Insurance Appraisal

[rjdodd]

Since this has come up again - I''ve got a poll (if it works).

You''ve just bought a 1ct D IF diamond solitaire for $15,000 which you plan to insure (and get re-appraised every three years). Assume we''re using like-kind with no inflation protection built into the policy (ie: no Chubb 50% extra free deal).

Take it to two appraisers: one give a current fair markety value appraisal of $15,000, the other an ''insurance appraisal'' of $22,500.

Do you insure it for $15,000 (what you paid) or $22,500 (the ''insurance value'')?

Why?

 

[hikerchick]

I would do the 15,000 because then you are protected for the amount you spent on the diamond and since that is currently fair market value, you''d be likely to find a replacement for a similar cost. And since you will be updating the appraisal every 3 years, you can protect yourself for the up-todate fair market value each time you have it re-appraised.

 

[crown1]

hi! i haven''t voted because i am not sure on a point or two and don''t want to affect the poll. i do want to ask a question. do you think you will actually get the ring appraised every three years? i know that i have not. do you think you will save money doing the every third year appraisal as opposed to the slight insurance increase? thanks!

 

[RockDoc]

I voted for other.

The reason is because the valuation used in the appraisal for insurance, needs to "parallel" how the cliam would be settled in the event of a loss.

The appraiser needs to take this into consideration and needs to know how the insurance policy dictates how a loss would be settled/paid.

If he or she doesn''t know this, the appraisal report''s value is sort of baseless. There is some due diligence here.

Additionally, use of "Fair Market Value" MAY not apply in this type of apprasial consideration. FMV requires a legal definition of it. Generally, there is no legal definition of FMV for insurance purposes. It depends if the venue (geographic location) has it written into the jurisidiction''s law.

The more approrpriate terminology is "Market Value". This is more generic, and the person making the opinion of market value has the flexibility of using different market levels that address the requirements of the assignment.

An additional consideration that needs to be made for a 1 carat D IF stone, is how available a replacement could be found given TIME constraints that the insurance company is under if the policy calls for them to replace it. A like kind D IF stone MIGHT be a bit difficult to locate particularly if it is a branded "super ideal" one. If such a condition exists, that would require special consideration in which the appraisal report should narratively explain the basis of the valuation methodology used by the appraiser.

Obviously, if the item being insured is easy to replace because supply is good, then a different approach may be called for in a replacement type policy. In that in a stated value policy, the stone isn''t going to be replaced, thus using the replacement market that would be commonly used by a supplier of replacements to an insurance company would not be the proper market.

Rockdoc

 

[Regular Guy]

Insurance is such a silly business.

I've sympathy to all 3 who have posted.

Like Crown1, I've not voted cause...Idunno.

Like Hikerchick...her comments make the most sense to me.

But...who says this is a common sense business. Not Rock Doc. He says you've got to read the policy...which also makes sense.

But maybe rjdodd is either or both not wanting to read the fine print...or figuring policies must be enough of a type that he really shouldn't have to read them. How crazy is that, given what he's already stipulated!

Insurance should certainly be about, among other things...insuring you from the unknown...to include price increases. If you're supposed to either re-appraise every 3 years, per the policy, or for that matter, eat insurance price increases to let your insure-er take care of this for you...why bother insuring for above the lower amount...if what you are ostensibly contracting to do is buy a policy guaranteeing replacement. It's understood that they pay wholesale, not retail, so the idea that insuring considerably over face value is the only way to be safe is taking the job of insurers away from them...and making yourself the arbiter of made up info about what should make you covered. But I hear this here all the time...and on what basis, I don't know.

Aren't replacement policies alike enough that this writer's question can be answered with specificity that nails it?

 

[Modified Brilliant]

The methods that insurance companies use to "replace" jewelry and how they base their decisions is a mystery to many consumers.

The term "fair market value" used in the poll is not really insurance related, as Rockdoc previously stated.

Your poll intentions were good . Insurance is always a hot topic. Lots of timely information is usually brought forth from these discussions.

www.metrojewelryappraisers.com

 

[rjdodd]

How about I replace ''Fair Market Value'' with purchase price - which is what I really meant, not some obscure legal/insurance term.

Insuring for the purchase price seems risky to me - if I lose the ring 2-1/2 years later. If diamonds are appreciating in value - or more to the point if purchase prices inflate can I get the same stone/ring 2-1/2 years later - even through the insurance company - that I bought today?

To crown1''s point - if I don''t appraise it every three years, if it slips to 5 because I forget or get lazy; can I then get the same stone 4-1/2 years from now for today''s price? I doubt it, especially if I''m in a hurry (to RockDoc''s point - or one of them at least).

Obviously the way the insurer replaces it is a big factor, I use Jeweler''s Mutual so I can use my prefered vendor not theirs. It was an online vendor to - so not a huge market up that the insurer can partly bypass.

I don''t know - but it seems to me that my appraisal has to cover me for getting a replacement up until the day before I get a new appraisal (and update the insurance value) - however far in the future that it.

I haven''t the faintest what the right way to do it is - but given that insurance is a safety net I don''t want a weak (even a little) one. For what it''s worth I have a big square H&A, not a RB. Looks like I''m definitely in the minority though.

I am not in the insurance business either.

 

[crown1]

rj, i am not sure i fully understood just where you were going. my denseness. i will tell you that i have chubb. an independent marine policy for my jewelry. i feel ok about it and am insured at the appraisal amount given me by my jeweler. it is not the price i paid since in my experience they always value at more than the purchase price. i am ok with what i am paying and in fact once made a claim after a loss. it was handled perfectly. i hope this may help you some.

 

[RockDoc]

RE: the Inflation Guard

I really don''t comprehend WHY the replacement companies don''t either include this coverage, or make a deluxe policy at a higher rate that would include it. I''ve suggested it to several companies, but no response.

Chubb does it "automatically" ... if the cost to replace it where you want is higher, then they pay up to 150% of the scheduled insured value. Simple.... easy to understand, is in the comsumers interest.

And...... by the time you insure it for a higher value to make the maiximum payment the same in the event of a loss, the stated value policy doesn''t cost that much more, and certainly doesn''t leave in a potential position that you have to fund a portion of the cost to buy another stone, should a loss occurs.

One "unknown" factor in selecting a value, is that some replacement companies don''t replace the stone. Some do cash out. I would think these are the smaller companies, that don''t have a volume of insurance covering jewelry. But the " major" players....JM, Allstate, State Farm,Nationwide etc, do save money and there are tons of jewelry replacement specialiists and insurance adjusters that are independent, that do supply the replacements, at low pre negotiated mark ups. USAA even buys their own replacements direct from cutters / dealers.

Rockdoc

 

[aro3eb]

I decided to play around with this a little. Here are my assumptions:

1) Both price and insured value increase at 5% a year. Thus your appraisal increases at 15.8% every three years.

2) Insurance premiums are 2.5% of the insured value each year.

3) In the years in which its insured at the price you paid, you make up the difference between the amount its insured for and the current price.

4) If its insured for the hire value, your only expense is insurance premiums (insured value is always greater than replacement cost)

5) Neglect time value of money.

I''m not sure how this works precisely, so let me know if any of these are not valid.


I did this out for 21 years, and the results are...!

Taking out insurance at the appriased value is cheaper if you make a claim in years 2, 3, or 9. All the other years, the total cost is less for insurance at current price. This becomes more pronounced over time as well. If you lose the ring in year 19, it will have cost ~$5000 more to have it insured at the appraised value and not the price, whereas this difference is only $780 in year 4.

 

[Regular Guy]

Date: 4/19/2007 12:13:36 AM
Author: aro3eb

I did this out for 21 years, and the results are...!

Taking out insurance at the appriased value is cheaper if you make a claim in years 2, 3, or 9. All the other years, the total cost is less for insurance at current price. This becomes more pronounced over time as well. If you lose the ring in year 19, it will have cost ~$5000 more to have it insured at the appraised value and not the price, whereas this difference is only $780 in year 4.

Though I''m not sure I followed all that...the crux of your argument must depend on your not accepting the original poster''s presumption. Remember...insurance is primarily one of two types...a) payment of cash, or b) replacement of like kind. Typically, the latter costs less monthly. The original poster says: "Assume we''re using like-kind...." So, regardless of the "valuation" of the diamond, whether it''s lower or higher...in the case of a loss...all you end up getting is a replacement diamond. You must have analysed that the user will get cash. Instead, in all instances, with a diamond being the only "anticipated" receivable...it''s hard to see where the higher valuation, causing a higher monthly premium, would under any scenario represent a better value. With the exception being made where the insurer is not able to find a suitable replacement, in which case, the unexpected outcome is the payment of I suppose the full valuation. But, this outcome, I understand, is an unexpected one.

 

[denverappraiser]

The optimum insurance value for a replacement type policy is exactly the replacement cost on the date of replacement. That is to say, you want to have the company carefully research what will be required to replace your lost item with another of like kind and quality and discover this is identical to the upper limit on your policy. If your declared value is higher than this, you will have paid premiums for coverage that you don’t need and if it’s lower you will be receiving less than you had before. Obviously this is a bit of a guessing game and most people prefer to come in a little high (thereby wasting a few premium dollars) rather than a little low (thereby having a shortfall at claims time) but this decision has a lot to do with your risk tolerance. Passing off risks to the insurance company in exchange for money is the whole point of insurance so risk tolerance on what you are willing to assume yourself and what you want them to assume is an important topic in making this decision. Being underinsured generally results in the maximum payout from the company and thereby gets you maximum value for your premium dollars (note: there are some rules about co-insurance that sometimes come into play with people who deliberately underinsure their property so we are assuming that this is not a deliberate attempt to mislead the company).

If you prefer a cash settlement, most companies will pay cash in the amount that it will cost them to replace the goods. If the payment amount is identical to the declared value of the policy then a replacement type policy is identical in results to a cash policy for typically less than half the premiums. The advantage of the replacement type becomes obvious. When it gets sticky is if the declared value is different from what the actual replacement cost turns out to be on the date of the claim. This is usually the case so now we’re debating where to draw the line.

It’s interesting to note that in most replacement situations, insurance companies pay higher prices than the typical PS deal for comparable goods. This is not because they’re stupid or because they can’t find pricescope, it’s because the replacement process is a forced purchase as Rockdoc mentioned and most clients want to do their shopping at a local store with a showroom. Telling a client that their new diamond will arrive in a brown box from Belgium in a week would simply not be an acceptable replacement procedure even if the diamond itself were entirely appropriate.

Your question boils down to estimating the value of insurance coverage beyond your cost of the merchandise. This involves several elements and assumptions beyond what you’ve mentioned.

1) Will actual replacement cost more, less or the same as your purchase? There are a lot of variables here including how good a deal you really got in the first place, how well your appraisal has defined like kind and quality, where the replacement purchase is likely to occur. If the transaction price, declared value, and the actual replacement cost were identical this would be an easy question but this is rarely the case. Often they differ by double or triple.

2) How will the market change after the date of valuation? The appraisal (or receipt) has a date, and it’s extremely unlikely that the loss will occur on or even particularly near this date. This is the part of the point of the 3 year reinspection cycle. It’s possible to make an estimate of how things will appreciate over time but it’s going to be a guess, and guesses often turn out to be wrong. Platinum, for example, is up drastically in the last 3 years and a heavy platinum piece appraised 3 years ago is probably undervalued today. These things do not change in a linear fashion.

3) How realistic is the appraised value? Appraisers generally will err to the benefit of recommending too much coverage rather than too little. How much too much is a point of negotiation. Some appraisals are just nuts and the objective is entirely different. They’re trying to make the jeweler look good. This is the reason for the whole ‘like kind’ business in the first place because the companies are, quite reasonably, unwilling to commit 100% to relying on the appraisal that YOU supplied.

4) What is likely to be required to exact the replacement? Certain items are easy to find and others are extremely difficult. An item that’s ugly or just unpopular is far more difficult to replace than more mainstream merchandise even though, in the usual marketplace, it may be sold at a steep discount precisely because it’s ugly and unpopular. This can lead to a wide disparity between transaction costs and the expected budget for replacement.
Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver