The Appraisal Clause in Insurance Policies

Fire insurance and many other kinds of insurance policies contain appraisal clauses. Such clauses are included in form fire insurance policies required by state insurance regulators and are included in various other policy forms covering losses to property.

Appraisal clauses are ineffective if there is no coverage under a policy, and if an insurer denies coverage under a policy, a request for an appraisal by the insured will be premature until the issue of coverage is resolved. However, if the insurer denies coverage for only part of a claim, admits coverage, or requests appraisal itself, the appraisal process may begin.

The appraisal process involves estimating or setting a value on an insured loss. The process is informal and conducted without a presiding officer and compulsory process or other indicators of a court proceeding. While the process originally was viewed as a means for providing insureds with an inexpensive and relatively quick determination of the value of an insurance claim, insurers may and do seek appraisals in the event that coverage of a loss is acknowledged but the worth of the loss is disputed.

The appraisal clause required in fire insurance policies is mandatory in most states. For example, the appraisal clause required in New York fire insurance policies is "binding on all parties" despite "any other provision of law to the contrary." In a minority of the states, an appraisal clause is required in fire insurance policies, but use of the appraisal process by the insurer and the insured is contingent upon the acceptance by each party of a request for appraisal.

Appraisal clauses, whether in fire insurance or other types of policies, normally provide that:


    • Either party to the insurance contract -- the insurer or the policyholder -- may demand an appraisal;

    • Each party selects an appraiser;

    • The appraisers select an independent umpire, or an umpire is appointed by a judge if the appraisers cannot agree on an umpire; and

    • The appraisers estimate the value of the loss while elements of loss upon which no agreement can be reached are submitted to the umpire for determination.

    The appraisal process may be used within the context of broader litigation. While appraisal may be a distinct proceeding, issues as to valuation may arise during litigation, and the fact that litigation is ongoing does not preclude the use of the appraisal process to determine valuation disputes within the litigation.

    Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.