Orlando Harmon
The appraisal clause in an insurance policy allows either party to demand an independent assessment of the amount of loss in the event of a dispute. This process can be beneficial as it is relatively expedient, less costly, and less adversarial than litigation. However, there are drawbacks, including the potential for a protracted timeline and the challenge of finding an impartial umpire. Invoking the appraisal clause may result in a favourable outcome for the insurance company, and the policyholder may incur costs that are not covered by the appraisal clause. While appraisal clauses are valid, they may not always be the best course of action for policyholders, who should carefully consider their options before proceeding.
| Characteristics | Values |
|---|---|
| Purpose | To resolve disputes between insurers and insureds regarding the amount of loss or the scope of damages during a claim settlement |
| Initiation | Either the insurer or the insured can make a written demand for an appraisal |
| Appraiser selection | Each party selects a competent, impartial, and independent appraiser (e.g., adjuster, contractor, engineer) |
| Appraiser role | Evaluate the claim and determine the amount or value of the loss |
| Appraiser disagreement | Both appraisers select a third appraiser or umpire; the decision of any two of the three sets the binding amount of loss |
| Costs | Each party pays its own appraiser and splits the cost of the umpire |
| Benefits | Expedient, less costly, less adversarial than litigation, potentially higher payouts for the insured |
| Drawbacks | Loss of control over the claim, difficulty finding unbiased umpires, potential for prolonged process and increased costs |
| Validity | Generally valid and enforceable, especially when contractually agreed upon to avoid breach of contract |
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What You'll Learn
Pros and cons of invoking an appraisal clause
Invoking an appraisal clause can be beneficial when there is a dispute between the insurer and the insured regarding the valuation of the loss. This alternative dispute resolution process can be expedient, relatively less costly, and less adversarial compared to litigation. It allows both parties to resolve the dispute without months of fact-finding and expert discovery, followed by a jury trial.
However, invoking an appraisal clause also has its drawbacks. Here are some pros and cons to consider:
Pros:
- Faster and Lower-Cost Option: Invoking an appraisal clause can be a faster and more cost-effective way to settle claim disputes compared to litigation. It can help avoid the time and expense associated with protracted legal proceedings.
- Neutral Evaluation: The appraisal process provides a neutral evaluation of disputed property damage by competent and impartial appraisers. This can help ensure a fair assessment of the claim and the value of the property or the amount of loss.
- Binding Decision: The appraisal process results in a binding decision that is enforceable by both parties. This means that once the award is signed, there are limited options for changing it.
Cons:
- Favors Insurance Company: Invoking an appraisal clause often works more in favor of the insurance company than the property owner. Insurance companies have dispute resolution teams dedicated to managing this process and are better equipped to navigate it.
- Cost of Appraisers: The policyholder is responsible for finding and hiring an appraiser, which can cost between $500 to $1,000, and even more for commercial property disputes. This can be a significant expense, especially if the policyholder does not recover the full amount of their claim.
- Limited Recourse: There are limited options to increase the award amount or alter the decision once the appraisal award is signed. The only recourse may be to sue the insurer for breach of contract or acting in bad faith, which can be costly and time-consuming.
- Loss of Leverage: Initiating an appraisal process may result in a loss of leverage for the policyholder. In most jurisdictions, policyholders may have more favorable rules of policy construction that they would give up by invoking an appraisal.
It is important to carefully consider the potential benefits and drawbacks before invoking an appraisal clause. While it can be an effective tool for resolving valuation disputes, it may not always result in a favorable outcome for the policyholder.
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The role of an insurance appraiser
An insurance appraiser is a competent and disinterested professional who evaluates a claim to determine the appropriate value of the property and/or the amount of loss. Insurance appraisers are typically employed by insurance companies, independent appraisal firms, or work as freelancers. They are responsible for assessing the value of property, assets, or damages for insurance purposes. Their primary role is to examine and evaluate the condition, quality, and worth of insured items to determine the appropriate coverage, claim settlements, or premiums.
Insurance appraisers provide accurate and objective assessments. They inspect and document the details of the property or assets being appraised, which can include buildings, vehicles, personal belongings, or commercial inventory. They consider factors such as age, condition, replacement cost, market value, and any specific features or attributes that affect the item's value. Using their expertise and knowledge of industry standards, they compile detailed reports that help insurance companies make informed decisions regarding coverage, claims settlements, or premium calculations.
Insurance appraisers may also work closely with policyholders, claimants, or legal professionals to resolve disputes or negotiate settlements in the case of insurance claims. When a policyholder files an insurance claim, their insurance company will often send an insurance appraiser to investigate, evaluate, and settle these insurance claims. If the two parties are unable to agree on the amount of money the insurer should pay to settle a claim, there will likely be a non-judicial means of resolving the dispute between the insurer and the insured.
The typical appraisal clause allows each party to select a competent and impartial appraiser (which can be an adjuster, contractor, or engineer competent to determine the amount of loss) to separately and independently evaluate the amount of loss at issue. If the party appraisers can agree, the amount agreed upon will be the settlement. If they cannot agree, they will submit their differences to a jointly selected neutral umpire who will then arrive at a settlement decision.
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The appraisal process
The first step in the appraisal process is for either party to make a written demand for an appraisal. Once this demand has been made, each party must select a competent, impartial appraiser within a specified time frame, which is typically around 20 days. This appraiser can be an adjuster, contractor, engineer, or anyone else who is competent to value and determine the amount of loss. It is important to select an appraiser who is familiar with the specific dispute and can help advocate for the highest possible amount. Each party is responsible for paying their own appraiser.
After being selected, the two appraisers will work together to evaluate the claim and estimate the damage independently. They will try to come to an agreement on the amount of loss. If they can agree, this amount will be the settlement. If they cannot agree, they will need to select a neutral umpire, who is a competent, disinterested, and impartial individual, such as a retired judge, engineer, or contractor. Each party will bear the cost of the umpire equally. The two appraisers and the umpire make up the "Appraisal Panel."
A decision agreed upon by any two members of the Appraisal Panel sets the amount of loss and is binding on the parties. This decision can result in higher payouts for the policyholder if their valuation arguments are complex or difficult to calculate, as it may be challenging for a judge or jury to comprehend without an accounting background. However, appraisal awards are binding, and there are few possibilities to alter the award aside from suing for a contract violation. Therefore, it is crucial to have an expert well-versed in the process on your side before invoking an appraisal to ensure a successful outcome.
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When to invoke an appraisal clause
An appraisal clause is a provision in an insurance policy that allows a neutral evaluation of disputed property damage. It is typically invoked when there is a disagreement between the insurance company and the policyholder on the amount of loss or the scope of damages during a claim settlement. This can include disputes over the cost of repairs or the calculation of lost profits during a period of business interruption.
- When there is a genuine dispute over quantifying a loss amount: If there is a disagreement between the policyholder and the insurance company on the amount of loss, an appraisal can be invoked to get an independent assessment of the damage. This is especially useful when the insurance company refuses to negotiate or there is a significant difference in the valuation of the loss.
- When there is a dispute over the scope of repairs: In cases such as water damage, appraisers may disagree about the scope of repairs needed. One appraisal may suggest repairs throughout the home, while another may only cover a few rooms. Invoking an appraisal clause can help resolve this dispute and determine the appropriate scope of repairs.
- When there is a disagreement on property damage coverage: If there is a dispute between the policyholder and the insurance company regarding the extent of property damage coverage, an appraisal clause can be invoked to get a second opinion on the damage and the necessary repairs. For example, if the insurance company only agrees to pay for shingles that fell off during a windstorm, but the policyholder believes a full roof replacement is warranted, an appraisal can help determine the appropriate scope of coverage.
- When there is a pricing dispute: An appraisal can be a faster and lower-cost option to resolve pricing disputes between the policyholder and the insurance company. It can help avoid the time and expense of protracted litigation by providing a binding contractual process to settle valuation disputes.
It is important to note that invoking an appraisal clause may have some drawbacks. The process can be time-consuming, and it may be challenging to find impartial appraisers and umpires. Additionally, there are no assurances, and appraisal awards are binding. Therefore, it is crucial to have a full understanding of the considerations and consequences before invoking an appraisal clause.
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Appraisal clauses in car insurance policies
An appraisal clause in a car insurance policy allows the policyholder to dispute the estimate provided by their insurance company after an accident. This is done by invoking the appraisal clause, which allows each party to select an unbiased, competent, and impartial appraiser to evaluate the claim and value of the property or amount of loss. These appraisers will then work together to select a third-party umpire who will determine the final settlement amount. The policyholder is responsible for paying their own appraiser and half the cost of the umpire.
The appraisal process can be beneficial to policyholders as it is generally faster, less costly, and less adversarial than traditional litigation. It allows policyholders to resolve disputes without months of fact and expert discovery, and it can result in higher payouts, especially if the valuation arguments are complex. Additionally, insurers want to avoid the risks associated with a trial in front of a jury, which can be unpredictable and may not view insurance companies favourably.
However, there are also drawbacks to invoking an appraisal clause. It can be time-consuming as each side needs to interview and select their own appraiser and jointly agree on an umpire. There are no assurances, as appraisal awards are binding, and there are limited options for increasing the amount or altering the award other than suing for a contract violation. Policyholders also lose control of the claim once it goes to appraisal and are not involved in the decision-making process.
It is important to note that appraisal clauses are different from policy to policy, and they can only be invoked if the policyholder is making a claim on their own policy. When shopping for insurance, it is advisable to check for the presence of an appraisal clause and understand the situations in which it can be used. Consulting with insurance advisors and coverage counsel can help determine the best course of action when considering an appraisal.
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Frequently asked questions
An insurance appraisal clause allows either the carrier or the policyholder to make a written demand for an appraisal if the parties agree on the scope of coverage but disagree on the amount of loss or cost of repair.
You should invoke an insurance appraisal clause when you and your insurance company disagree on the amount of loss or the scope of damages during a claim settlement, and the company refuses to negotiate.
Invoking an insurance appraisal clause can be cheaper and faster than filing a lawsuit against your insurance company. It is also less adversarial compared to coverage litigation.
There are no assurances as appraisal awards are binding. Appraisals may also end up taking longer than expected as each side needs to select its own appraiser and agree on an umpire. Additionally, appraisal clauses do not cover expert fees.
