Appraisal, Other Insurance and Recovery Rights

Introduction

After a covered loss, three practical questions can remain open:

• How much is the loss? The homeowner and the insurer may disagree on the dollar amount.
• Who else pays? Another policy or a home warranty may also respond to the same damage.
• Can the person who caused the damage be made to pay? If someone else caused the loss, the insurer may try to get its money back from them.

A homeowners policy answers each question with its own clause: appraisal, other insurance, and subrogation. This lesson teaches what each clause does and what it does not do.

What You Will Be Able to Do

• Tell whether a disagreement is about the amount of a loss, which appraisal can settle, or about whether the policy covers the loss at all.
• Describe who chooses the appraisers and the umpire, how the amount gets set, and who pays the costs.
• Calculate a policy's share of a loss when another policy also covers it, using the proportion clause, without assuming an even split.
• Calculate what the homeowners policy pays when a service agreement, such as a home warranty, also applies.
• Explain how an insurer that has paid a claim can recover from a responsible third party, and what limits that right.

Before you start: This lesson picks up after a claim has been reported and documented. If notice, protecting property, and proof of loss are new to you, review what happens after a loss: notice, protection, proof and insurer response first.

About the policy wording: The rules here come from one homeowners form, the HO-3 Special Form, edition HO 00 03 10 00, published on the Nevada Division of Insurance website. Other policies and editions can word these clauses differently, so always read the policy actually in front of you. All people, companies and dollar amounts in this lesson are invented for teaching.

Appraisal: Settling a Disagreement About the Amount

Appraisal is a way to settle an argument about how much a loss is worth. It works by handing the number to appraisers and, if needed, a tiebreaker. It does not decide whether the policy covers the damage. It only sets the dollar amount.

The clause begins when "you and we fail to agree on the amount of loss." Either side can then demand appraisal. Here, "you" means the homeowner and "we" means the insurer.

Worked example: same storm, different numbers

Marisol's roof is damaged by wind. The insurer accepts that the loss is covered. The two sides disagree only on the cost to repair it:

• Marisol's contractor estimates $18,000.
• The insurer's adjuster estimates $13,000. An adjuster is the person who investigates and values a claim for the insurer.

Both sides agree the roof is covered. The open question is the dollar figure, so this is an appraisal issue. Under this form, the process runs like this:

1. Either side demands appraisal in writing. Marisol or the insurer can start it.
2. Each side chooses an appraiser. An appraiser is a person who estimates the value of the damage. Each side must choose its appraiser within 20 days after receiving the other side's written request. The form requires each appraiser to be "competent and impartial." Impartial means fair to both sides, not an advocate for the person who chose them.
3. The two appraisers choose an umpire. The umpire is a tiebreaker. If the appraisers cannot agree on an umpire within 15 days, either side can ask a judge in the state where the home is located to choose one.
4. The appraisers each set the amount of loss separately. If they agree and give the insurer a written report, that agreed figure becomes the amount of loss.
5. If they don't agree, they take their differences to the umpire. Any two of the three people (the two appraisers and the umpire) can set the amount by agreeing on it.

The 20-day and 15-day periods are what this form says. They are not a universal appraisal schedule. Another policy can set different steps or deadlines.

Appraiser vs. umpire: Each side chooses one appraiser, and the appraisers do the valuing. The umpire is chosen by the appraisers and only matters when the appraisers disagree.

Who pays for the appraisal

Under this form, each side:

• pays its own appraiser, and
• splits the other costs of the appraisal and the umpire equally.

Suppose Marisol's appraiser charges $1,200, the insurer's appraiser charges $1,500, and the umpire charges $900. Marisol pays $1,200 plus half the umpire's fee ($450), for a total of $1,650. The insurer pays $1,500 plus $450, for a total of $1,950.

Change one fact: now it's a coverage question

Keep the same roof. This time the insurer says the damage was not caused by wind but by long-term wear, which the insurer says the policy does not cover. Marisol says wind did it.

The disagreement is no longer about how many dollars. It is about whether the policy pays at all. That is a coverage dispute: a disagreement over whether the policy applies to the loss. This appraisal clause is written for disagreements about the "amount of loss." It does not give the appraisers or the umpire the job of deciding coverage.

The tempting mistake: "Any claim disagreement can go to appraisal." Ask what the two sides actually disagree about. If both accept that the loss is covered and only the number differs, it is an appraisal issue. If they disagree about whether the policy covers the loss, it is a coverage question, and agreeing on a dollar amount does not answer it.

Check: Dev's kitchen was damaged by a covered fire. The insurer offers $22,000 to replace the cabinets. Dev's estimate is $29,000 because Dev believes the cabinets were custom-built. Neither side questions that the fire is covered. Is this an appraisal issue or a coverage dispute? Who can demand appraisal?

Other Insurance: When Two Policies Cover the Same Loss

Sometimes two insurance policies cover the same damage. The other insurance clause stops the homeowner from collecting the full loss twice. In this form, it does that by having each policy pay a share based on the size of its limit. A limit is the most a policy will pay.

The form says that if a covered loss is also covered by other insurance, this policy pays "only the proportion of the loss" that its limit bears to the total insurance covering the loss. In plain terms:

This policy's share = (this policy's limit ÷ total of all limits covering the loss) × the loss

Worked example: proportional shares

A home is covered by two policies:

• Policy A has a $100,000 limit.
• Policy B has a $200,000 limit.

A covered loss costs $30,000. For teaching, assume the following:

• Both policies cover this loss.
• Both contain this same proportion clause.
• There are no deductibles or other adjustments.

Step 1: Total the insurance covering the loss. $100,000 + $200,000 = $300,000.

Step 2: Find Policy A's fraction. $100,000 ÷ $300,000 = 1/3.

Step 3: Apply that fraction to the loss. 1/3 × $30,000 = $10,000. Policy B's fraction is $200,000 ÷ $300,000 = 2/3, so it pays 2/3 × $30,000 = $20,000.

Check the result. $10,000 + $20,000 = $30,000. The two policies together pay the loss exactly once. The policy with twice the limit pays twice as much.

Change one fact: equal limits

Raise nothing else, but change Policy B's limit to $100,000. Now the total is $200,000. Each policy's fraction is 1/2, so each pays $15,000. The shares are equal only because the limits are equal.

The tempting mistake: "Two policies means each pays half." In the first example, an even split would have Policy A pay $15,000 when its proportional share is $10,000. The split follows the size of the limits, not the number of policies.

A second caution: Policy A's clause controls only what Policy A pays. We could calculate Policy B's $20,000 because we assumed Policy B has the same clause. If a problem gives Policy B different wording, apply Policy B's own wording to Policy B.

Check: A home has Policy C with a $50,000 limit and Policy D with a $150,000 limit. A covered loss is $12,000. Both policies cover it, both use this proportion clause, and there are no other adjustments. How much does each pay?

Service Agreements: The Homeowners Policy Pays After

The same clause treats a different kind of overlap differently. A service agreement is a contract to repair or restore property. The form lists a service plan, a property restoration plan, a home warranty, or a similar service warranty agreement. The form counts these as service agreements "even if" they are labeled as insurance.

When a covered loss is also covered by a service agreement, this policy is excess. That means the homeowners policy pays only what is left after the amount payable under the service agreement. "Excess" here means "second in line." It does not mean extra money on top of the loss.

Worked example: excess over a home warranty

A covered loss costs $10,000. A home warranty will pay $4,000 of it. Assume there are no deductibles or other adjustments.

Step 1: Start with the loss. $10,000.

Step 2: Subtract what the service agreement pays. $10,000 − $4,000 = $6,000.

Step 3: The homeowners policy pays the rest. $6,000.

Check the result. $4,000 + $6,000 = $10,000. The loss is paid once.

Proportion vs. excess

• Proportion (other insurance) answers: What share does each policy pay? Each pays its fraction at the same time.
• Excess (service agreement) answers: Who pays first? The service agreement pays first, and the homeowners policy covers what remains.

The fact that decides which method applies is what the other source of payment is. Under this form, another insurance policy triggers the proportion rule. A service agreement, even one called "insurance," triggers the excess rule.

Check: A covered water loss costs $7,500. A property restoration plan will pay $2,500 toward it. Assume there are no other adjustments. What does the homeowners policy pay under this form? Why is a proportional split the wrong method here?

Recovery Rights: Subrogation

Sometimes another person caused the damage. That person is called a third party, meaning someone other than the insured and the insurer. Once the insurer has paid the claim, it may want to collect that money from the person responsible. Subrogation is the insurer stepping into the insured's place to recover from the responsible party, up to the amount the insurer paid.

The form does this through an assignment, which is a transfer of a right from one person to another. If the insured has not given up those rights in advance, the insurer "may require an assignment of rights of recovery for a loss to the extent that payment is made by us."

Worked example: the delivery truck

A delivery company's driver backs into Priya's garage door. The insurer pays Priya $8,000 under her homeowners policy for the damage.

• What the insurer may require: Priya must assign her right to recover that $8,000 from the delivery company to the insurer.
• What Priya must do if the insurer asks: She must sign and deliver the related papers and cooperate with the insurer.
• What the insurer then pursues: It seeks the $8,000 from the delivery company. The right covers what the insurer paid, not more.

Two things subrogation does not mean:

• It is not a second payment to Priya. Once Priya assigns her right to recover the $8,000, the insurer holds that right. Priya cannot collect the $8,000 from her insurer and then keep that same claim against the delivery company.
• It does not guarantee the insurer gets its money back. The assignment gives the insurer the right to pursue recovery. Whether it actually collects is a separate question.

Whether the delivery company is legally responsible is a liability question, which is covered in recognizing negligence and other bases of liability.

Change one fact: a written waiver signed before the loss

Go back to before the accident. Suppose Priya had signed a written agreement giving up all her rights to recover against the delivery company for damage. The form allows this: an insured "may waive in writing before a loss all rights of recovery against any person." To waive means to give up voluntarily.

Now the insurer's subrogation right only applies "if not waived." Priya gave up her recovery rights in writing before the loss, so there is no right left for her to assign to the insurer.

The waiver this clause allows has two conditions. It must be in writing, and it must be made before the loss.

Exceptions in this form

The clause says subrogation does not apply to two coverages in the policy's Section II: Coverage F (Medical Payments To Others) and the additional coverage called Damage To Property Of Others.

Check: A plumbing contractor damages Lena's floor during a repair. Lena's insurer pays her $6,000. Lena has never signed any waiver. The insurer asks Lena to sign papers transferring her recovery rights. What may the insurer require, and up to what amount?

Keep the Neighboring Ideas Apart

These clauses describe different features of the same policy. Each one answers a different question:

• Appraisal asks: How much is the covered loss worth? It applies when the two sides agree there is coverage but disagree on the amount.
• A coverage dispute asks: Does the policy cover this loss at all? It is not resolved by agreeing on a dollar figure.
• Other insurance (proportion) asks: How do two insurance policies share one loss? Each pays its limit's fraction of the total insurance.
• Service agreement (excess) asks: Who pays first? The service agreement pays first, and the homeowners policy pays what remains.
• Subrogation asks: Can the insurer recover what it paid from the person who caused the loss? It can, up to the amount it paid, unless the insured waived those rights in writing before the loss.

Practice on Your Own

1. Classify each disagreement as an appraisal issue or a coverage dispute.

• (a) Both sides agree a covered hailstorm damaged the siding. The homeowner says repairs cost $9,400. The insurer says they cost $7,100.
• (b) The insurer says the damaged item was not covered property under the policy. The homeowner says it was.

2. Policy X has a $150,000 limit and Policy Y has a $50,000 limit. A covered loss is $40,000. Both policies cover it, both use the proportion clause from this lesson, and there are no other adjustments. What does each pay? Then explain why $20,000 each would be wrong.

3. A covered loss to a heating system costs $5,200. A home warranty will pay $1,800 of it. There are no other adjustments. What does the homeowners policy pay under this form, and what term describes its position?

4. A landscaping crew hired by a neighbor knocks over Omar's fence. Omar's insurer pays $5,000. Two years earlier, Omar had signed a written agreement giving up all recovery rights against that landscaping company. Can the insurer require Omar to assign recovery rights against the company? Explain.

5. Hail damages Tomás's roof. The insurer accepts that the loss is covered, but values it at $16,000, while Tomás's contractor says $24,000. The insurer sends Tomás a written demand for appraisal. Assume the following:

• Tomás's appraiser charges $1,400, and the insurer's appraiser charges $1,600.
• The two appraisers cannot agree on an umpire, so a judge chooses one. The umpire charges $1,000.
• The appraisers and umpire rent a lift for one joint roof inspection for $300. Treat this as an other expense of the appraisal.
• Tomás's appraiser sets the loss at $21,000, and the insurer's appraiser sets it at $17,500. They submit their differences to the umpire. The umpire and the insurer's appraiser then agree in writing on $19,200. Tomás's appraiser does not agree.

Answer these questions:

• (a) How long does Tomás have to choose an appraiser, and what must that appraiser be?
• (b) How long did the appraisers have to agree on an umpire before a judge could be asked to choose? Who could make that request, and which court?
• (c) What is the amount of loss, and why?
• (d) How much of the appraisal cost does each side bear?

What to Remember

• Appraisal settles the amount of a covered loss, not whether the loss is covered. In this form, either side can demand it. Each side chooses an impartial appraiser, the appraisers choose an umpire, and agreement by any two of the three sets the amount. Each side pays its own appraiser and splits the other appraisal and umpire costs equally.
• Other insurance in this form is proportional. Each policy pays its limit divided by the total insurance, times the loss. Equal shares happen only when the limits are equal. Each policy's own wording controls its own share.
• Service agreements come first. The homeowners policy is excess, which means it pays the loss minus what the service agreement pays.
• Subrogation lets the insurer pursue the responsible third party up to what the insurer paid. The insured must sign the related papers and cooperate if asked. A written waiver made before the loss removes the rights the insurer would otherwise take over. Subrogation is not a double payment to the insured, and it does not guarantee the insurer will recover.

Related practice: calculate deductibles, limits and coinsurance and solve mixed cases and repair your weak spots.