Insurance Appraisal: The Process that Determines Insurance Premiums and Claim Payouts

Tobias Patch
40 articles

Last updated on February 01, 2023
Published on January 23, 2023
Reading time: 6 minutes

In this article, we will discuss the importance of insurance appraisal in determining the value of a property, personal contents, or claim values for different purposes. We will explain the different types of insurance appraisals, such as pre-damage and post-damage appraisals, and how they are used for different circumstances. 

We will also discuss the difference between a home purchase appraisal and an appraisal for insurance and what to expect when getting your house or personal property appraised for insurance purposes. 

Even though this is a complex subject, you need not worry – we will provide all the facts necessary for understanding this key term to make informed decisions regarding your specific needs or situation.

What is the definition of appraisal?

The definition of appraisal is – “an expert estimate of the value of something.” 

It is helpful to remember this definition as we discuss how appraisal applies within the context of insurance. 

What is the definition of insurance appraisal?

Brelly defines insurance appraisal as “the process of establishing the value of property and belongings to buy insurance policies or the value of loss for an insurance claim.” 

It is important to recognize that this question does not have a straightforward response; an appraisal is a complex concept involving many details and variations of use. Do a quick search, and you’ll find multiple interpretations of insurance appraisal that contrast with one another, some of which are entirely wrong! What remains steadfast and accurate across all interpretations is the association with determining value – which explains the meaning of “appraisal” in this context. Pretty simple right? 

Not so fast…

Knowing when to utilize an appraisal is vital. Appraisals can be done before or after a loss has occurred, creating two distinct types of insurance appraisals. We will delve deeper into these types later in the article to give you a better understanding.

What is the difference between appraisers and adjusters?

Adjusting claims is a separate profession, where adjusters are responsible for determining coverage and liability and negotiating settlements for an insurer with an insured. There are different legal parameters surrounding these two topics – appraisal services often are used for dispute resolution around the value of a claim. 

Insurance appraisal IS NOT adjusting. It doesn’t include determining responsibility or coverage for an insurance claim. It is important to note that an appraisal is not the same as an insurance claim adjustment. If you want to learn more about adjusters or the claims process, please read our complete breakdowns of each topic.

What is the difference between real estate appraisals and insurance appraisals?

Both types of appraisals seek to put a price on your house. But while a real estate appraisal examines your residence’s market value to determine a sale price, an appraisal for insurance assesses how much it would cost to rebuild should disaster strike and what unique items inside may be valuable. 

Insurance appraisers are well-versed in their craft and have the right software to accurately determine a replacement cost appraisal for insurance policies. However, a broker or real estate agent may conduct an appraisal to itemize your home’s value if you’re trying to purchase a house or put one up for sale. Nonetheless, this estimation does not serve as a basis for calculating insurance costs; it’s meant to support real estate pricing used to determine accurate sales prices, which is a part of setting mortgage interest rates for a house loan.

What are the different types of insurance appraisals?

The two main types of insurance appraisals are pre-damage and post-damage appraisals. As it would seem, pre-damage valuation is conducted before an accident or disaster, and these estimates help determine the value of items in a policy for coverage purposes. Post-damage appraisals take place after an incident and calculate the exact costs related to a covered loss and frequently are used to settle a dispute. Keep reading to learn more about the various types and how they might apply to your situation or needs.

Appraisals for buying home insurance

In this situation, an appraisal is used to evaluate your home’s replacement cost, not its market value. Since land is not customarily insured, it is generally disregarded during these assessments. You might also have your personal contents appraised to confirm the value when purchasing a policy for your insurer. The primary goal of this type of appraisal is to decide how much coverage will be necessary to adequately protect your house, business, or personal possessions.

“Scheduled item” personal property appraisals

Appraisals for high-end belongings are usually obtained when an insurer wants a valuation for expensive items or collections. These specialty or rare items are generally excluded from a standard homeowners policy and may require a special umbrella policy to be purchased. For example, suppose you have a valuable coin collection or a highly-priced artwork piece or collection. In that case, you may need to be scheduling property or belongings separately for the item to be insured with its own specific premium. This type of appraisal is more detailed than a standard home policy estimate. 

The appraisers will look at each piece of art or jewelry separately. To do this accurately, he or she must have experience in the specialty field and know about the current market values of similar items. 

Business interruption appraisal

Business interruption appraisals are used to set the loss of income and insured business experiences after a disruption due to a covered claim. During this process, the appraisers will consider many factors, including the length of time the business was closed, potential customers lost during that period, additional expenses, and how much revenue had no disruption occurred. The appraisal is then used to settle the insurance claim and decide how much money the insured business will receive. Often a forensic accountant appraiser is hired to perform business interruption appraisals.

The insurance appraisal process for resolving disputes over the value of a claim

This type of appraisal process has become an increasingly common practice in the past five years as a more economical and efficient way to resolve disagreements over a property loss and reach a final settlement. As such, we will dive deeper into this section. 

General facts surrounding claim dispute appraisals

  • It does not consider coverage issues or bad faith.
  • It is frequently used to determine the scope and value of a property loss for damages concerning a claim settlement.
  • A condition included in most policies called an “appraisal clause” gives an authorized person, like the home insurance company or the policyholder, the right to demand appraisal. 
  • Often, it’s seen as an option to save time and money for both parties instead of pursuing litigation or arbitration.

Our article, “Insurance Appraisals: settling your claim without litigation,” offers an in-depth look at this appraisal process, so you can be well-informed before making any significant decisions. 

The most common appraisal clause appraisal language

If you or we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal. Each will then select a competent, independent appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a district court of a judicial district where the loss occurred. The two appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item.

Insurance Appraisal Clause Language from Standard HO3 Homeowners Insurance Form

Insurance policies contain different appraisal language, so you must check yours to ensure you have correctly demanded or invoked the appraisal clause. Here is a short breakdown of how the appraisal process works.

  • The insurance company or policyholder can invoke the appraisal clause with a properly executed written demand.
  • Each party must hire its own appraiser within 20 days of the demand and will pay its own appraiser fees (these individuals should be industry experts) 
  • After a professional appraiser is selected for each party, they must choose an umpire equally within 15 days.
  • If the two appraisers fail to agree on an umpire equally, they may petition the district court in the judicial district court where the appraisal is located to select one for them.
  • Your appraiser will work with the insurance carrier’s appraiser to assess the dispute and will generally perform a home inspection to determine if the insurer should pay more money to the insured. 
  • An itemized decision agreed to by the two appraisers will be outlined in an award – such award will set the value of the loss and, in most cases, is a binding agreement that ends the process. 
  • If the two appraisers fail to agree on the valuation of the loss, they may request the umpire to review their valuation and settle their dispute. If either of the two appraisers agree with the umpire, they may sign an award. 

Pro Tip: Homeowners and business owners – if you hire an appraiser, ensure you review how much you will pay for their fees before agreeing to hire them. Inquire about any other expenses you might be charged, and take the time to get a contract properly executed before starting. Additionally, ensure they fully understand the dispute and provide a complete list of all your expenses and any other expenses you might still need to pay. 

Give them the contact information for the insurance carrier’s appraiser and ask your appraiser to keep you regularly updated on progress. 

Tobias Patch

Whether you or an insurance company demands appraisal it is essential to be well-versed in the subject so you can make informed decisions. 

Bringing it full circle

Well, there you have it! Appraisals are used to evaluate homes and personal items to insure them and settle disputes over claims. Appraisers may specialize in certain areas, such as business interruption appraisal, which involves determining loss of income due to a claim-related disruption. An appraisal is not the same as adjusting a claim, and different legal parameters surround it.

This post discussed different types of appraisals, the insurance appraisal process, their purpose, and how they are used. I hope this article has been helpful but if you need to know more about your specific situation or how to navigate the appraisal process yourself, reach out to us and we can connect you with someone who can help.

Tobias Patch
40 articles
About the author
Tobias is a seasoned contractor, adjuster, and technology zealot. In prior lives he worked for both insurance companies and policyholders, so he understands claims and the rebuilding process from all possible angles. His obsession with finding a better way to handle claims led him to found Brelly, where he serves as the CEO.