Property Insurance: What is an Appraisal?

I see a number of cases that involve first party insurance claims under property and casualty insurance policies. This is an area of practice that strongly benefits the insurance company and should be approached with great caution by the insured. The appraisal process is set forth in most policies. It is supposed to be a shorter, more cost effective way to handle the claims process. The appraisal process has nothing to do with whether a claim is covered in the first place. It typically involves a dispute over the amount it will cost to replace or repair damage.

Either party has the right to request an appraisal. If either party requests an appraisal, each party selects an appraiser. The appraisers then get together and select an umpire. Each appraiser then makes his case to the umpire and the umpire selects a figure.

If you are going through the appraisal process you should consult a public adjuster or an attorney. It could make a huge difference.


3 thoughts on “Property Insurance: What is an Appraisal?

  1. Tim, good advice. Please be advised that a further important distinction, even within the appraisal process being applied, is the differential in determining the basis of value.

    Namely, there is an important distinction between Cost of Replacement New (CRN) and Reproduction Cost New (RCN). Effectively replacement cost is a functional equivalent basis. While reproduction cost is an exact duplicate for costing. (i.e., same materials, quantities, finishes, etc.)

    This difference can have a significant impact on the basis upon which the claim may be based. As often times a functional equivalent is typically lower than an exact replicate.

    Thanks for the blog post.

    • Thank you for your comment. You raise an excellent point. The terminology in insurance policies can be confusing and misleading. Many agents don’t even know what they’re selling. Co-insurance, functional replacement cost, etc. Bottom line is, “Buyer Beware!”

  2. J, interesting comments… Typically, the Appraisal Panel is only to determine the “amount of loss”, essentially, the total economic cost the insured’s loss.

    As the determination of value can deviate vastly, with application of diferent valuation techniques, Appraisers enjoy a somewhat limited authority in the Interpretation of policy language, adjusting processes and the specific basis of value. An Appraiser should not look to the policy and valuate the loss according to coverage, rather, the appraisal award should be reviewed against the policy, in order for the courts to determine what aspects of the amount of loss is covered. And of course, state statute trumps and supersedes all policy language.

    Value Methodology Memorandum

    If in case the Appraisers would like to define the valuation methods outlined in the policy, for which the appraisal panel is to utilize, an “appraisal memorandum” can aid in defining and guiding the panel. This type of memorandum can reduce any controversy during the appraisal of the amount of loss.

    Form and Substance of Appraisal Award Memorandum

    The typical measure which the appraisal panel can undertake to insure that the carrier does not pay for aspects of the loss for which they are not contractually bound to, is to require the appraisal panel to provide a line by line award. This would allow any court of law, agent to the carrier, or counsel to easily determine which “line items” of the appraisal award is subject to a “limit”, “loss provision”, “category”, etc., and “adjust” the final proceeds due to reflect the contractual obligations of the undersigned. Furthermore, the appraisal award would have two columns, Replacement Cost Value and Actual Cash Value. Each and every line item of the loss would be valued at both RCV and ACV. This would allow the carrier to adhere to their “hold back” provision, and pay on the replacement cost value on only items which have been purchased. If the insured chooses not to replace, then they will only be paid on the Actual Cash Value of the item. The appointing parties look to the appraisal panel to determine the amount of loss, and entrust it to resolve the disputes faced in valuation. In my opinion, a detailed line by line appraisal award is the best option to fairly and accurately protect the interests of all parties involved.

    T. Di Sieno, Digitory Solutions, Inc.

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