Synthetic Diamonds —
and Insuring Tips
Synthetic diamonds have a fraction of the value of natural ones. Replacing a synthetic with a natural could result in an overpayment of thousands or even tens of thousands of dollars. How can you guard against this error?
Our last issue discussed the emergence of synthetic diamonds on the market, the types of synthetics produced, the price attraction for consumers, and the high motivation of the manufacturers. This month we run through some of the issues and marketing tactics that directly affect insurers. Throughout this issue, Tips for Underwriters, Agents and Adjusters are marked with bullets.
Mining diamonds is much more costly than making synthetics, and the best synthetics are almost impossible to distinguish from naturals. The jewelry industry is scrambling. DeBeers, which controls most of the world’s mined diamonds, is working on tools to detect synthetics. Jeweler groups are pressuring the Federal Trade Commission to force diamond manufacturers to label their stones as synthetic. Companies that make diamonds are strategizing about marketing techniques.
About Colored Diamonds
Intense colors in natural diamonds are extremely rare and such stones are valued accordingly. Intensely colored diamonds are called Fancies. An international gem trader recently examined a yellow diamond, which he took as natural fancy, and valued it at $15,000. It was a synthetic Gemesis diamond, produced for under $100.
The Web site of one retailer advertises that its Gemesis synthetic diamonds are graded by gem labs “the exact same way as Natural Fancy Colored Diamonds.” Actually, they are graded the same way any diamond is graded. Bringing up natural fancy diamonds suggests that the value is comparable to a natural fancy, which it is not.
Web sites for synthetics may even link to industry charts for diamond values. These values are based on natural gems, not synthetics. The buyer may be getting a stone of comparable appearance, but it is not of comparable worth.
- In nature, intensely colored diamonds are VERY rare and are highly priced for that reason.
- For lab-made stones, colored diamonds are the default. They are cheap to make and are, or should be, inexpensive on the market.
- In insuring colored diamond, or any diamond of high value, never assume the gem is natural (and therefore more valuable). Insist on an appraisal that states whether the stone is natural or synthetic.
- In replacing a diamond of high value, never assume that the stone is natural simply because the appraisal doesn’t mention synthetic. Use every means possible to determine whether it is natural or synthetic.
- Be sure the appraisal is written by an appraiser who takes full responsibility to both client and carrier.
So much about jewelry insurance depends on disclosure: what did the maker or distributor know about the stone, what did the jeweler who set the stone know, what did the retailer know, what did the buyer know, what did the appraiser know—and how much of it gets on an appraisal so the insurer will know?
With diamonds, the price difference between natural and synthetic is far greater than with other stones. Emeralds, for example, have been synthesized for years, but the price of natural emerald is not so high, so the potential loss in an erroneous overpayment is not so great. For diamond, however, the loss could be tens of thousands of dollars.
- The chain of disclosure for synthetic diamonds must be complete — laboratory, distributor, jewelry manufacturer, retailer, appraiser, buyer, insurer. Note that it’s the insurer who suffers if there is a break in the chain.
- Deliberate nondisclosure by the diamond manufacturer, distributor or retailer is a danger because the price difference between natural and synthetic diamonds is so great.
- Since synthetic diamonds are difficult to detect, improperly trained retailers and appraisers may unwittingly pass on synthetic diamonds as naturals.
- The buyer may not have been told the gem is synthetic. He may have been told verbally and choose to withhold that information from the insurer.
- The insurer’s appraisal should explicitly state whether the diamond is natural or synthetic.
Gemesis has taken several steps to deter fraud. It has its lab-made diamonds inscribed along the girdle with the phrase “Gemesis created” and a serial number. However, potential for fraud remains.
- Inscriptions on the girdle can be concealed when the stone is mounted in a setting.
- Laser inscriptions can be removed.
- Gemesis stones under .25 carat are not laser inscribed.
- Not all Diamond Certificates come from respected authorities in diamond grading. (See Spotting a Bogus Appraisal for further discussion.)
- A certificate issued by the seller is basically a sales tool, not a document for insuring jewelry.
- A diamond certificate that gives valuation is not to be trusted. The respected grading labs only describe the stone, they do not give valuation.
- A certificate, even from a highly regarded lab such as the Gemological Institute of America (GIA), is not sufficient for insuring jewelry of value. The insurer should also have an appraisal with a detailed description of the gems and the setting, and a valuation of the piece.
- Disclosure information can be lost. Many jewelers have stories like the one of a customer who brought in inherited family jewelry, had the stones reset in an expensive setting, then had the jewelry appraised only to find out that the stones were synthetic. At the time of purchase, 60 or 80 years ago, it was understood to be inexpensive ornament jewelry, but that knowledge slipped away.
- Disclosure information can get “lost.” A customer may buy jewelry with synthetic diamonds, not understanding the meaning of a term like cultured, for example, or not appreciating the extreme difference in value between natural and synthetic diamond. When he becomes aware that he made a bad purchase, he may sell it to the insurance company through a fraudulent claim.
What’s in a Name?
Since “synthetic” has unpleasant associations, one producer wants to call its diamonds “cultured.” When Mikimoto developed the cultured pearl, selling for 1/10 the price of natural pearl, consumers switched so completely that cultured pearls are now the norm.
- A term like “cultured,” when applied to diamond, means synthetic. Treat it as a synthetic.
- Makers of synthetic diamonds are strongly advertising to attach their names to their products. Recognizing these names, or working with a jewelry expert who does, could save you tens of thousands of dollars on a claim.
FOR AGENTS & UNDERWRITING
Jewelry, constituting about 10% of all inland marine business, is generally considered a profitable class of insurance. But that could change dramatically as synthetic diamonds enter the market. If inexpensive lab-made stones start slipping in as naturals, the potential for overpayment on claims is enormous. Synthetics are only beginning to enter the market and will not immediately affect insurers. Now is the time for the industry to be proactive in dealing with these developments, before the losses take over and loss ratios plummet.
Now is the time to establish firm guidelines for insuring jewelry. It comes down to relying on people and documentation you can trust. We suggest the following:
Guidelines for Insuring Jewelry
- Certification by a Major Lab. For quality diamond jewelry, have on file a certificate from a respected gem lab. Note that not all diamond certificates are reliable. Some are prepared by labs that are not reputable authorities on diamond grading, and many are merely used by retailers as sales tools (see the Spotting a Bogus Appraisal for a more complete discussion). Insist on a diamond report from a highly regarded lab, such as Gemological Institute of America (GIA) or American Gemological Society (AGS).
- ACORD Appraisal. For all quality jewelry, insist on an
appraisal that gives a detailed description of the jewelry, both stones
and setting, and gives a valuation. The typical appraisal today, whether
prepared by seller, appraiser or manufacturer, is not suitable for insurance
The insurance appraisal should be written on ACORD 78/79, which presents information in an easy-to-understand format. The insurer can readily see whether any necessary information is missing. He will know where to look for details that significantly affect insuring, such as a term like “synthetic” or a Princess cut diamond highly vulnerable to damage.
- CIA™ Appraiser. The appraisal should be written
by a graduate gemologist who is experienced in buying and selling jewelry
and who is trained as a Certified
Insurance Appraiser™ in Jewelry.
Such an appraiser has the training to examine stones in a gem lab and accurately report qualities. He’ll recognize and report gem treatments important to the insurer, such as gem laser-drilling and fracture-filling (more on these treatments in an upcoming newsletter). He’ll know when to be suspicious, as when a too-perfect diamond is not reported as synthetic but probably is (see Synthetic Diamonds ). He’ll be aware when too much of a rare gem, such as yellow fancy diamond, starts showing up on the market. If he suspects a gem is synthetic, he can connect with a larger lab that has equipment to distinguish synthetic from natural diamond.
In general, diamond manufacturers are willing to disclose that the stones are synthetic, but not all gem dealers and jewelry sellers will do so. In some cases the distinction will not even be discussed, and the synthetic diamonds will wind up being sold as natural.
Most important, be aware that synthetic diamond is worth just a fraction of natural diamond. Read carefully all documents on file. Do not assume that a gem is natural unless this is specifically stated on the appraisal.
On a damage claim for a high-priced diamond, always have the piece examined by a qualified gemologist, such as a CIA™, to determine whether the diamond is natural or synthetic (and to be sure its qualities are as stated in the appraisal).
Now is the time to review and update procedures according to the Guidelines above, to head off costly problems in the future.
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