Reviewed by Stefan Tirschler
ap·prais·al | əˈpreɪz(ə)l
Definition: In insurance, the valuation of property performed by a third party with no interest in that property.
In order to insure her engagement ring, Claire’s insurance provider asked for an appraisal of the ring.
When insurance is covering something, whether it be a house or a wedding ring, it’s important to know how much the object is worth. If a $10,000 watch gets stolen and its owner’s insurance policy only provides $1,000 worth of coverage for watches, well… that’s a problem.
It’s easy to figure out the value of some things; a TV bought last week probably came with a receipt that tells you (and your insurer) exactly what its value is. When it comes to things like houses or antique figurine collections, the value can be a little harder to figure out. That’s where the appraisal process comes in.
When you request an appraisal, an expert will determine the value of the object in question. A professional appraiser has a lot of specialized knowledge and training, so they can make a much more informed valuation than the average person.
Salwa is an appraiser specializing in gemstone jewellery. Clients often come to her with heirloom jewellery whose value they are completely clueless about. When someone brings Salwa a piece of jewellery to appraise, she uses her keen eyes to determine the quality of the gemstones and the piece overall. With that information, she researches what jewellery of a similar quality and kind is being sold for in stores or auctions, as well as current precious metal and gem prices. That research helps her determine the piece’s value. If she’s ever stumped, she’ll consult with her network of other jewellery experts.
In the insurance world, there are several different reasons that something might have to be appraised. For example:
We’ll take a deeper look at some appraisal situations in home insurance, but first:
Appraisers are specialists. When you need one, you can’t just go to any appraiser; you have to find one who’s an expert about the type of property you’re getting appraised. Their specialist expertise helps them make accurate valuations. Who better to tell you the value of your grandmother’s silver cutlery than someone who’s entire job is appraising silverware and other similar items?
There’s more to it than finding the right specialist, though. Appraisers belong to professional associations. The International Society of Appraisers, for example, has chapters in Canada. The ISA has strict membership requirements, so an appraiser belonging to the association probably knows their stuff. You can search for appraisers by specialty on the ISA’s website.
If you’re having your home’s value appraised, you can enlist the services of a CRA or AACI-designated appraiser. These two designations are assigned by the Appraisal Institute of Canada. This type of appraiser specializes in real estate; they get called upon to determine the value of residential and commercial properties.
Speaking of home appraisal, let’s move on to some home insurance appraisal situations.
When people think of their home’s value, they often think of the market value. Market value is what the home would fetch if it were sold. It doesn’t really have much to do with insurance. Home insurance is concerned with rebuild value. Rebuild value is the amount of money you’d spend to build your house from scratch on the same site. If your home were to be totally destroyed, your home insurance is there to step in and cover the rebuild costs.
Insurance companies usually determine your home’s rebuild value on their own, based on the size, construction type, and many other factors. For that reason, you don’t generally need to have your home appraised when you buy home insurance. Appraisal is more for the benefit of mortgage lenders.
In fact, there can be big downsides to insuring your home for less than the insurance provider’s suggested rebuild value.
Some home insurance providers—like Square One!—offer Guaranteed Replacement Cost Coverage, which means they’ll cover the full cost of rebuilding your home even if it exceeds your policy limit. In order to receive this coverage, your rebuild cost coverage limit has to be at least as high as the recommended amount. If you choose to insure your home for less than that amount, you won’t have Guaranteed Replacement Cost Coverage.
An important thing to remember:
A home appraisal is not the same thing as a home inspection. A home inspection focuses on very different details. The inspector investigates the home’s current condition and notes any necessary repairs; an appraiser is just figuring out what the home is worth. Inspections are for the home buyer, and appraisals are for the mortgage lender.
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Most of the stuff you own is protected by your home insurance policy’s Personal Property coverage. If, say, your television is damaged in a fire, your home insurance provider won’t need you to get it appraised in order to pay your claim; it’s pretty easy to find out what a television costs (especially if you still have the receipt). An original 100-year-old painting, however, is a lot harder to price.
Things like artwork, jewellery, antiques, and collectibles are often subject to special sub-limits on home insurance policies. The policy might have a coverage limit of $1,000 for jewellery, even if the overall limit for Personal Property is $100,000. That is a problem if you’ve got jewellery worth more than $1,000.
Tamara has a diamond necklace that was given to her by her grandmother. It’s a real piece of work; Tamara’s never had it appraised, but she’s pretty sure that it’s worth around $8,000. Tamara has recently moved into a new home, so she’s buying a new home insurance policy. The policy she’s looking at has a sub-limit of $1,000 for jewellery. She wants to make sure her necklace is protected, so she asks the insurance company how she can increase that limit.
Her insurer tells her they can schedule the necklace; that is, add a special extra policy to her home insurance that covers the necklace. Before they do that though, they ask Tamara to have the necklace appraised so they have proof of the value. Tamara takes the necklace to Salwa, who does a little research and determines that the necklace is actually worth $9,500. She provides Tamara with a document that includes a photo and detailed description of the necklace, the date of the appraisal, and her signature. Tamara gives that document to her insurance company, who’s then happy to schedule the necklace for $9,500.
When you’ve got a valuable piece of property that exceeds your insurance policy’s sub-limits, you can ask your insurer to schedule that property. Scheduling property just means adding an endorsement to your main policy that covers the special item. When you schedule something, the insurance company will often ask to have the item appraised before they cover it.
At Square One, we handle it a little differently.
We don’t include separate sub-limits on our home insurance policies. Instead, coverage for specialty property like jewellery, art, or sporting equipment isn’t included in the policy unless you want it. This way, you don’t have to pay for automatic coverage for items you don’t need or want to insure. If you have something special to insure, you can add that coverage to your policy in the exact amount that you’d like. We’ll only ask for an appraisal if the limit you choose is higher than our maximum payable amount (for example, $6,000 for jewellery and watches).
When you make a claim, your insurance adjuster will examine the details to come up with the amount that the insurer will pay. Sometimes, people disagree with their adjuster’s valuation. If the insured and the insurer can’t agree, appraisal is one possible solution.
Most insurance policies include an appraisal clause. This lays out the rules for how the dispute resolution process happens. Normally, it involves each side hiring their own appraiser to negotiate the value of the claimed property. These appraisers aren’t necessarily of the same type as the professionals we talked about earlier. These appraisers are simply third parties who negotiate on behalf of the insurer and insured.
If these appraisers agree, then problem solved! If there’s still disagreement about the value, a third appraiser (called an umpire) gets called in. The umpire reviews both submissions and establishes a final settlement value for the claim. Sometimes the umpire is part of the process from the beginning.
The appraisal clause is binding. Once the appraisers have determined the value, there’s no more arguing about the amount of the claim settlement.
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