Insurance companies are aggressively reevaluating their commitments to red zones. The only constant in a world of increased legal and insurance peril is the reassurance of USPAP.
The proper appraisal of the value of assets matters. When disasters damage or even destroy property, the burden on the insurance industry will be massive, and it will take a very good look at the veracity of each appraisal before settling claims.
Where property was destroyed, insurance payments could hinge on an accurate appraisal of the value before the fire. Where property was damaged, a diminished value appraisal will have to serve as the basis for any claim, and the veracity of such appraisals could have profound legal and insurance implications.
Recent high-profile civil cases have also highlighted the legal and insurance implications of accurate and credible appraisals of valuable properties. However, these highly visible demonstrations of the importance of accurate appraisals are the exceptions that prove the rule. We all need accurate appraisals that comply with acceptable and measurable rules.
USPAP
USPAP stands for the Uniform Standards of Professional Appraisal Practice. USPAP governs how appraisals are done by providing a set of standards and guidelines on how different kinds of appraisals have to be done. USPAP is the gold standard of appraisals that guides appraisers to operate consistently, ethically, and professionally.
USPAP is applied to all appraisals, including the diminished value appraisal of personal property, real estate, vehicles and business equipment, business valuations, and mass appraisals.
The Appraisal Foundation
USPAP falls under the purview of the Appraisal Foundation, a non-profit entity tasked with overseeing professional valuation in the USA and beyond. The Foundation is authorized in this task by the U.S. Congress as the foundation for the standards of appraisal and the validation of appraiser qualifications.
The Appraisal Foundation revisits USPAP every two years to review and update it. It incorporates changes in the appraisal landscape, including evolving legal requirements, and new demands on those who practice appraisal.
This regular review ensures that the norms of USPAP and the way they are applied by practitioners stay relevant in this ever-changing and often contentious financial landscape.
USPAP Compliant vs Non-compliant Appraisals
There are no legal licensing requirements for personal property appraisers. Anybody can appraise the value of a property or do a diminished value appraisal, and the appraisal can vary substantially depending on which side of the fence the appraiser sits.
A fair appraisal will have legal and insurance implications and will result in equitable premiums and fair settlements. While the insured party will benefit from a fair appraisal in both premiums and payout, the entity responsible for paying the claim will often be motivated to use non-compliant appraisal methods to put a finger on the scale and result in a lower payout.
Diminished Value Calculator vs 17c
One area of contention is the diminished value appraisal in a vehicle accident. When a vehicle is damaged in an accident, there would be a claim to repair the damage. The diminished value comes after the repair and is based on the perceived value of the vehicle compared to a similar vehicle, no matter how well the first was repaired. A buyer, faced with two identical vehicles, would choose the one that was not involved in an accident, or pay a lesser price for the one which was.
USPAP Diminished Value
The first step in any claim based on the diminished value appraisal is to determine if the claim is valid. Such a claim can be made if the car is not leased, although financing or a loan are fine. The vehicle has to be less than seven years old, with less than 100,000 miles on the clock. The vehicle was not involved in a serious accident before, and a third-party driver was at fault for the accident.
USPAP Calculation
Assume the vehicle has a book value of $30,000. USPAP will calculate the diminished value appraisal as 10 to 15% for minor to moderate damage, 15 to 20% for moderate to severe, including structural damage, and up to 25% if the airbag had been deployed.
This means your claim could range from $3,000 to $6,000, or $7,500.
17c Calculation
The most well-known alternative to USPAP is an insurance industry formula known as 17c. It works like this:
- Start with the book value of the car
- Take 10% of that value
- Apply mileage to modify the value
- Apply a subjective damage assessment
So the same vehicle as in the example above:
- Book value $30,000
- Mileage 70,000
- Damage moderate
The 17c calculation is $30,000 x 10% cap, = $3,000 x .30 mileage = $900 x .5 for moderate damage = $450 diminished value appraisal.
Flaws of the 17c Appraisal
How do we get from a $3,000 to $7,500 appraisal to $450?
The 10% cap on the book value is arbitrary and clearly means to limit payouts. The mileage deduction is invalid, as the book value of the car already accounts for the mileage. The damage assessment is flawed because it is subjective and not based on measurable variables.
The 17c does not address the class of the vehicle, nor its history. Damage to a Ferrari will have a greater impact than similar damage to a Toyota Corolla.
Why USPAP Is Important
The example of the diminished value appraisal is only to illustrate the value of USPAP and the pitfalls of alternative standards. In an industry with no legal standards for appraisal, USPAP at the minimum gives a level of consistency and credibility sorely needed in this often contested field.
USPAP demands ethics, even-handedness, impartiality, and objectivity.
It creates consistency in how a claim is evaluated. USPAP is accepted in the US, Canada, and most other major countries. In a world where commerce freely flows across borders, this is important.
Insurance In an Increasingly Volatile World
Fires in California and hurricanes in the South-East are becoming the norm, rather than the expectation. Insurance companies are aggressively reevaluating their commitments to red zones. The only constant in a world of increased legal and insurance peril is the reassurance of USPAP.
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