UNDERSTANDING APPRAISALS AND INSURANCE

It is important to protect your fine jewellery from the unthinkable. Having the right coverage will make getting your much-loved treasure replaced with like kind and quality a simple matter. There are two things you need to do to ensure this: determine what your insurance company will cover and how it will be covered; and obtain and submit the correct appraisal.

From all the questions I have answered over the years it is clear that most insureds do not really comprehend appraisals and why it matters who does it, when it is done, and for what purpose it is done. So here is the basic information you need to understand appraisals and their relationship to your jewellery insurance beginning with the two biggest questions: when an item of jewellery is appraised for insurance what does that value really mean? And why do some appraisal values differ so much from what was actually paid for the item?

Price, Cost and Value

The general public has long had a misunderstanding about price, cost and value. In everyday language the terms are used interchangeably in most circumstances. One assumes an item's value is what was paid, and in turn what was paid was the cost. But in reality these are three quite different concepts.

Prior to the conclusion of a sale, price is more or less negotiable. Price tags merely represent the asking price. This price only becomes the cost when an item is actually sold; after a customer pays and accepts the article in exchange. So if a discount is given, then one can see that the cost will be less than the asking price. Still, these are everyday terms with a subtle distinction but value is entirely different.

The definition of value is very specific: "perceived worth to a defined purchaser from a defined vendor in particular circumstances at a specified time with both parties having reasonable knowledge."

Value is not principally related to either price or cost. Consider the following example:

The Garage Sale Monet

Could it ever be that the value of a Monet was $100? The answer is no. But its cost could be and so could its price because cost and price can both be set without the requirement of reasonable knowledge. Suppose that an individual held a garage sale and among their wares was an authentic painting by Monet but they did not know it. They had originally purchased the painting for $100 for its antique frame from someone else who did not recognize the Monet and was asking $140 for it.

In this case the price of the item was $140 and the cost was $100. And it may come to be that this same Monet may have a resale price at the current garage sale of $50. But since reasonable knowledge is the key with value neither of these situations can affect the value. Price and cost never change value. The value of a Monet is millions of dollars regardless of whether or not someone paid $100 for it or whether or not someone is unknowingly selling it for $50.

This relationship of price and cost to actual value is why the value on a jewellery appraisal sometimes has little relationship to what was paid. If you bought wisely or got in on a sale then the value on the appraisal will be more than your cost; and if you were unfortunate and perhaps over-paid then the value will be less than your cost. Only when you have made a fair deal and were sold an item with reasonable knowledge will price, cost and value be closely related.

Changing values

When someone asks "what is my diamond worth?" it is not possible to answer this question unless you know for what purpose, to whom and from whom and in what time frame. There is no single value for a diamond. What your diamond is worth depends on the circumstances - according to the definition: who the defined purchaser is and who the defined vendor is going to be when the exchange takes place. Why? Consider these common transactions. A wholesaler sells a diamond to a dealer, the dealer then sells it to a retailer, and the retailer then resells it to a final customer. What would be the value of the stone? It is not one single value; there are three values, one set at each of the three transactions.

Exceptional blue sapphire and half-moon diamond ring from the DEEDEE Collection

Appraisals

An appraisal is an expert opinion of authenticity, design, composition, quality and value. The word appraisal is preferred to valuation in order to reflect the considerable range of expertise needed to comprehensively identify and describe an object before any attempt can be made to estimate its value. Obviously, if a mistake is made in identification then a matching mistake will be made evaluation. Expertise is crucial in jewellery appraisal because of rapid industry and technological advances in gem treatment and the radical effects on values. For example, diamond can be laser drilled, irradiated, fracture filled and High-Pressure/High-Temperature treated; sapphire and ruby can be oiled, heat-treated, surface diffused and lattice diffused and; emerald is commonly oiled and also oiled in combination with colouring and bonding agent. Being able to detect the existence of these treatments, the degree to which they are present and how this affects value necessitates considerable experience. It is a requirement of all diligent appraisers to keep their knowledge current. They must continue their education to maintain pace with new developments and industry changes. Granted, this is not easy as the changes are rapid and even seasoned industry members may struggle to keep up but appraisers are honour bound to do so.

Within the professional appraisal community, there are three accepted general rules for appraisals. An appraisal is an opinion:

1. Given in good faith

2. Based on good commercial knowledge and experience of the value of goods

3. Made for a specific purpose and on a specific date

Understand that an appraisal is an opinion. It is based on good commercial knowledge and experience of the value of the goods but in the end, it is an opinion. When we are taking about insurance we are talking about a future loss and none of us have a crystal ball thus, the more educated and experienced your appraiser the more accurate that opinion is going to be and the more likely you are to have adequate coverage when the time comes.

Types of Appraisals

There are numerous types of appraisals, most all of which will carry a different value because they are produced for different reasons. Appraisal types include:

1. for insurance

2. as evidence in litigation

3. to establish import duties and taxes payable

4. to re-identify jewellery (e.g., returning from abroad)

5. to establish the tax deduction for a donation

6. to establish a capital gain or a capital loss

7. for probate (i.e., the legal basis to settle an estate)

8. for property settlement in a divorce or the end of a partnership

9. to establish the collateral level for a loan

10. to establish the reserve bid for jewellery at auction

11. as the basis for the asking price in resale of the article

It is possible the same item may have as many as 11 different values with respect to these different purposes. To make this easier to comprehend let's consider the sale in 2000 of one pair of the ruby slippers from the Wizard of Oz. They were bought at Sotheby's for $660,000 USD plus fees and taxes.

If they were to be insured it's reasonable to use the cost plus fees for a total value of $872,000. It would also be reasonable to add an additional amount to this to cover their future appreciation in the event that the insurance policy will not automatically do so. An appraisal for tax donation to the Museum of Motion Pictures and Television Arts would be fair at $1,100,000. A collateral value appraisal might be as low as $240,000 assuming they were forced to sell them right away for recovery of funds. And the auction reserve was $80,000 to $90,000. These are all very different values because the purpose of the valuation matters as much as the item itself.

This also clearly illustrates why your diamond will be one value for insurance, another value for collateral for a loan, and still yet another value if it were probated as part of an estate. For this reason, you should never use any appraisal which is not intended for insurance as the basis of your insurance coverage.

Appropriate Valuations for Insurance

The value on your appraisal sets the basis for calculating insurance premiums. Therefore, if the appraisal is purposely too low, you will indeed pay less in premiums but in the event of a loss you may not have sufficient coverage to replace the item. If the value is purposely high, and I know some people like this because it makes them feel good, it only results in additional premiums. There is no advantage to this, particularly if the insurance company's liability in the case of loss is limited to the lesser of the cost of replacement or the stated value for insurance. You should always check how your insurance company handles the replacement liability. Prestige insurers such as CHUBB accept the liability as the stated value for insurance but it is common for other insurers to set the limit at the cost to replace. Therefore, you can submit an appraisal for $25 000 and pay premiums on that amount only to find out at claim time that the insurance company will be within their right to say that they can replace that item for $19 000 and cap your settlement at that amount.

Remember, insurance value is not bound to a relationship with price. If the replacement value is $25,000 that means that the appropriate jeweller would charge $25,000 for that exact item. It does not matter if you overpaid at $30,000 or if you got a great deal and bought it for $20,000. When a ring worth $25,000 is lost and you have the correct coverage you will get a ring worth $25 000 in return. The purpose of insurance is to make you whole again and selecting the right insurer and appropriate valuation level is critical.

The only values you should ever use for insurance coverage on a jewellery item is Insurance Replacement Value or Reproduction Value as these are the only two values which specify the correct purchaser and vendor to ensure that you: (a) pay only what is necessary in premiums and; (b) have enough coverage to get an item identical to that lost. Both have advantages and which you should choose will depend on the item and how your insurance company settles claims.

Insurance Replacement Value - this is the most common value used for commercial retail jewellery in Canada. It properly reflects what it is likely to cost to have the item replaced by insurance. The important point here is that: this value typically assumes that the insurer (not the insured) will choose the vendor for the replacement and/or the set the value for the replacement which can then be given to the insured's vendor of choice. This is the only level of valuation appropriate if your insurance company handles claims in this manner. If your insurance company will settle your claim based on their own cost estimates there is absolutely no need for you to pay premiums on any higher value and you must understand that just because you pay premiums on $25 000 does not mean you will automatically receive a settlement for $25 000 in the event of a loss. When a loss occurs your insurance company will recost the item through an insurance replacement specialist or a discount jeweller and use their costing to determine the value for your settlement. This is typically less, for example $19 000, at which time they will either arrange that replacement for you or cash you out for that amount so that you can have the item replaced where you choose.

This is not an appropriate level of insurance for high-net worth individuals or those who have special items or gemstones of distinction because this valuation level will not consider exceptional criteria. It is price-table based and will determine your replacement with an average or lowest-common-denominator formula. If you have a diamond, gemstone or jewellery item that is exceptional in some way, you should ask your insurance about this before you agree to the coverage because after the fact is too late. This type of coverage typically replaces your item on the basis of only its basic description without consideration of its singularity which may be the all-important.

A common example is the insurance of a 2.00 carat diamond F colour SI2 clarity and excellent cut. With an insurance company setting the limit of the liability your replacement will be limited to what your insurance must pay for the average 2.00 carat F colour SI2 of excellent cut. And it's important to note here that there is as much as 40-50% difference between the lowest cost stone which matches these criteria and the highest cost stone that matches these criteria. This wholesale difference is attributable to additional factors that real diamond experts evaluate which are beyond the traditional 4 C's. One thing is certain, between knowledgeable wholesalers if two diamonds have the same criteria in terms of the basic 4 Cs, the one with the higher price is going to look better. So, if your stone is better because it is an exceptional SI2 on the border with SI1 with nothing eye-visible, you may indeed find yourself with only sufficient money to purchase an average SI2 in which you might see some eye-visible inclusions. Insurance considers replacing SI2 with SI2 as replacing "life for like" but finer jewellery is more complicated than this simple categorization and you should realize this before you select insurance in this manner. As an opinion, I consider this level of insurance only appropriate for average commercial jewellery.

Reproduction Value - also termed duplication value, reflects what it is likely to cost to have a new item constructed which is as exact a duplicate of the item as can be produced in identical materials, design and workmanship. Whatever special conditions make the duplication value different from the replacement value should be noted on the appraisal document. This value can specify replacement of the item by the original designer or maker. For example: "Duplication value for replacement of the item by the original maker, Tiffany & Co." It can also specify exceptional gemstone colour or criteria above and beyond the standard grading. Duplication value is generally very high. On exceptional pieces of renowned selection or superior or antique craftsmanship this value can be upwards of 100-300% more than the common market average. Renowned makers will not discount to an insurance company therefore, the full value of duplication of the item should be stated on the appraisal. This is the value appropriate for prestige items, antique or vintage pieces, rare and exceptional gemstones and any item of jewellery which by its basic description will be undervalued and cannot be easily replaced through an average jeweller. Another word of caution: not all insurance companies will accept this type of coverage and you should check the details of this in your policy.

The RIVIERA Diamond necklace from the DEEDEE Collection

The Value Not to Use

In theory, a fair market value is the most commonly occurring price at which an item sells within a marketplace where such property is commonly sold. This is a retail price valuation. In Canada it is legally defined as: "The highest price, expressed in terms of money or money's worth, obtained in an open and unrestricted market between informed and prudent parties, neither party being under the compulsion to act." This is the appraisal value responsible for all those over the moon inflated values you see on appraisals. Looking at the definition we can see this is allowable. The appraiser is allowed to use the "highest price" of the item regardless of where it was bought. So a jeweller can be in a small strip mall selling a decent diamond ring and issue a fair market appraisal for it as though it were being bought through Cartier. Thus, this is normally the appraisal that accompanies the item when it is bought at retail because it is used as a selling tool. Fair market value should never be used for insurance because the highest price obtained in an open market is almost always grossly over the actual cost to replace an item. It is merely the highest possible asking price for such an item. This appraisal is meant to simply verify the item and its characteristics and to say in effect: "This is what it could be selling for at high retail...and see how much you are saving..." If you see this term on an appraisal you acquire with an item if would be advised to reappraise it and obtain a value more in line with realistic replacement.

The Bottom Line

The most important thing to understand about insurance is that not all insurance is created equal. If you select insurance solely based on premiums and price it may come to pass down the road after you experience a loss and make a claim that you find yourself faced with unpleasant restrictions you did not expect resulting in your dissatisfaction with the replacement. The best advice I can give anyone looking for jewellery insurance is to understand what will be covered and how it will be covered beforehand in order to select the most appropriate insurance for you. Then, make certain you have appropriate appraisals with valuations in line with that coverage.

If you are a purchaser of diamonds or other rare or important gemstones it is always wise to obtain a certificate for the gem from a reputable laboratory such as GIA, HRD, IGI, or Gubelin. Such a certificate (sometimes referred to as a grading report) attests to the nature and quality of the gemstone and is an important piece of identification for your gem. These certificates will assist anyone evaluating your gemstone however, they do not state a value because value is relative not absolute. Only appraisals carry a value.

If you are an individual with a great deal of jewellery or high-value prestige items you should always seek the advice of an insurance broker who focuses on elite coverage. There are many different policies available and seeking a specialist's advice is the best way to protect your jewellery. I have exceptional recommendations in this arena and would be more than happy to discuss this with you during your consultation.