The Price of a Replacement
When a jewelry settlement requires a replacement, what should that replacement really cost?
If insurers don't know – if they expect replacement cost to match the jewelry's appraisal valuation, or if they merely go to the original retailer for replacement and pay whatever he asks – then they are almost surely overpaying.
Here's a typical claim:
The insured filed a damage claim on her diamond engagement ring, and the adjuster determined that a replacement was required. The insured wanted the replacement supplied by the jeweler who sold her the ring.
The sales receipt showed the insured had paid $9,200. The appraisal – written by the seller – valued the ring at $12,795, and the ring was insured for that amount.
The selling jeweler was invited to submit a quote for the replacement.
Here's an insurer's atypical procedure:
The insurer also sought a replacement quote based on the value of the jewelry's components. The center diamond and its small side stones — described as to color, clarity, cut and carat weight (the 4 Cs) – each has a value. The ring's 18-karat gold band has a certain value. A percentage is added for labor and profit. The calculations determined that the ring could be replaced for $10,496.
The selling jeweler's quote came in at $14,294.
This was about $1,800 above the retailer's appraised value and over $5,000 more than the price the insured had paid four years earlier.
Maybe you're thinking: "Oh well, inflation. There's nothing I can do about it." Or: "Well, that's how it goes, what do I know about jewelry?" Well, now consider this: when the jeweler was told about the much lower replacement cost the insurer had been quoted, the jeweler revised his $14,294 quote to $8,200!
The jeweler's new quote was even lower than the insurer's calculation, no doubt because the jeweler wanted the job. And it's reasonable to assume that, even at $6,000 below his original replacement quote, the jeweler was still making a profit.
What's wrong with this picture?
Overpricing replacements is more common than not. And the replacement issue is aggravated by inflated appraisals, which we've covered frequently before (here or here, for examples), so now we'll focus on replacements.
For replacements, the insurer often goes to the selling jeweler. The jeweler consults his records for the price the customer paid and for the jeweler's own appraisal (likely with an inflated valuation, to make the customer happy with the purchase), and adds a little.
Or the insurer may go to a local jeweler or replacement house, asking for a replacement based on the appraisal's description and valuation. That's always a wrong move! If the valuation is supplied, the replacement price is likely to match the valuation, even if the jewelry's quality does not merit it.
What's the cure?
Why doesn't jewelry insurance have a way to arrive at reasonable replacement costs, rather than giving the jeweler a free hand in pricing?
The ring discussed above is an example of an item commonly insured, and the jeweler's replacement cost was inflated by more than a third. Imagine how egregious the overpricing is on more complex jewelry. Complicated items are more expensive, but all jewelry is made up of its component parts, and these components should be the basis for replacement cost.
The insurer covering the ring discussed here used software that took into consideration the qualities of the ring's components, the item's appraised value, and the amount of insurance, and then calculated the insurer's price to replace based on current market values. As suggested by the experience recounted above, a wider use of such software would make replacement prices much more reasonable.
As it is today, the best that jewelry insurers can do is get a detailed appraisal from a reliable appraiser. We've urged getting an appraisal that includes thee ACORD/JISO 78/79/806 forms, prepared by a GG or FGA+ gemologist who is also a Certified Insurance Appraiser™ (CIA). But even a CIA, who is trained to write detailed jewelry appraisals for insurance, is not an advocate for the insurer.
If the insurance industry wants to get control of the jewelry claim situation and eliminate the fraud and abuses that occur on a daily basis, insurers must have more than just good appraisals.
For construction and auto claims, insurers have experts who inspect the damage. For any specific repairs, their software can calculate the cost of materials and labor. For cars, software can even provide comparables based on the model and age of the vehicle.
Insurers of jewelry should follow the model used for auto and construction claims, where CCC, ADP, Xactware, and others manage the DRP (Direct Repair Programs) for insurers at large. A similar solution exists for jewelry claims, but it has not yet been embraced by the insurance industry.
FOR AGENTS & UNDERWRITERS
The best appraisal includes the JISO 78/79 appraisal form, and is written by a qualified gemologist (GG, FGA+, or equivalent) who has additional insurance appraisal training. One course offering such additional training is the Certified Insurance Appraiser™ (CIA) course of the Jewelry Insurance Appraisal Institute.
One or more photos of the jewelry, from various angles, are invaluable in creating a replacement.
For jewelry of substantial size and value, ask for a gem report from a reliable lab. A respected lab can better afford to have the latest technology for plotting geometry of a stone, measuring light performance, finding inclusions, detecting lab-made stones, and the like.
These are the major trustworthy labs, and you can use these links to verify gem reports you receive.
FOR ADJUSTERS
On a damage claim, ALWAYS have the jewelry examined in a gem lab that has reasonable equipment for the job and is operated by a trained gemologist (GG, FGA+ or equivalent), preferably one who has additional insurance appraisal training, such as a Certified Insurance Appraiser™.
For replacement, do not automatically rely on the jeweler who sold the piece. If you do not have access to pricing software, asking for multiple quotes may lead to great savings on a replacement.
When pricing a replacement, give the replacement house only the descriptive information and photos of the jewelry. Do NOT give the valuation from the appraisal or the schedule value. The replacement cost should be based on the quality of the components.
If you have a gem's lab report number but do not have the report itself, or if you have a report that you want to verify, you can often get a copy online using the links above (or call the lab for assistance).
Watch out for watches. If you seek a replacement from the watch manufacturer, he'll quote you the MSRP (manufacturer's suggested retail price) of the current model. That would be an unreasonable valuation for a used watch.
Unlike other jewelry, watches are subject to depreciation. Like cars, watches are machines and parts can wear out. You wouldn't replace a 7-year-old Lexus with a new one. For an older watch, consult the huge vintage watch market and find a model comparable to the one lost. For a cash settlement, the settlement amount would equal the insurer's cost for a replacement from the vintage market—just as is done with automobiles. See Insuring a Rolex – Things to Consider for more details.
Be on the lookout for fakes, counterfeit watches wearing a famous logo. They are found at every price point, and you don't want to replace a fake with an authentic name brand watch. See our stories Counterfeit Watches—The Mushroom War and Frankenwatches to familiarize yourself with what to look for.
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