Implications of USPAP-Compliant and Non-Compliant Appraisals: Legal and Insurance Perspectives
It's no secret that insurance companies are taking a hard look at their commitments to high-risk zones. Through it all, one constant remains — the importance of USPAP.
When calamities strike and properties get damaged or worse, the insurance industry will be shouldering a massive burden. To make matters fair and just, insurers will keenly examine each appraisal before settling a claim. The accuracy of the initial appraisal, especially for properties that no longer exist, could have severe legal and insurance repercussions.
High-profile civil cases have shed light on the importance of such assessments, but these instances are exceptions proving the rule. We always need solid, dependable appraisals that meet acceptable standards.
Enter USPAP — the Uniform Standards of Professional Appraisal Practice. USPAP is the gold standard for appraisals, guiding practitioners towards consistency, integrity, and professionalism.
USPAP covers not just real estate appraisals, but also personal property, vehicles, business machinery, and business valuations, as well as mass appraisals.
USPAP falls under the umbrella of the Appraisal Foundation, a non-profit organization tasked with overseeing professional valuation in the USA and beyond. The Appraisal Foundation is chosen by the U.S. Congress to develop the standards of appraisal and validate appraiser qualifications.
Every two years, the Appraisal Foundation reviews and updates USPAP, implementing changes in the appraisal landscape to ensure the standards remain relevant in this ever-fluctuating financial landscape.
Visions of USPAP-compliant appraisals and non-compliant ones typically vary depending on which side of the coin an appraiser finds themselves. A fair appraisal will carry legal and insurance implications, leading to equitable premiums and fair settlements. Insurance companies, motivated by profit, may employ non-compliant techniques to skew the scale in their favor and reduce overall payouts.
One thorny issue lies in the diminished value appraisal for damaged vehicles. In this scenario, the vehicle's quality after repair plays a role in determining the diminished value based on the perceived value of the vehicle relative to similar ones.
When it comes to making a claim based on diminished value, the first step is to determine the claim's validity. Valid claims typically must involve privately-owned vehicles, not leased ones, and should have less than seven years on the clock and 100,000 miles. The accident should not have involved serious injuries or fatalities and be the fault of third-party drivers.
After determining the claim's validity, USPAP calculates the diminished value based on the vehicle's book value, accounting for the extent of the damage done. Generally, diminished values can range from 10 to 25% of the vehicle's book value, depending on the severity of the damage and whether the airbag deployed.
An alternative to USPAP for diminished value appraisals is the formula known as 17c. This method calculates diminished value by taking a percentage of the vehicle's book value, adjusting for mileage, and evaluating damage subjectively. However, 17c faces criticisms for its arbitrary 10% cap on payouts, invalid mileage deductions, and flawed damage assessments.
USPAP's importance goes beyond the automotive world. In a marketplace devoid of appraisal standards, USPAP at the very least offers a semblance of consistency, credibility, and guidance that the appraisal industry desperately needs. It demands ethics, objectivity, and impartiality, and creates consistency in the evaluation of claims. USPAP is embraced in the United States, Canada, and most major countries.
In today's increasingly volatile world, where extensive damage caused by wildfires and hurricanes is ever-present, the support and trust afforded to USPAP by the legal and insurance spheres have become invaluable.
In the rapidly evolving financial landscape, USPAP's role extends beyond the real estate and automotive sectors, providing a crucial standard for various types of appraisals such as business valuations, personal property, and vehicles. Insurance companies, when appraising damages, seek USPAP-compliant appraisals to ensure fair and just settlements, particularly in high-risk zones like areas vulnerable to natural disasters.
