What Is an Appraisal Clause and How Does It Work?
Learn how the appraisal clause in insurance policies provides a clear, structured way to resolve disputes over claim amounts.
An appraisal clause within an insurance policy offers a structured path for resolving disagreements between a policyholder and their insurer concerning a claim. This provision aims to provide an efficient method for both parties to reach a resolution without necessarily resorting to legal action.
Understanding the Appraisal Clause and Its Role
An appraisal clause is a standard feature in property insurance policies, including homeowners and commercial policies. This provision outlines a specific procedure when a policyholder and their insurer disagree on the financial amount of a covered loss. For example, if a property sustains damage and the insurer’s estimated repair cost differs significantly from the policyholder’s, the appraisal clause can be invoked.
The primary function of an appraisal clause is to determine the monetary value of a loss, such as the cost to repair or replace damaged property. This process focuses solely on the “amount of loss” and does not address questions of coverage or whether a specific loss is covered under the policy terms. Issues related to policy interpretation or coverage eligibility are outside the scope of an appraisal.
Appraisal is considered a form of alternative dispute resolution (ADR), offering a less formal and often more expedited path than litigation. It provides a means to settle valuation disputes without the extensive time and expense that can be associated with court proceedings. Either the policyholder or the insurance company can initiate this process by making a written demand for appraisal.
The Appraisal Process: Step-by-Step
The appraisal process begins when either the policyholder or the insurer formally requests it in writing due to a disagreement over the loss amount. Each party must select a competent and impartial appraiser within a specified timeframe, often around 20 days. These appraisers should have expertise in assessing the type of damage or loss.
The two selected appraisers then independently evaluate the loss and attempt to agree on a valuation. If they successfully reach a consensus on the amount, that agreed-upon figure typically becomes the settlement amount. However, if the two appraisers cannot agree on the full extent of the loss, they are tasked with selecting a neutral third party, known as an umpire.
If the two appraisers cannot agree on an umpire within a certain period, such as 15 days, either party may request a court appointment. Once an umpire is chosen, the appraisers present their differing valuations and supporting evidence. A decision agreed upon by any two of the three individuals (both appraisers, or one appraiser and the umpire) will determine the amount of loss. Both parties typically share the cost of the umpire and bear the expense of their own chosen appraiser.
The Outcome and Finality of Appraisal
The decision reached through the appraisal process regarding the amount of loss is generally binding on both the policyholder and the insurer. Once the amount is determined, both parties are obligated to accept this figure as the final amount of the loss. This binding outcome provides a conclusive resolution to the valuation dispute.
While the appraisal award is largely considered final, there are limited circumstances under which it might be challenged. Such challenges are typically restricted to issues like evidence of fraud, or if the appraisal panel exceeded the defined scope of their authority by attempting to determine coverage issues rather than just the amount of loss.