We are all much more familiar with insurance appraisals as it relates to buying our individual home, but there tends to be less clarity around the function of an insurance appraisal as it relates to homeowner and condominium associations. Below we’ll discuss what an insurance appraisal is, who should conduct an appraisal, what key details should always be included, and why community associations need accurate, up-to-date appraisals.
What is an insurance appraisal?
Many community associations commission a periodic insurance appraisal to ensure they are not over-insured or under-insured. It is one of the key fiduciary responsibilities of every Board of Directors. So, what exactly is an insurance appraisal?
An insurance appraisal is a replacement cost analysis that provides an accurate and supportable estimate of the cost to replace each structure as of the date of the valuation. It’s different from the standard market valuation because it considers only the cost approach to value and only those structures or insurable assets that need insurance. It does not consider land and/or non-insurable site improvements (sidewalks, parking lots, curbs, etc.) in the valuation process.
Who should conduct an appraisal?
The appraisal should always be performed by a qualified and experienced appraiser who has the expertise in valuing your type of property. Individual states have licensing and certification boards which administer certification of appraisers to standards which are no less stringent than those issued by the Appraiser Qualifications Board. The valuation should utilize local labor rates and material prices as to the location of the subject being appraised as well as any other factors that would affect the value including design, shape, workmanship, access to location, etc.
Further, the appraisal report should be certified, explain the approach and methods used, and include the definitions of the appraisal or insurance terminology. The report should be compliant with the Uniform Standards of Professional Appraisal Practice(USPAP), the industry standard for appraisers established by The Appraisal Foundation. The Appraisal Foundation is the nation’s foremost authority on the valuation profession. The organization sets the Congressionally authorized standards and qualifications for real estate appraisers as well as qualifications for personal property appraisers and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals.
What does an appraisal include?
The appraiser should visit the site and record the key information required to accurately value and support those values. This should include pictures, measurements, framing, ISO class, walls, finishes, HVAC and building extras. The appraiser should be thoroughly knowledgeable in existing statutes (which vary by state) or policies that would affect the valuation conclusion and who would be responsible for providing insurance on areas of the building that may not be the association’s responsibility.
The report should also include pictures, addresses, unit count and the following key characteristics to assist the users and the insurance professional in using the report:
- Square foot area (by use)
- unit area
- common areas
- balconies / patio area
- parking garage area
- ISO classification
- Date of construction
- Roofing, roof deck, frame, pitch
- Exterior walls and windows
- Structural floor type
- Floor finishes, ceiling finishes, partition finishes
- Fire protection (sprinkler, fire alarm, etc.)
- Elevators, emergency generators, balconies, patios, porte cochere, etc.
- Insurable site improvements
- pool house
- tennis courts
The last item of the report should be the valuation conclusions. To support the valuation, the report should include the building valuation worksheet. The values should include:
- Cost of replacement new
- Exclusions (standard insurance – footings, foundation wall, excavation, etc.)
- Insurable value (cost replacement new less exclusions)
Why are they important?
Your appraisal will also provide proof-of-loss documentation. This documentation is critical in the reconstruction phase of a loss and can help settle any disputes between the association, adjusters, and insurance companies. This proof-of-loss documentation can also help an association get their claim and settlement faster, allowing repairs or reconstruction to be started sooner.
In today’s insurance market, it is critical to get the insurable replacement cost number accurate. If the number is inflated, the association could be wasting premiums dollars year after year. If the number is low, the association’s insurable property replacement could be at risk.
In summary, an accurate and realistic insurance value of an association’s structures will bring peace of mind to both the Association Board and to the Unit Owners year-round. In the event of a storm or other loss, the appraisal will also help your association recover and allow the board and owners to focus on enjoying life in paradise.