Can Valuations Be Trusted?
The limit of liability for jewelry is usually based on the valuation. Whose valuation are you trusting? How do bogus valuations play out for the insurer? What can you do about them?
In February, Jewelry Insurance Issues discussed inflated valuations. In this issue we’ll take a look at some real claims that show the cost to insurers of these exaggerated valuations.
An insurer recently contacted JCRS about a loss claimed on a diamond ring. In the carrier’s files was an “Appraisal Report” giving details about the center diamond’s qualities. The report estimated the replacement value of the main stone at $29,290. The carrier also supplied an “Identification Report” with details about the mounting, which included eight small diamonds. No valuation was assigned to the mounting.
The insurer’s limit of liability was $29,290.
JCRS put the replacement out for bid, using the descriptions on the documents submitted by the insurer. A bid from a well-respected, high-end retail jeweler came in offering to replace the diamond and mounting for a total of $16,900 — well below the insured value.
Two things about this claim stood out.
- The Appraisal Report and Identification Report both came from a lab known to give highly inflated valuations. As discussed in detail in the February issue, documents from labs such as this one are supplied by the seller and are basically sales tools, not reliable appraisals. They typically value the jewelry at twice its selling price, so the customer thinks he is getting a great bargain. In this case, the document stated that it was “for insurance purposes,” and the insurer took it at face value.
- The policy took effect on October 10 and the loss (mysterious disappearance) occurred on November 11. JCRS flagged this for the insurer’s Special Investigative Unit (SIU). There was also in the insurer’s files a receipt for a new mounting, dated November 1. Is it a stretch to wonder whether the jeweler who did the remounting told the owner that the ring’s real value was well below its insured value, and the policyholder was tempted to “lose” the ring and cash in on the insurance?
Another claim dealt with two items lost in a burglary — a gold bracelet set with 100 small sapphires and a lady’s gold ring with 17 diamonds. The bracelet was valued at $12,750, the ring at $8,150, for a total of $20,900.
JCRS noticed that the appraisal came from the seller, in this case a pawnshop. This raised a red flag about inflated values. Using the information from the appraisal, JCRS found that the bracelet could be replaced for $1,631 and the ring for $2,796.
The limit of liability for the two items was $20,900, but the insurer had to pay only $4,427, a savings of $16,473.
The root problem in both these claims is a grossly inflated valuation. Exaggerated jewelry valuations are becoming more frequent, as retailers more commonly supply appraisals or certificates with the merchandise they sell. The buyer is impressed that the valuation far exceeds his purchase price, and he feels like a savvy shopper. Neither buyer nor insurer may realize these documents are prepared by the seller, or by a lab on behalf of the seller, rather than by a disinterested appraiser.
On a loss claim, the policyholder expects to receive the full appraised value of the insured item and feels defrauded to get only a fraction of that sum. Indeed, some insurers pay the scheduled value, even though the policy does not require them to do so. They see a simple payment as easier and assume the financial loss will not be great.
But with retailers supplying appraisals, inflated valuations become more and more common. And with inflated valuations, moral hazard increases.
Isn’t it time for insurers to utilize ITV (insurance-to-value) software for jewelry?
Insurers can have ITV software on their websites, or agents can subscribe to an ITV service. Each jewelry item to be insured can be checked for valuation. If information needed for valuation is missing from the appraisal, the agent can tell the insured what is needed. This is a value-add for the agent. It assures the policyholder that he is not overpaying for insurance and it provides an accurate and complete description for replacement in the event of a loss.
An additional benefit is an increase of the policyholder’s confidence. The agent can warn clients about the prevalence of certificates with inflated valuations. If the ITV software determines that the jewelry is worth considerably less that the customer paid, the insured has an opportunity to return the merchandise.
FOR AGENTS & UNDERWRITING
Do not rely on diamond certificates that carry valuation, as these valuations are often inflated and the description may not be accurate. Ask to see the sales slip. Ask for a descriptive appraisal and valuation by a graduate gemologist who is a Certified Insurance Appraiser (CIA)™ and who has examined the stone.
Be attentive with jewelry from large retailers, especially when the purchase price is significantly below the certified valuation.
For large retailers, certificates and other appraisal documents are sales tools. You have no way of knowing whether a certificate supplied by a retailer represents the jewelry actually purchased. The same is true for online purchases. Ask for a descriptive appraisal on ACORD 78/79, prepared by a graduate gemologist who is a Certified Insurance Appraiser (CIA)™.
Even certificates from respected authorities such as GIA and AGS leave out information crucial to valuation, such as mounting data. For quality jewelry, always ask for a descriptive appraisal, preferably on ACORD 78/79.
If the insured item has only a certificate by a suspect lab, the valuation is probably inflated.
If the valuation on a certificate is much higher than the purchase price, the valuation is probably inflated.
In pricing a replacement, use descriptive information from the certificate or appraisal to get competitive bids. Don’t automatically turn to the seller for replacement.
How can you tell if a diamond certificate or appraisal is reliable? Is there any way to know whether a valuation is reasonable?
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