Jewelry insurers’ ethics
We’ve talked from time to time in this newsletter about unethical practices by jewelry retailers and jewelry appraisers. It’s time we looked at jewelry insurers.
One of the major canons of insurance is not to overinsure, not to insure for an amount that is in excess of the insured object's fair or reasonable value. Yet we find that for jewelry, overinsurance occurs often.
Here’s how overinsurance happens.
- A customer purchases jewelry.
- The customer obtains an appraisal with a valuation far in excess of the purchase price. This is extremely common.
The inflated appraisal may be supplied by the retailer, to support the claim that the customer is getting a steep discount. Or it may be written by an appraiser who is hired or recommended by the retailer to “verify the true value” of the jewelry. Or the customer may obtain an appraisal from an independent appraiser who, intending it as a favor to the client, ups the valuation “for insurance.”
- The customer then applies for insurance, submitting the appraisal with an inflated valuation. Often it’s a grossly inflated valuation, maybe twice the purchase price or even more.
What should the insurer do?
They should underwrite to remove moral hazard.
The simplest thing to do is ask for the sales receipt, to check if the appraisal’s valuation is in the neighborhood of the purchase price. If there is a huge difference, the insurer can assume the actual purchase price is a truer indication of the item’s market value.
However . . .
- Many insurers simply cover the item at the appraisal’s (inflated) valuation. This is overinsuring the jewelry, an unethical practice that causes the insured to pay excessively high premiums.
- Some insurers go even further. One prominent insurance company has relationships with many jewelers. These jewelers recommend the insurance company to their customers, in return for which the insurance company goes to the selling jeweler for replacements. The selling jewelers have agreed to give the insurer especially low replacement prices, which are based on the jeweler’s cost plus a percentage.
The selling jeweler accompanies each sale with an appraisal and valuation, which the insurance company accepts without question. Unless a claim is necessary, the insured probably isn’t aware that this insurance company does not offer cash settlements. The only settlement is a replacement. The circular arrangement brings business for both the jeweler and insurance company—at the customer’s expense.
This setup takes advantage of the customer in 3 ways:
- The jeweler is motivated to provide inflated valuations, knowing that these valuations will please the customer and will be accepted by the insurer.
- The insurer will charge the customer excessive premiums based on inflated valuations.
- The customer is misled about the value of their jewelry. Because of the circular arrangement, the customer will never know how little the insurance company paid on the claim, won’t know that the jewelry’s valuation was inflated, won’t realize they’d been paying—and will continue to pay—higher premiums than the jewelry merits.
Where is the AGENT?
Notice in that last scenario that there is no agent working on behalf of the insured. The jeweler sends customers directly to the insurance company and the customer pays whatever premiums are offered—perhaps feeling happy about having “eliminated the middle-man.” But agents know that they can save clients money by searching for the lowest premiums.
The key is to locate jewelry insurers who do not base rates on inflated valuations. Some insurers have the ability to calculate insurance to value (ITV) for jewelry, resulting in premiums that are typically 20% lower than other insurers. This can mean significant savings over the years. Wise agents will seek out such insurers for their clients.
Advising consumers
Insureds commonly believe that, in the event of a jewelry loss, the company will simply write them a check for the insured value. They don’t understand that the insurer is liable only for the insurer’s cost to repair or replace—and the insurer’s cost is much lower than the customer’s retail price and certainly far lower than an inflated valuation.
Consumers are typically unaware than some insurers do not make cash settlements at all, they will only replace the item.
Most consumers, and even many jewelers and appraisers, believe that a falsely high appraisal valuation is an advantage when it comes to insurance. It is not! An inflated valuation just means the insured will pay higher premiums than necessary.
Although insurance rates are set by the state, the rates are based on the jewelry’s value. Inflated valuation means higher premiums. Consumers should be shopping for the lowest premiums, not the best rates.
Pro-active agents can provide a valuable service by helping their clients understand just how insurance works. Giving information and saving their client money go far in winning the client’s trust.
FOR AGENTS & UNDERWRITERS
Inflated valuations do not serve the insured. They just mean higher premiums.
It’s good practice to always ask for the sales receipt. If the appraisal’s valuation is significantly higher than the price paid, the selling price is probably closer to the true value of the jewelry.
An agent can easily do what many insurers do not: compare the sales receipt with the appraisal valuation. If there is a huge discrepancy, advise the client that getting an appraisal with a more accurate valuation can mean lower premiums.
Agents could also do business with insurers that both analyze the appraisal for content AND determine ITV (insurance to value).
FOR ADJUSTERS
Review all documents on file—appraisals, sales receipts, diamond reports. If some of these documents are lacking, ask the insured for them.
Comparing purchase price to the appraisal valuation is a useful way to avoid overpayment, as the price is generally a truer indication of market value than a possibly inflated valuation.
Be aware that appraisals and lab reports supplied by the seller are likely to have inflated valuations.
Reject lab reports that carry valuations. More reliable labs report on the quality of the gem, they do not include valuation.
On a damage claim, ALWAYS have the jewelry examined in a gem lab that has appropriate 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™.
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