Valuing Jewellery for Insurance : Is a New Approach Needed?
Paul Nilsson challenges existing practices
In this article Auckland Valuer Paul Nilsson questions whether jewellery valuers have kept up with changes to domestic insurance policy wordings as they apply to jewellery.
US readers should substitute the term ‘Indemnity Value’ with ‘Actual Cash Value’ and ‘Valuer’ and ‘Valuation’ with ‘Appraiser’ and ‘Appraisal’.
Most Valuers would agree that when they write an insurance valuation on a piece of jewellery for a consumer their primary objective is to protect the owner. Here are two scenarios where that objective may not have been met:
Consumer A had an estate diamond brooch professionally valued at $6000 and listed separately on their insurance policy for that amount. A year later they lost it and discovered it would cost $12,000 for the new replacement their policy entitled them to. However the insurance contract meant that the settlement was limited to the specified amount of $6000. Their Valuer had unfortunately only valued the brooch at its second-hand value.
Consumer B inherited their mothers' engagement ring and had it valued for $2,000 and listed on their policy. When they made a claim 5 years later they discovered their policy only entitled them to a $400 pay out. The Valuer had valued it for replacement with a new one but their policy was for market value (indemnity value) not replacement. More about these two scenarios later.
Professional Jewellery Valuers consider (correctly) that the key to protecting the client is the quality of the description of the item in the report. They go to a lot of time & effort to make the description as accurate and complete as they can. They augment their report with good quality photos. They research and calculate what they believe is the appropriate value for the item. And this is where the problem seems to stem from. Current Jewellery Valuation courses and associations teach the Valuer to take an item-centric approach rather than considering what their customers' insurance contract says.
When a client submits a pre-loss valuation report to their insurer, unless it is a ‘valued’ or ‘agreed value’ policy that they hold, all they are effectively doing is advising said insurer of the amount they want the item covered for. At this point the insurance company has not agreed with the value nor have they promised to pay that amount if there is a claim. On most policies, once the item is specified the notified amount forms the limit of the insurer's liability. The real benefit of the comprehensive description in a professional jewellery insurance valuation only comes into play when there is a claim. This is because the value at the time of loss has to be established, and because the item itself cannot be referred to this can only be done from the documentation the client holds.
Two Types of Insurance Cover
There are two distinct types of home and contents cover, Replacement Cover & Indemnity Cover and it is important for both jewellery owners and valuers to have a good understanding of the differences.
Most contents policies today are ‘new for old’ replacement for some or all of your personal possessions. Here is the Insurance Council of NZ Definition of Replacement from their website - This is a policy under which an insurance company will replace a lost or destroyed item with a new one, or repair the item so it is as new as practically possible. The item is usually repaired or replaced. If you want the cash, you can only get the indemnity value of the item.
It is important to recognize that replacement means with like kind and quality and, with rare exception, it does not mean replication of the item. So a mass produced piece of jewellery is replaced with a similar quality production item. A handmade piece is replaced with an equivalent quality handmade item, but not necessarily a facsimile of the original.
The other type of cover available to home owners is Indemnity. Here is the Insurance Council's definition - An indemnity policy puts you back in the same position you were in before the loss or damage occurred. The settlement is based on how much you would pay for the item second-hand.
There is an alternative wording on Indemnity policies that defines it as replacement less depreciation but effectively both mean the retail market value of the lost item, as opposed to the cost of replacing it. Indemnity value is sometimes referred to in policy wordings as current value, present day value, market value, or actual cash value.
Policy wordings have changed a lot over the years. Back in the 1970s all personal possessions, including jewellery items & watches, were covered for indemnity only. Remember that indemnity means to return the claimant to the same position they enjoyed before the claimable event. Indemnity value is the cash equivalent of that indemnification. 40 years ago indemnity value was not as clearly defined as it is today, and the circumstances of the claimant at the time of loss were factors in establishing indemnity.
Using this family crest signet ring as an example, imagine it has been lost and the client has made a claim on their insurance policy. If at the time the ring was lost the claimant was in the process of advertising it for sale, under those early policies indemnity value might have been assessed as what the claimant would probably have achieved ie the cash realization value. If the ring was a prized family heirloom on the other hand, indemnity might have been correctly expressed as the likely cost of an equivalent age and condition blank signet plus the cost of the family crest being carved into it. To further complicate things back then even though cover for jewellery was indemnity only it became common practice for insurers to replace with new jewellery instead of paying cash - for two reasons - to reduce fraud, and because they believed that the discounts they got from jewellers approximated indemnity anyway.
Evolution of Property Insurance Policies
Because all of these different methods of settlement caused confusion among consumers back then, regulators began to require that insurers make their policy wordings clearer and easier to understand. The result today is that Indemnity Value is more narrowly defined as either the retail market value of the item, or, its replacement value less depreciation.
Over this same period insurance companies in competition with each other were trying to make their policies more attractive to consumers and they started offering better terms. One was to promise to replace certain contents items that weren't too old with new ones, commonly furniture and electrical appliances less than 5 years old, but excluding clothing, sports equipment, and jewellery which were still only covered for indemnity value. Over the years the ante was raised until now we have policies where virtually all your contents can be covered for replacement with new ones, irrespective of age or condition.
But there are still lower cost policies available to consumers that only pay the indemnity (second-hand retail) value. This process of policy evolvement has taken place in other countries as well. Here are three overseas examples of current wordings...
Insurance Council of Australia - Quote
‘Most policies offer consumers new-for-old cover. This means you are covered for the full cost of replacing lost or damaged possessions with new possessions, which usually have a higher dollar value. You will generally pay a higher premium for new-for-old cover.’
Association of British Insurers - Quote
‘Most policies are ‘as new’ or ‘new for old’, which means that if something is damaged they will pay the full cost of repairing it, and if something is stolen or destroyed they will pay the full cost of replacing it with an equivalent new item.
However, you can choose an indemnity policy instead. This reduces the amount the insurance company pays out, to reflect wear and tear as well as depreciation. The idea is that you would be paid enough to replace your five-year-old television with another one of the same age, rather than with a new one.’
Insurance Information Institute (USA) - Quote
‘A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company won't deduct for depreciation -- the decrease in value due to age, wear and tear, and other factors. Actual Cash Value is the current value of property measured in cash, usually arrived at by taking the replacement cost and deducting for depreciation brought about by physical wear and tear, age and other factors’
Please note that it has been confirmed with iii.org that ‘Replacement Cost does imply replacing the item with a new one.’ and that ‘other factors’ includes the important jewellery related factor of ‘fashion obsolescence’.
It's More Complicated Than That!
As is common with insurance matters it's actually more complicated than it first seems. Even though a policy might be one of replacement ‘new for old’ there are often circumstances or exceptions written into the policy under which a client might only receive an indemnity settlement instead of the, usually higher, replacement settlement. One example is when the client requests cash instead of having the item replaced. Some policies cover jewellery for replacement but not for items originally obtained second-hand which only attract an indemnity settlement. Other policies only pay for replacement new if the item is specified on the policy, with indemnity applying to unspecified items.
Which Value? Replacement or Indemnity
Which value should be reported on a client's jewellery insurance valuation report? As mentioned earlier the current practice by valuers is to take an item centric approach - if they consider the item to be ‘in current production’ they value it for replacement new, but if it's not in current production, an old cut diamond brooch for example, or a vintage watch, they value it for ‘replacement in the estate market’, ‘antique replacement’ or ‘market value’. Sometimes they even state ‘replacement value’ even though it is an indemnity value they are reporting.
Let's go back to the consumer scenarios. This is the brooch that Consumer A owned.
Victorian Crescent Brooch
Handmade in 15ct gold and silver, old European cut diamonds. Lead solder repairs at the back, otherwise in good condition.
Under current item-centric practice jewellery valuers would consider that this brooch could not be replaced new and would only report an indemnity value. But they may incorrectly label it as a ‘replacement’ value. Let's assume that figure is $6000.This means the brooch is listed on the policy at $6,000 and this then becomes the maximum the insurance company will pay in the case of loss. What if the client wants to replace with a new equivalent quality brooch costing $12,000 as allowed for under their ‘new for old’ policy wording? They would not be able to because their Valuer had effectively set the limit at $6,000. Worse, because the valuation uses the word replacement the insurer might issue a voucher at $6000 and expect the client to purchase a new item for that figure (with the insurer probably only paying the supplying jeweller $5000 because of a discount arrangement between them).
Now let's consider the other scenario. This is the ring that Consumer B owned
1950s illusion set diamond engagement ring
Round brilliant cut diamonds. Cast white gold settings, handmade 18ct yellow gold shank with hand engraved inscription. In a worn condition.
The owner of this ring has a lower cost contents policy that has a relatively low limit of $500 for unspecified items. They decide therefore that they should get it valued. Because it is an item that would be considered replaceable new their Valuer values it at $2000 and it is listed on the policy at that figure. The appropriate premium is paid for 5 years until one day they lose it. Their insurer has the ring assessed for its indemnity value as per the policy wording and pays the client the $400 it is worth second-hand. One client extremely unhappy with their insurance company. Or is the Valuer at fault?
Valuing to The Policy
Perhaps the solution would be for valuers to value according to their client's policy wording instead of arbitrarily deciding which value to report based on the attributes of the item? That is a nice idea but the reality is that most clients would probably not know the exact terms of their insurance contract as they apply to jewellery. And because they are not authorized insurance advisers, jewellery valuers may not be able to correctly interpret individual policy wordings.
In this writer's opinion Valuers should report both values on every item they value for insurance for consumers and then advise them to discuss the most appropriate level of cover with their insurer. Jewellery Valuers may struggle with the idea of valuing estate and antique jewellery and vintage watches for replacement with equivalent new items. They could look to property valuers who have been valuing houses professionally for years on the very same policy wordings.
ANZ Valuation and Property Standards
‘Replacement Cost is an estimate of the cost, as at the date of valuation, of replacing with a new modern equivalent using current equivalent quality construction methods and materials.’
Effectively, then, replacement means with a new item of like kind & quality.
Let's go back to Consumer A's diamond crescent brooch and have the Valuer report both values and use the like kind and quality new replacement approach. Like kind means a diamond brooch. Like quality could be handmade to a good standard in 14ct yellow & white golds using equivalent quality modern round brilliants. The resulting replacement value might be $12,000, double its indemnity value.
So the valuation report would state ...
Replacement New Value $12,000
Indemnity Value $6,000
It is important to recognize that the client is not obligated to replace with the same item, or even the same type of item - they are normally free to purchase whatever new jewellery they want, in this case to the value of $12,000. They also cannot be forced to purchase new jewellery if their preference lies with estate jewellery but they would have to accept the, usually lower, indemnity pay out.
And for Consumer B, the valuation report on their three stone diamond ring would state...
Replacement New Value $2,000
Indemnity Value $400
In each case when the client goes to their insurer with their report they will be able to have it covered according to the wording of the policy they own, or at least discuss with them the level of cover they would prefer. Consumer A would have been able to have their brooch covered for the full amount of replacement. Consumer B would have had the opportunity to upgrade their policy to full replacement if they wanted.
In my opinion there are only two situations where a Valuer might report only one value in an insurance report and avoid the potential to damage their client. The first is where a new item has just been sold and the replacement value only is reported. The second is for an item where the rarity, provenance, or other extrinsic factors were such that Indemnity Value exceeded the cost of Replacement New, and only the Indemnity Value is reported.
Here is an example of the latter.
Turquoise Necklace, 18ct gold, sapphire set clasp
This necklace is documented as once belonging to Elizabeth Taylor. Its cost of replacement new is estimated at $12,500
But, based on sales data of other jewellery with similar provenance, the necklace itself would cost $20,000
The Valuer would therefore report the values as...
Replacement New Value : Not Applicable
Indemnity Value : $20,000
Jewellery Valuers who are seeking to provide best protection for their client's jewellery through their insurance valuation reports might be well advised to add an understanding of insurance to their quiver of knowledge. Hopefully this article will give them something to think about. And perhaps the jewellery valuation associations in New Zealand, Australia, the UK, and the US might be encouraged to research the insurance contracts their member's clients are signed up to in their respective jurisdictions and to revise their instruction courses and guidance manuals accordingly.
Most jurisdictions prohibit unauthorised people from offering insurance advice to consumers. The author believes that this article and any valuer following through on it would be providing valuation advice that is applicable to insurance, not insurance advice per se.
- Paul Nilsson FGA, GIA Gemologist
- Independent Jewellery Valuer
- Auckland, New Zealand
- GemLab Jewellery Valuers
- Appraisal Theory (primary)
- Appraisers/Valuers (primary)
- Insurance Professionals
- Appraisal Students
- June 2020
- 12 mins reading time
- Dale-Chall readability level:
Easily understood by an average College Student
- 17 mins speaking time
- 0 Comments
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Consumer advice can be found in the Consumer Resources section, this contains information to assist the jewellery-buying public, for example: Types of Jewelry Appraisals and Jewelry Trade Asociations etc.