What Is an Insurance Appraisal?

Homeowners Insurance Appraisals Explained

An insurance adjuster with a clipboard surveys flood damage to several houses
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An insurance appraisal is a documented assessment of a property’s replacement value by a qualified professional. Insurance appraisals are commonly used, but there generally isn’t a standard appraisal format, form, or style. In this article, we’ll examine what appraisals are, how they work, and when they’re necessary. We’ll also look at the difference between insurance and purchase appraisals.

What Is an Appraisal?

An appraisal is a detailed, written, and independent assessment of a property’s worth by an appraiser or relevant expert. It can be ordered by you, a trusted advisor, a lender, a lender’s agent, or your insurance company, depending on the appraisal’s purpose.  

When the appraisal is used to buy or sell a home, it describes what makes the property valuable and how it compares to other homes in the area. Insurance companies use appraisals to calculate what it costs to replace property or estimate the amount of damage after a covered loss. They may specifically ask for appraisals for old houses or homes that don’t have recent inspections.

How Homeowners Insurance Appraisals Work

The purpose of home insurance appraisals is to judge your home’s replacement cost, not its selling price on the market. These types of appraisals exclude land value, since your land isn’t at risk for theft, fire, and other covered perils.

Buying a Policy

When you buy a policy, some insurers may send an appraiser to your home to collect an accurate rebuild estimate, especially with higher-end homes. But other companies may simply use software to determine your home’s rebuilding cost based on its build date and square footage. If your insurer’s assessment seems off, you can ask to review the property details the company has on file to make sure everything is accurate. 

If you want to insure unique or rare items on your policy, insurance companies may also ask for a formal appraisal explicitly listing those items, their details, and estimated value based on similar items on the market. You may need to purchase additional insurance or an umbrella rider to cover these types of items.

Assessing Property Damage

Your insurance company provides a professional adjuster at no charge to assess property damage. If you don’t agree with the adjuster’s valuation or a settlement amount, you can invoke your policy’s appraisal clause. A standard homeowners insurance policy may state that either party can make a written demand for an appraisal if you and the insurer aren’t in agreement. Each party then chooses an independent appraiser and notifies the other of the appraiser’s identity within 20 days.

Both appraisers then have 15 days to choose an umpire, after which point either you or the insurer can request that a judge choose the umpire. The appraisers each estimate the damage and then try to reach an agreement on the losses. If they can’t, the umpire makes an itemized decision based on the two appraisal reports.

Alternatively, an insurer may offer to resolve a claim valuation dispute through arbitration, where a neutral arbiter hears both sides and makes a final decision.

If you’re unhappy about how your insurance handles the valuation or appraisal process, you can file a complaint with your state against the insurer or insurance adjuster. Check your state’s Department of Insurance or Office of Insurance Regulation to learn how to submit a complaint.

Insurance Appraisal vs. Purchase Appraisal

In addition to having property appraised for insurance purposes, a property is also commonly appraised during real estate transactions. These two types of appraisals have a few similarities and a number of important differences. Here’s how insurance and purchase appraisals compare:

Purpose

Insurance and purchase appraisals both seek to put a price on your home. But while purchase appraisals assess your home’s market value, insurance appraisals determine your home’s rebuilding cost if it’s destroyed, as well as the value of any special contents. 

Insurance appraisers have the skills and software needed to do a replacement-cost estimate for insurance. An appraisal for a property purchase may also include a “cost approach” analysis that itemizes your home’s value without the land. But the result is used to support a real estate appraisal instead of to calculate insurance costs.

Evaluation

Insurance appraisals look at labor costs, debris cleanup and removal expenses, construction and finishing materials, and other factors and activities that would be necessary to restore your home and other structures to their pre-damaged state. The replacement-cost estimate is then used to calculate your insurance premium. Appraisals for high-value belongings like art or collectibles use comparable items on the market for cost estimations and consider future potential market fluctuations.

Appraisals may not include the additional costs of rebuilding a home that complies with current building codes. Some insurance companies offer building code coverage (also called ordinance or law coverage) to reimburse you for the extra cost of meeting current regulations.

Variables analyzed for purchase appraisals prioritize the overall economy, age and condition of the home, and property values for similar homes in the neighborhood in order to ascertain its market value.

Initiation 

Purchase appraisals are usually requested by your lender for mortgage approval, and you pay for them. You may also pay for an appraisal before selling your house to determine how much to list it for.

If you already have a home insurance policy or are purchasing one, the insurer may send an appraiser to evaluate a claim or to assess your home before issuing a new policy. If you invoke the appraisal clause in your contract, you’re responsible for hiring your own appraiser. 

Do You Need an Appraisal for Homeowners Insurance?

Appraisals for home insurance are appropriate or required when you:

  • Purchase home insurance and either you or your insurer want to estimate an accurate dwelling replacement cost.
  • Have an existing policy and want to ensure you’re not underinsured or paying for more coverage than you need.
  • Believe your insurer’s appraiser has substantially undervalued your claim.
  • Have expensive, unique, or rare items and want to insure them properly.

Insurance appraisals are not appropriate to settle claim disputes involving policy coverage, provisions, deductibles, or previously paid claims.

You can get an idea of your home’s rebuilding cost by contacting local licensed homebuilders and asking for the building costs per square foot for a home in your area, or by using online building cost calculators. 

Key Takeaways

  • Insurance companies and homeowners use appraisals to estimate a home’s cost to rebuild, settle claim valuation disputes, and provide adequate coverage for personal belongings.
  • Many home insurance policies have an appraisal clause that details the valuation dispute process. 
  • Purchase appraisals are different from insurance appraisals because they estimate your home’s market value, which is useful when selling or buying a home.