Property and Casualty Insurance · Property Insurance · 6 min read
Appraisal and Settlement Choices
- Explain how the appraisal process resolves disputes over the value of property or the amount of loss.
- Identify insurer settlement options, including rules for pairs or sets, salvage, and the prohibition against abandonment.
- Describe unfair claims settlement practices standards, loss payment timeframes, and rights of third-party payees.
The Appraisal Condition and Dispute Resolution
The appraisal condition sets forth a method for resolving disputes between the insurer and the insured regarding the amount of a loss. Either the insured or the insurer may make a written demand to initiate the appraisal process. This condition applies only to disagreements over the value of property or the amount of loss. It does not apply to coverage disputes. If an insurer denies that a loss is covered by the policy, the appraisal process cannot be used to resolve that coverage dispute.
Under standard property policy conditions, each party must select a competent and impartial appraiser upon a demand for appraisal. Some standard ISO forms give each party 20 days after receiving a written appraisal demand to select an appraiser, though you should check the applicable policy for its specific deadline. These two chosen appraisers are then responsible for selecting an impartial umpire. If the appraisers cannot agree on an umpire within the time stated in the policy, either party may ask a court with jurisdiction to appoint one.
The appraisers state separately the value of the property and the amount of loss. If the two appraisers agree on an amount of loss, their appraisal decision is binding on that amount, but it does not decide whether the loss is covered. If the appraisers fail to agree, they submit their differences to the umpire. The three participants in the appraisal process are the insured's appraiser, the insurer's appraiser, and the umpire. An appraisal decision agreed to by any two of these three participants binds the insured and insurer on the amount of loss, but not on coverage.
Each party pays the fees and expenses of its own chosen appraiser. The fees and expenses of the umpire are shared equally by the insured and the insurer, and other expenses of the appraisal process are split equally between them. Appraisal can resolve a dispute about the value of property or amount of loss without a lawsuit over that issue, although a court may still become involved. Participation in appraisal does not waive any of the insurer's legal rights under the policy, including the right to deny coverage later.
| Participant | Selected By | Expense Responsibility |
|---|---|---|
| Insured's Appraiser | The insured | Paid entirely by the insured |
| Insurer's Appraiser | The insurer | Paid entirely by the insurer |
| Impartial Umpire | The two appraisers (or appointed by a court) | Shared equally by insured and insurer |
Common mistakes
- Believing that an appraisal panel can decide whether an exclusion applies or whether a claim is covered, rather than only deciding the value of property or the amount of loss.
- Assuming that the insured has the right to insist on a cash settlement instead of allowing the insurer to exercise its option to repair, rebuild, or replace damaged property.
- Thinking that losing one part of a matched pair or set permits the insured to declare the entire set a total loss and collect its full original value.
- Assuming that an insured can unilaterally abandon damaged property to the insurance company and demand payment for a total loss without the insurer's consent.
Key points
- The appraisal process resolves disputes over the value of property or the amount of loss, but it cannot be used to decide coverage questions.
- An appraisal award agreed to by any two of the three participants (insured's appraiser, insurer's appraiser, and umpire) binds the parties on the amount of loss.
- The insurer holds the option to pay property value, pay repair costs, rebuild, repair, or replace with property of like kind and quality, or take salvage at an agreed or appraised value.
- The abandonment condition prohibits an insured from abandoning damaged property to the insurer without the insurer's consent.
- For pairs or sets, the insurer may repair or replace the part to restore value, or pay the difference in actual cash value before and after the loss.
- State unfair claims settlement practices laws require prompt investigations, fair settlements, proper explanations of claim denials, and truthful communication of policy provisions.
- Loss payable provisions and mortgage clauses protect third-party interests, and standard ISO forms commonly establish payment windows of 30 or 60 days after receiving proof of loss.
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