Insurance Appraisals and Your Property

What You Need To Know

By: Lawrence Lewin, ASA

An insurance appraisal is a methodical unbiased impartial opinion of replacement cost. This opinion or estimate is arrived at through a formal appraisal process that typically uses the three common approaches to value. They are the Cost Approach - which is what it would cost to replace the improvements. There is the Direct Comparison Approach - which involves making a comparison to other similar, nearby properties which have recently been built. The third approach is the Income Approach, which is not applicable as an indicator of cost it is of most importance in appraising income producing properties. Insurance appraisals are made by accredited professional appraisers who have acquired the knowledge and experience to complete an appraisal according to standards of professional appraisal practice and that will meet the test of peer review.

The appraiser you select should be involved in property insurance appraisals on a full time basis, as with any profession the more involved you are in a particular sector the more aware you are of current changes that can affect the appraisal process. Specialization is the path to expertise and efficiency. It is important to communicate that you want a senior appraiser with the necessary skills to perform your insurance appraisal. Your insurance appraisal should include a process for gathering all necessary information this can include a building drawings review and site statistics gathering, this can be done in person or remotely. An experienced appraiser will know exactly what to look for and how to efficiently gather the necessary information either on a site inspection or through data collection over the internet. Today one can efficiently complete an insurance appraisal on any property anywhere in North America through the use of current technology.

Once data gathering is completed the cost estimate portion of the process is begun, traditionally this has consisted of the selection of a cost reporting publication or software, the inputting of the parameters and the output of the resulting cost estimate. More recently the use of more than one cost reporting agency along with publically researched new construction project(s) have led to a stronger more defendable appraisal report. As with any construction project, cost estimates can and do vary widely, it is no longer a best practice to rely on a single source of information as the ultimate answer to your replacement cost question. Today at a minimum three cost sources should be referenced and analysed to a conclusion of cost preferable along with recent new project construction cost results, one can never have too much data to analyse.

The appraiser you select needs to be able to convey all that we discussed above into an insurance appraisal report. This report must explain the complete appraisal process from start to finish, it must identify the property appraised state what is included and what is excluded from the appraisal process, it must have a definition of replacement cost new, it should discuss the appraisal process, why one approach was selected over another or why more weight was placed on one cost source over another. It should include the qualifications and experience of the appraiser who completed the work and a bibliography of the data used in the appraisal report. Finally every professional appraisal report must have a signed certificate of appraisal. A strong indicator of the professionalism of any appraiser is the appraisal report they produce. Part of your selection process should include a request for an example report of a similar property to yours to review.

The entire appraisal process is placed into a work file, these work files are usually kept on file for extended periods of time. Within the work file is all the documentation created during the initial phase of the appraisal process and can include site plans, photos, data collection forms, cost calculation worksheet, original appraisal report and appraisal communications. These documents are then used when the original appraisal report is being updated in the future or when post loss support is required.

When selecting your appraiser look for accreditation, experience, professionalism, and someone who is using todays technology to the benefit of their clients and you will have found an appraiser you can work with and trust.

Lawrence Lewin is the principal of Lewin, Wright & Company Valuation Consultants Inc. he has been engaged as a professional certified property appraiser for more than 35 years. He has performed insurance appraisals on everything from apartment blocks to nuclear generating facilities throughout the world. On many occasions he has provided expert testimony before courts and tribunals on property appraisal matters.