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Diamond Appraisals - how do they work?

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kev_800

Shiny_Rock
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Jan 27, 2007
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So, if someone buys a loose diamond (online or otherwise), and say it costs $10,000.00, why do you get an appraisal with the diamond that says the diamond is worth $14,550.00 or something thereabouts? Is it some gimmick to make you think you got a deal?

If the purpose is to increase the amount of insurability of the diamond, doesn''t that just defeat the purpose because you''ll be paying a higher premium on the diamond since it is worth more according to the insurer?

Is the value determined against the Rappaport diamond reports?
 

denverappraiser

Ideal_Rock
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Not all appraisals are done the same way but the usual pre-loss insurance type report is to document the details of what you have and to provide appropriate funding for the insurance company to replace a lost item with another of like kind and quality in the case of a loss. The bottom line number on the policy will usually set the maximum limit of liability, not the expected limit. In most cases, the market of replacement is defined as the local retail marketplace for items of that nature (diamond rings, watches, charms or whatever it is that you’ve written the policy about).


Depending on how the appraisal is written and what the details of the property are, the insurance company may be able to replace at a less expensive provider or beat up the jeweler for a better price than you would be able to get on the same item at the same store.


Insuring an item for significantly more than the cost to replace is a waste of premium dollars. Insuring for slightly more is popular because it allows for the opportunity of inflation between the time you write the policy and when you file the claim. The relationship between the cost to replace and the amount you pay will depend on where and how you buy and what market your appraiser defines as the replacement marketplace.


In the scenario you give, an expected outcome would be that the company can replace for approximately the same as what you paid and the preimiums associated for setting their maximum liability at $14000 instead of the $10000 replacement cost would have been wasted. If you paid $10k and the company end ups needing to pay $14k to make the replacement, you would get value for the premiums associated with raising that limit.


Notice also that I used lots of phrases like ‘usually’, ‘in many cases’, and similar weasel words. This is because insurance is a highly regulated business and it will vary considerably from state to state and from policy to policy. For details on how your particular policy works, ask your insurance agent and/or read your contract.


Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver
 

kev_800

Shiny_Rock
Joined
Jan 27, 2007
Messages
122
Date: 2/5/2007 1:03:58 PM
Author: denverappraiser

Not all appraisals are done the same way but the usual pre-loss insurance type report is to document the details of what you have and to provide appropriate funding for the insurance company to replace a lost item with another of like kind and quality in the case of a loss. The bottom line number on the policy will usually set the maximum limit of liability, not the expected limit. In most cases, the market of replacement is defined as the local retail marketplace for items of that nature (diamond rings, watches, charms or whatever it is that you’ve written the policy about).



Depending on how the appraisal is written and what the details of the property are, the insurance company may be able to replace at a less expensive provider or beat up the jeweler for a better price than you would be able to get on the same item at the same store.



Insuring an item for significantly more than the cost to replace is a waste of premium dollars. Insuring for slightly more is popular because it allows for the opportunity of inflation between the time you write the policy and when you file the claim. The relationship between the cost to replace and the amount you pay will depend on where and how you buy and what market your appraiser defines as the replacement marketplace.



In the scenario you give, an expected outcome would be that the company can replace for approximately the same as what you paid and the preimiums associated for setting their maximum liability at $14000 instead of the $10000 replacement cost would have been wasted. If you paid $10k and the company end ups needing to pay $14k to make the replacement, you would get value for the premiums associated with raising that limit.



Notice also that I used lots of phrases like ‘usually’, ‘in many cases’, and similar weasel words. This is because insurance is a highly regulated business and it will vary considerably from state to state and from policy to policy. For details on how your particular policy works, ask your insurance agent and/or read your contract.



Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver
Thank you for that detailed explanation! so if I understand you correctly:

1) insure at a value above the fair market value of the piece at your own discretion, knowing that you may never get the amount over the fmv at the time of the loss
2) different appraisers come to different values for retail pricing for the diamond based on their location and other factors that you''ll need to look closely at the appraisal report in order to understand
 

denverappraiser

Ideal_Rock
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FMV is a legal concept that really doesn’t apply here dispite the name. Most insurance policies are written based on either replacement value or declared value. I know of none that use FMV.


Different appraisers will use very different procedures to estimate replacement value. Often, jewelers will supply an appraisal that lists a replacement value that is completely unrelated to any market on earth because it carries with it an illusion that the transaction price is a bargain. Yes, it’s important to read the entire report and often it helps to discuss it with your appraiser during your session to understand what they mean by their value conclusion. If you weren’t the client and the report doesn’t match the known facts (like it reports a value that you know to be unrealistic), you should probably ignore it in it’s entirety and hire a different appraiser. If you are the appraisal client and the report is unclear, call up your appraiser and ask them to explain their logic and how they came to their value conclusion.


Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver
 

kev_800

Shiny_Rock
Joined
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Messages
122
Date: 2/5/2007 2:00:10 PM
Author: denverappraiser

FMV is a legal concept that really doesn’t apply here dispite the name. Most insurance policies are written based on either replacement value or declared value. I know of none that use FMV.



Different appraisers will use very different procedures to estimate replacement value. Often, jewelers will supply an appraisal that lists a replacement value that is completely unrelated to any market on earth because it carries with it an illusion that the transaction price is a bargain. Yes, it’s important to read the entire report and often it helps to discuss it with your appraiser during your session to understand what they mean by their value conclusion. If you weren’t the client and the report doesn’t match the known facts (like it reports a value that you know to be unrealistic), you should probably ignore it in it’s entirety and hire a different appraiser. If you are the appraisal client and the report is unclear, call up your appraiser and ask them to explain their logic and how they came to their value conclusion.



Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver
"Often, jewelers will supply an appraisal that lists a replacement value that is completely unrelated to any market on earth because it carries with it an illusion that the transaction price is a bargain."


That is the key, then!

Also, FMV v. Replacement Cost --- good catch! You''re very right... the FMV (price the seller could obtain if the stone was sold as is and left on the market for a reasonable period of time) of a loose diamond is substantially lower than the replacement cost...

Ok thanks for putting this into perspective for me!
 

RockDoc

Ideal_Rock
Joined
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2,509
KEV

Fair Market Value is a rather complex definition to understand.

There are literally thousands of legal definitions for it which change drastically depending on why the appraisal was done, what it is going to be used for, the legal jurisdiction and many, many other considerations in determining it.

Briefly, FMV should ONLY be determined by someone who thoroughly understands the requirements to use it. Most appraisals do not require the determination of FMV. The ones that do, generally have a legal requirement stating how the determination of it is to be defined and reported.

IRS has several varying FMV definitions.... Commonly they would be Donation/ Estate Tax/ Casualty Loss. Local legal jurisdictions have others such as FMV for Measures of Loss ( theft ), Probate, for determination of Assets when filing for Financial Assistance, Real Estate Valuation for Tax , Divorce, and many others.

If there isn''t a legal definition for FMV, then it should NOT be used. Rather the valaution should be called Market Value, which is more generic, but may require reporting several values that are relevant to the assignment.

Commonly these definitions are written in JURY INSTRUCTIONS, but some are defined in statute law.

I have been gathering various FMV definitions for the last 12 years. Unfortunately, these can change and have to be constantly researched, and are also affected by case law opinion.

The very interesting part of this research that in some states which border on each other some of the FMV definitions have "opposite" or conflicing definition approaches. For valuation practicitioners ( guess this is a fancy name for appraisers) who have practcies located geographically on state borders, this requires the appraiser to be aware of any FMV that is required for the jurisdiction that the appraisal is written for.

Even more problematic is that many attorneys do not understand the concepts of it either. There is erroneous case law written sometimes as well. Many states have written in case and statute law that "Market Value and Fair Market value are synonomous". Depending on the facts and purpose of the assignments this may or may not be true.

One thing is constant however. If an FMV value is used, the appraisal report needs to state the specific legal definition
as used in reaching the value conclusion. So if FMV is used where there isn''t a legal definition, the valuation really isn''t valid.

Hope this isn''t too confusing.... and that it helps clarify the "seriousness" of using FMV, as a lot of appraisers use this terminology without understanding it.



Rockdoc
 

denverappraiser

Ideal_Rock
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Date: 2/5/2007 3:00:17 PM
Author: RockDoc


One thing is constant however. If an FMV value is used, the appraisal report needs to state the specific legal definition as used in reaching the value conclusion. So if FMV is used where there isn''t a legal definition, the valuation really isn''t valid.

Rockdoc

Whatever value definition is used the report should clearly state it or the value conclusion is useless, even if it is somehow correct. ‘Replacement Value’ and ‘Value for insurance purposes’ are the root of a tremendous amount of misunderstanding of appraisals.


Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver
 

kev_800

Shiny_Rock
Joined
Jan 27, 2007
Messages
122
Yup! The idea of FMV is a creature of state law so it will vary by jurisdiction.

Any loss under an insurance policy will really be determined under the terms of the policy as it is written, unless the policy is void against public policy, superceded by statute, or otherwise ambiguous. I was just using the term FMV in a general sense because I didn''t know I was writing to a forum filled with attorneys :)

Anyhow, thank you for going out of your way to explain this all to me -- it was very helpful...
 

Modified Brilliant

Brilliant_Rock
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Joined
Mar 24, 2005
Messages
1,481
I'm sure Rockdoc and Neil will attest to the fact that as appraisers, we are called upon by lawyers who sometimes don't understand
the FMV definitions. That is very frustrating for us when we have to explain to them. I did an appraisal for a federal agency last year
who requested that I "just value the items." Not one person in this agency knew "what" value they actually needed for the assignment.
Yes, the definition of FMV is comprehensive. Great information from Neil and Rockdoc. Thanks guys


P.S. Hopefully, appraisers are spending a little time explaining the insurance process to their clients. It is an area that needs attention.


www.metrojewelryappraisers.com
 
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