What is the appraisal clause

 An appraisal clause is included in most insurance policies—whether it’s a homeowner’s policy, a commercial policy, or coverage on a vehicle—and it serves a very practical purpose. When there’s a disagreement over the value of a loss, it provides both sides with a way to resolve that dispute without immediately resorting to litigation. Put simply, it’s designed to keep the process moving and reach a fair resolution in a more efficient, common-sense manner. 

The process itself is fairly straightforward. Each side selects an appraiser to represent their position, and those two appraisers work to come to an agreement on the value of the loss. If they can’t get there on their own, they bring in a neutral third party—an umpire—to help settle the remaining differences.

One of the most important aspects of this process is that the appraisers are supposed to be independent. They should be experienced, knowledgeable, and—most importantly—unbiased. Their job isn’t to “win” for one side or the other. It’s to arrive at a fair and accurate valuation. Because of that, their compensation should never depend on the outcome of the appraisal.

It’s also important to keep in mind what appraisal does and does not do. Appraisers don’t decide coverage. They aren’t there to determine whether something should be covered under the policy—that’s still up to the carrier (or ultimately the courts, if it gets that far). Their role is limited to putting a value on damages that have already been accepted as covered. That typically means determining things like Replacement Cost Value (RCV) and Actual Cash Value (ACV).

While policy language can vary, most appraisal clauses follow this same general structure and intent. Below is an example of how that language is typically written, along with a breakdown of what an appraiser’s role looks like in practice.

 “If you and we fail to agree on the amount of actual cash value or amount of loss, either one can demand a determination by appraisal. If either makes a written demand for appraisal, each shall 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 shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the resident premises are located to select an umpire. The appraisers shall then set the amount of the actual cash value and loss for each item. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the actual cash value and loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. A written agreement signed by any two of these three shall set the amount of the actual cash value and loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.”