State Farm Insurance License Practice Exam

What is the purpose of an appraisal clause in insurance?

1. To outline how losses are paid over time

2. To determine the insurable value of property or the value of a loss

3. To provide a standard rate for claims processing

4. To specify the types of losses covered

The correct answer is: To determine the insurable value of property or the value of a loss

The purpose of an appraisal clause in insurance is to determine the insurable value of property or the value of a loss. This clause is particularly important in situations where there is a disagreement between the insurer and the insured regarding the value of the property at the time of a loss or the extent of damages that occurred. When an appraisal clause is invoked, it typically involves both parties selecting their own appraisers, who will assess the value of the loss or property independently. If the appraisers cannot agree, they may choose an umpire to help resolve the discrepancy. This process ensures that both parties have a fair and unbiased evaluation, leading to a clearer determination of the payment owed based on the agreed-upon value. The other options do not accurately reflect the primary function of an appraisal clause. While they touch on various aspects of insurance policies, they do not specifically address the purpose of appraisals in resolving valuation differences.