What is an Appraisal Clause and How Does It Work in an Auto Policy?

Let’s say that you recently got into an accident.  It didn’t look that bad at first, just your basic rear-ender. But it turns out, the front of your car is fairly damaged and it’s looking like it’s going to be a total loss.  After speaking with the shop, in anticipation of this, you start doing a little research online about what your car would be worth in the case where it is declared a total loss.  After some digging, you come up with a sum of $15,000.  Your car was in good condition before the accident, you took care of it and you have all of the maintenance records.  Plus, other cars similar to it in your area are selling for about this price and you chose neither the top of the range nor the bottom.  You are confident in your assessment because you were fairly thorough in your evaluation.

As if on cue, you get a notification from your insurance company, ABC Insurance Co., that your vehicle has been declared a total loss and that they will shortly be forwarding you a settlement offer based on the actual cash value of the vehicle.  When you get your offer, you note that it is only offering $11,000!  Not even close to the amount your own research determined your vehicle to be worth.  What can you do now?  This is where the appraisal clause in your auto policy can come into play.

An appraisal clause is found in many auto insurance policies, and if you have a situation where you would like to use yours, make sure you find your policy and read the clause so you understand what the requirements are.

What is an appraisal clause in an auto policy?

An appraisal clause is a clause that typically allows for the resolution of disputes over value without either party having to go to court.  You or your insurance company can request an independent review if you have a disagreement over the value of the claim.  This can include a dispute over the value of repairs, or the value of the vehicle itself.  Keep in mind that appraisal clauses do not address disputes over fault or whether or how coverage applies.

When can you use it?

You can usually invoke your appraisal clause:

·        When the vehicle has been declared a total loss and you and the insurer disagree on the value of the vehicle; or

·        When there is a dispute about the cost of repairs or whether the vehicle has suffered diminished value.

All appraisal clauses will be different and some auto policies don’t include them at all. There also some state laws that regulate how they operate.  You will want to determine how the appraisal clause works both with the insurance company you are working with and the state where your claim is based.

What are the steps to use the appraisal clause?

1.     Request it in writing.  Either you or the insurance company can demand an appraisal to invoke the appraisal clause.  In our example, you would write a letter to your insurance company advising that you would like to invoice your appraisal clause because your own research has determined the value of your vehicle to be different from the offer you have received for your total loss.

2.     Each side hires an appraiser.  You choose an appraiser, and ABC Insurance Co. also chooses one.

3.     The appraisers compare notes.  Your independent appraiser will work together with the appraiser of ABC Insurance Co. to see if they can come to an agreement about the value of the vehicle.

4.     If there is no agreement, a neutral third party is chosen.  A third appraiser will be chosen to be like a referee for the other two appraisers, and to break a tie if it is necessary.

5.     Two of the three appraisers decide.  When two of the three appraisers come to an agreement on the value, that decision then becomes binding. 

The payments for services are divided between the two parties.  You will pay your appraiser, ABC Insurance Co. will pay their appraiser and the fee for the third appraiser is split between both sides.

The Benefits of Using the Appraisal Clause

·        It is faster than litigation.  Going to court can take months or years; using an appraisal clause is usually going to be much quicker.

·        Cheaper. This option isn’t free, but can often be less costly than hiring a lawyer and filing a lawsuit.

·        Neutral outcome. Since the value is determined by experienced independent appraisers, this can result in a more fair resolution for you.

The Disadvantages of Using an Appraisal Clause

·        Decisions are typically binding, most of the time you won’t get a second chance.

·        Cost – although it can be cheaper than a lawsuit, the costs can add up. 

·        Availability.  This may not be available in certain areas depending on the specific policy and state law.

·        This option only settles value, it won’t apply to any other dispute that you may have with respect to your claim.

Tips for Using Your Appraisal Clause

·        Read your appraisal clause.  Read your policy and ensure that you do have an appraisal clause and do your best to understand it.

·        Try to weigh the costs versus the benefits.  Keep in mind you will have to pay your appraiser and half the costs of the third neutral appraiser.  For a relatively small dollar amount dispute, the costs will outweigh the benefits.  In our example, the $4000 difference between your valuation and ABC Insurance Co.’s could be a good use of the appraisal clause because the amount in dispute is not minimal.

·        Choose an experienced appraiser.  You want to choose an experienced appraiser who is well versed in vehicle values.  Any value presented by your appraiser will need to be supported by facts and appropriate analysis.  Choose a professional that is well versed in their field.

·        Make sure that all of the processes are documented in writing.  You don’t want to enter in a dispute over any sort of verbal agreement or notification. If everything is documented in writing, the process is clear and straightforward, eliminating the possibility of confusion or ambiguity down the road.

Conclusion

There will be some instances where the appraisal clause will be the right tool for you to use to dispute the valuations of your claim. It may be simpler, less costly and quicker than any other option to resolve the dispute.  However, as with all things in life, this will largely depend on the circumstances of your situation. If you have doubts as to whether this could be the right step for you, talk to a claims adjuster or attorney for clarification of next steps.