Jewelers sometimes use appraisals as sales documents. “I’ll sell it to you for $1,000.00 but I’ll give you an appraisal for $5,000.00.” The IRS defines value as what the willing buyer pays the willing seller. In this case we know the seller is more than willing and to entice the buyer he provides an appraisal document that inflates the value of the item sold. The replacement value is the price the buyer paid. It is difficult to believe that anyone would fall for this but they do. Not only is this practice unethical but over the long run the buyer pays through the nose.
Insurance premiums are based upon the replacement price stated in the appraisal document. Insurance companies are well aware of the practice of inflating value, a practice they could eliminate it with the stroke of a pen. They purposely choose not to do so. In fact they are more than willing participants in a defacto fraud that makes them huge profits.
Most insurance policies contain a clause that allows the company to replace a lost item with “like kind and quality.” Insurance companies maintain ongoing relationships with certain jewelers and manufacturers that allow them to buy at wholesale. You insure at retail, they replace at wholesale or in the case of the example sited above they collect a premium based on five times the retail price year after year and if a claim is filed they replace at their cost which may be a fraction of the insured value.
I have personally seen instances where insurance companies will try to replace fine handmade originals with generic pieces of production jewelry. In one instance one of our clients lost a one of a kind handmade ring set with a rare fine quality Malaya garnet. It was only the client’s stubborn refusal and willingness to sue coupled with the fact that I had written an article on this garnet that prevented the insurance company from trying to force the client to except a cheesy commercial substitute worth less than ten percent of the original. The company’s position was that a ring is a ring and one is much like another. That’s like saying that a painting is a painting and a Picasso might be legitimately replaced with Elvis on velvet.
Not all insurance companies engage in this sleazy slight of hand. I have worked with Chubb and it is one example of a company that will pay the full insured value when an item is lost with no questions asked. My understanding is that Chubb charges higher premium but you get what you pay for.
There are obviously some cases where the replacement cost will be higher than the selling price. The obvious example is an appraisal done years after the purchase. Another example is the ruby sighted in the previous post. After my trip to Hong Kong it was obvious that I could not replace that stone for the price the client paid. In these sorts of cases both should be included in the appraisal and then it is up to the client, in consultation with the insurance company to decide what level of risk he or she is willing to assume.