarding the subject property that might undermine the appraiser’s ability to develop credible assignment results or to complete the assignment competently
- Decline to appraise a property if lacking the necessary knowledge and experience
- Refer the client to a knowledgeable and experienced specialist
At times the appraiser’s knowledge and experience is so limited as to require (in accordance with the COMPETENCY RULE) a competency disclosure to the client. At other times, however, the appraiser’s knowledge and experience is sufficiently advanced to allow the assignment to be completed competently by means of expanding the assignment’s scope of work (in accordance with the SCOPE OF WORK RULE) by the appraiser conducting additional research or by calling upon the assistance of expert consultants.
By complying with USPAP, the appraiser can sign the appraiser’s certification statement with confidence that his or her analyses, opinions and conclusions are worthy of belief, and that the client will have reason to rely upon their report.
For part 1 of this article, go here.
© 2011 William M. Novotny, AQB Certified USPAP Instructor