Why The Marine Insurance, Financial And Legal Professions Should Move Towards Requiring USPAP Compliant Marine Surveys (Appraisal Reports)


After graduating from California Maritime Academy, I sailed on various ships and tugs for several years and then worked as a Marine Operations Manager for a small tug and barge company. In 1991 I decided to make a career change and apprenticed with a medium sized Marine Surveying firm.

I recall one of my first attendances along with the owner of the firm was to perform a Condition and Valuation survey on a vessel. After the survey inspection my boss had me complete the report. He then took the report back to complete the appraisal portion of the report, which included Fair Market Value and Replacement Cost New. When I asked my boss how he arrived at the values, his response was, “I have been doing this for a long time, the value is based upon my experience”. In other words, it is because I say it is.

I doubt that my boss knew it, but his explanation was a logical fallacy called Ipsi dixit[1]. My apprenticeship took place almost 30 years ago. It would be nice to think that we, in the Marine Survey profession doing appraisals, have progressed as appraisers since that time. Unfortunately, based upon survey reports that I occasionally have the opportunity to review, things do not appear to have changed much.

The acronym USPAP stands for the “Uniform Standards of Professional Appraisal Practice”. The USPAP standard manual is published every two years by the Appraisal Standards Board of the Appraisal Foundation, an industry group authorized by Congress to write appraisal standards. The standards are organized into five sections consisting of Definitions, Preamble, Rules, Standards, and Statements on Appraisal Standards. Standard 7, Personal Property Appraisal Development and Standard 8, Personal Property Appraisal Reporting, are the Standard Rules applicable to appraising marine assets (as well as a lot of other things like gems and jewelry, trucks and tractors, art and sculpture, etc.).

USPAP Standard Rules 7 & 8 requires specific consideration and content including, but not limited to:

  • Identification of the client and intended users

  • Identification of the intended use of the appraisal (i.e. purchase, financing, insurance, divorce proceedings, etc.)

  • Identification of the type and definition of value (i.e. Fair Market Value) and the terms (cash or other considerations)

  • Identification of the effective date of the appraisal (usually, but not always the date of inspection)

  • Identification of the asset’s characteristics and condition

  • Identification of any extraordinary assumptions made[2], and hypothetical conditions used in the appraisal[3], as well as any limiting conditions used

  • Analysis of the asset’s use, market and relevant economic conditions

  • The report must be clear and accurate and must not be misleading

  • The report must contain sufficient information to enable the intended user(s) to understand the appraisal

  • The report must include the property interest being appraised (i.e. 100%)

  • The report must summarize the scope of work used (the scope of work includes almost everything from the above list)

  • The report must state the type and definition of value (i.e. Fair Market Value, Replacement Cost New, Orderly Liquidation Value, etc.) and cite the source of the definition (i.e. IRS, ASA, etc.)

  • The report must summarize the appraisal methods or techniques and state the reasons for excluding the sales comparison, cost or income approach

  • The report must include a signed certification. The certification must include specific content included in Standard Rule 8-3, and anyone who signs any part of the appraisal report must also sign the certification. For that reason, the certification should be separate from the report and be included as an attachment or a separate page

It is of upmost importance for the appraiser to understand the three appraisal approaches; sales comparison, cost and income. The income approach is seldom used in marine appraisals. For pleasure boats, the answer is easy; there is no income being produced. However, even with commercial vessels it is usually difficult to separate out income streams for individual vessels. The cost approach uses the principal of substitution; a prudent buyer will not pay more than the cost of acquiring a substitute asset of equivalent utility. The sales comparison (market) approach is generally the most commonly used appraisal approach for marine assets. At least where there are readily available sales or broker’s listings for the type and age of vessel (think production pleasure boats, tugboats and barges).

Many yacht and pleasure boat Condition and Valuation survey reports base the opinion of value, either wholly or partially, on one of the marine “blue book” valuation services (NADA, BUC, Price Digest, etc.). At first glance it is not completely clear what the basis is for the values obtained from these services. On the BUC website FAQ’s (http://www.bucvalu.com/index.cfm?fuseaction=consumerfaq) there is a mention of depreciation derived from “analyzing the market”, then …“Our expert staff, using the very latest computers and sophisticated software, studies the information statistically for different geographical regions. The various plotted value curves are usually unique to a manufacturer”…Based upon this description this is the cost approach to value. Generally speaking the most readily available valuation approaches to use, especially for smaller yachts and pleasure boats, would be the market approach, with the cost approach reconciled to the market approach, as a check. So using one of the “blue book” valuation services as a check on the value derived from the market approach would likely be considered a credible appraisal approach. However, I probably would not consider it credible as a standalone value. In any event, since USPAP requires the appraiser to identify the appraisal approach being used, it must be identified as being the cost approach.

And remember, USPAP not only requires that the appraiser explain the appraisal approach used and why any of the three approaches were excluded, but also that the report be clear, accurate, not misleading and that the report contains sufficient information to enable the intended user(s) to understand the appraisal.

This means that the appraiser cannot say something like…”based upon my analysis the opinion of value is X”. Or simply say …”the comparables were adjusted for size, age and power”. The sales or listing comparables need to be included, along with either the calculations, or the criteria for the calculations (so the user can understand the analysis).

The rest of the financial, insurance and legal world are used to working with appraisals that are USPAP compliant. I can think of no valid argument for the marine financial and insurance industry, as well as the maritime legal profession, to not expect the same.

[1] Ipse dixit, otherwise known as the bare assertion fallacy. This fallacy makes no attempt to use logic to justify the conclusion and is an argument by authority. For example, if you are in the army there are situations where there is no time for debate. Your commanding office simply tells you. If you challenge the assertion you are likely to be shouted at or worse. The fallacy takes the form: it is true because I told you it is true.

[2] An Extraordinary Assumption, is defined as “an assignment-specific assumption as of the effective date regarding uncertain information used in an analysis which, if found to be false, could alter the appraiser’s opinions or conclusions”

[3] A Hypothetical Condition is defined as “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis”.

Dana R. Teicheira is a NAMS Certified Marine Surveyor and an ASA Accredited Senior Appraiser in both Appraisal Review and Management (ARM) and Machinery and Technical Specialties (MTS), with a designation in Commercial Marine Surveying. Mr. Teicheira is headquartered in Northern California and can be contacted at 707-769-9171 or by email at dt@maritimesurveyor.com