What Is an Insurance Appraisal?
An insurance appraisal is a qualified professional's documented assessment of a property's replacement value. Insurance appraisals are common, but there is no universal appraisal format, form, or style. In this article, we will look at what appraisals are, how they work, and when they are required. We'll also discuss the difference between insurance and purchase appraisals.
What Is an Appraisal?
An appraisal is a detailed, written, independent evaluation of the value of a property by an appraiser or relevant expert. Depending on the purpose of the appraisal, it can be ordered by you, a trusted advisor, a lender, a lender's agent, or your insurance company.
When used to buy or sell a home, the appraisal describes what makes the property valuable and how it compares to other homes in the area. Appraisals are used by insurance companies to determine the cost of replacing property or estimating the amount of damage after a covered loss. They may specifically request appraisals for older homes or those that have not had recent inspections.
How Homeowners Insurance Appraisals Work
The purpose of a home insurance appraisal is to determine the replacement cost of your home, not its market value. Because your land is not at risk for theft, fire, or other covered perils, these appraisals exclude land value.
Buying a Policy
When you purchase a policy, some insurers may send an appraiser to your home to gather an accurate rebuild estimate, particularly for higher-end homes. Other companies, on the other hand, may simply use software to calculate the cost of rebuilding your home based on its build date and square footage. If your insurer's assessment appears to be incorrect, you can request a review of the property details the company has on file to ensure everything is correct.
- If you want to insure unique or rare items on your policy, insurance companies may also require a formal appraisal that explicitly lists the items, their details, and an estimated value based on comparable items on the market. To cover these types of items, you may need to purchase additional insurance or an umbrella rider.
Assessing Property Damage
Your insurance company will send a professional adjuster to assess property damage at no cost.If you disagree with the adjuster's valuation or a settlement amount, you can invoke the appraisal clause in your policy. If you and the insurer cannot agree, a standard homeowners insurance policy may state that either party may make a written demand for an appraisal. Each party then selects an independent appraiser and notifies the other within 20 days of the appraiser's identity.
Both appraisers then have 15 days to select an umpire, after which either you or the insurer can request that the umpire be selected by a judge. Each appraiser estimates the damage and then attempts to reach an agreement on the losses. If they are unable to do so, the umpire makes a detailed decision based on the two appraisal reports.
An insurer may also offer to settle a claim valuation dispute through arbitration, in which a neutral arbiter hears both sides and makes a final decision.
- If you are dissatisfied with how your insurance company handles the valuation or appraisal process, you can file a complaint with your state's insurance department against the insurer or insurance adjuster. Learn how to file a complaint with your state's Department of Insurance or Office of Insurance Regulation.
Insurance Appraisal vs. Purchase Appraisal
A property is commonly appraised during real estate transactions, in addition to being appraised for insurance purposes. These two types of appraisals share some similarities but also have significant differences. Here's how insurance appraisals stack up against purchase appraisals:
Purpose
Both insurance and purchase appraisals attempt to place a monetary value on your home. However, whereas purchase appraisals determine the market value of your home, insurance appraisals determine the cost of rebuilding your home if it is destroyed, as well as the value of any special contents.
Insurance appraisers are equipped with the knowledge and software required to perform a replacement-cost estimate for insurance. A property appraisal may also include a "cost approach" analysis that itemizes your home's value without the land. However, the outcome is used to support a real estate appraisal rather than to calculate insurance costs.
Evaluation
Labor costs, debris cleanup and removal expenses, construction and finishing materials, and other factors and activities that would be required to restore your home and other structures to their pre-damaged state are all considered in insurance appraisals. Your insurance premium is then calculated using the replacement-cost estimate. 6 Appraisals for high-value items such as art or collectibles use comparable items on the market to estimate costs and take into account future potential market fluctuations.
- Appraisals may or may not include the additional costs of rebuilding a home to current building codes. Some insurance companies provide building code coverage (also known as ordinance or law coverage) to reimburse you for the additional costs associated with meeting current regulations.
In order to determine the market value of a home, variables analyzed for purchase appraisals prioritize the overall economy, the age and condition of the home, and property values for similar homes in the neighborhood.
Initiation
Purchase appraisals are typically requested by your lender for mortgage approval, and you are responsible for paying for them. You can also get an appraisal before selling your house to figure out how much to list it for.
If you already have or are considering purchasing a home insurance policy, the insurer may send an appraiser to evaluate a claim or assess your home before issuing a new policy. If you use the appraisal clause in your contract, you must hire your own appraiser.
Do You Need an Appraisal for Homeowners Insurance?
Appraisals for home insurance are necessary or appropriate when you:
- When you purchase home insurance, you or your insurer will want to estimate an accurate dwelling replacement cost.
- Have an existing policy and want to make sure you're not underinsured or paying too much for coverage?
- Believe that your insurer's appraiser has significantly undervalued your claim.
- Have expensive, one-of-a-kind, or rare items that you want to properly insure.
You can estimate the cost of rebuilding your home by contacting local licensed homebuilders and asking for building costs per square foot for a home in your area, or by using online building cost calculators.