Introduction to the Appraisal Clause
In the world of property insurance, disagreements are common. However, not all disagreements are about whether a claim is covered. Often, the insurer agrees that the loss is covered but disagrees with the policyholder on exactly how much the damage is worth. This is where the Appraisal Clause comes into play.
The appraisal process is a mandatory provision in standard homeowners policies (such as the HO-2, HO-3, and HO-5) designed to resolve disputes regarding the amount of loss without resorting to expensive and time-consuming litigation. For students preparing for the practice Homeowners questions, it is critical to distinguish between a dispute over coverage (which requires legal interpretation) and a dispute over valuation (which requires appraisal).
For a broader look at policy conditions, refer to our complete Homeowners exam guide.
Appraisal vs. Arbitration
| Feature | Appraisal | Arbitration |
|---|---|---|
| Primary Purpose | Determining the 'Amount of Loss' | Determining Coverage or Liability |
| Trigger | Disagreement on valuation | Disagreement on legal obligations |
| Participants | Two appraisers and one umpire | One or more neutral arbitrators |
| Binding Nature | Binding as to value only | Can be binding or non-binding |
The Step-by-Step Appraisal Procedure
The appraisal process follows a specific sequence of events defined in the policy conditions. If either the insurer or the insured makes a written demand for an appraisal, the following steps occur:
- Selection of Appraisers: Each party must select a competent and disinterested appraiser within 20 days of the request. "Disinterested" means the appraiser should not have a financial stake in the outcome or a close personal relationship with the party hiring them.
- Selection of the Umpire: The two appraisers then select an umpire. If they cannot agree on an umpire within 15 days, they may request that a judge of a court of record in the state where the property is located make the selection.
- The Evaluation: Each appraiser evaluates the loss independently. They attempt to reach an agreement on the value of the property and the amount of the loss.
- The Award: If the appraisers agree, they sign a written report, and the amount is set. If they disagree, they submit their differences to the umpire. An agreement in writing by any two of the three (the two appraisers or one appraiser and the umpire) determines the amount of the loss.
Important Exam Distinction
Appraisal cannot be used to determine if a loss is covered by the policy. For example, if an insurer claims damage was caused by a flood (excluded) and the homeowner claims it was a pipe burst (covered), this is a coverage dispute, not a valuation dispute. Appraisal is only valid once both parties agree that the loss is covered but disagree on the repair or replacement cost.
Appraisal Process Economics
Costs and Expenses
One of the most frequently tested aspects of the appraisal clause is the allocation of costs. The policy is very specific to ensure fairness:
- Each party is responsible for paying the appraiser they selected.
- The expenses of the appraisal and the compensation for the umpire are split equally (50/50) between the insurer and the insured.
This cost-sharing mechanism encourages both parties to act reasonably. If one party selects an unnecessarily expensive appraiser, they bear that cost alone, but the neutral party's costs are shared to maintain impartiality.