Criminal or civil? Out-of-pocket or benefit-of-the-bargain? Here, the differences in the types of fraud and damages that appraisers should know.

Before insurance, cargo ships could secure what were called bottomry loans. This was a loan with the cargo or ship as collateral. If the ship was successful, the loan was paid. However, if the ship sank, then the loan was forgiven. More than 2,000 years ago, an ancient Greek merchant named Hegestratos misrepresented the worth of his cargo with fake paperwork to get a large loan with the intent of sinking his ship. But his fraud was discovered, and he did not complete his scheme.¹

        Double Fraud

There are two types of fraud. The action of fraud that is brought forth by the state, namely through prosecution, is a crime. To successfully pursue a criminal prosecution, the state must prove these elements: (1) misrepresentation of a material fact, (2) the fraudster had knowledge of the falsehood, (3) he or she intended to defraud, (4) the victim had a justifiable reliance, and (5) there was an actual injury or damage caused by the fraud. To fail to prove all elements will lead to failure.

Then there is the civil version, namely a reason to sue someone.

Civil fraud also has elements: (1) misrepresentation, (2) intent, (3) reliance, and (4) damage. Like the elements of criminal fraud, all four must be proved to prevail in the lawsuit. An appraiser retained as an expert in a civil fraud case is only able to provide opinion evidence linked to misrepresentation and damages. Fraud is defined as: "An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. Any kind of artifice employed by one person to deceive another."²

        One Element Short

Misrepresentation is often stated as a cause of action (reason to sue) in a lawsuit in addition to fraud. It has the same elements to prove except for intent. Can misrepresentation exist if one tells the truth or does not state all facts in a transaction? Yes, and yes.

Imagine looking at a house for sale, and the seller points through a window to a paved driveway right next to the house and states, "Look at this great driveway with roses and a security gate!" Later the purchaser discovers the driveway belonged to a neighbor! "A fraud may be as effectually perpetrated by telling the truth as a falsehood; by calling things by their right names as by their wrong names."³ That is still misrepresentation.

The element of intent is what separates fraud and misrepresentation. In misrepresentation, there need not be intent. This is an easier cause of action to prove. From the appraisers' perspective, the elements of misrepresentation and damage are the same. A gemologist's knowledge of the item involved will be evidence of misrepresentation. But what about damage?

        Two Paths to Damage

In the legal arena, there are two basic types of dollar amounts used for damages. Punitive damages are levied by the court as punishment. Compensatory damages, however, are based on the facts in the litigation. Appraisers are involved in providing values to be used for compensatory for compensatory damages. Is this not just fair market value?

        Reach into your Pockets

If someone buys a diamond ring for $5,000, and the stone is found to be a cubic zirconia, making the ring worth $150, the customer is out $4,850. That is called out-of-pocket damages. The Pennsylvania Jury Instructions clearly states:

"Damages -- Fraud

If you find that [name of defendant] [fraudulently misrepresented a material fact] [fraudulently concealed a material fact] [fraudulently omitted a material fact] [negligently omitted a material fact], [name of plaintiff] is entitled to be fairly and adequately compensated

(1) in an amount measured by the difference between the value [he] [she] [they] gave or paid and the actual or real value of what [he] [she] [they] received in the [type of transaction]; and

(2) for any other monetary losses, including expenses incurred and lost profit, as a result of the [misrepresentation] [concealment] [omission]."⁴

This is the standard in several state jurisdictions. Yet, a second approach is also commonly encountered, called benefit-of-the-bargain.

        The Other Pocket

Again, if someone buys a diamond ring for $5,000 and the stone is found to be a cubic zirconia, making the ring worth $150, the customer is out $4,850. But if the ring would have been worth $7,000 if the ring had a diamond, then the difference would be $6,850! That is called benefit-of-the-bargain. A quote from Wisconsin's jury instructions concerning how benefit-of-the-bargain is achieved]

"2405 INTENTIONAL MISREPRESENTATION: MEASURE OF DAMAGES IN ACTIONS INVOLVING SALE [EXCHANGE] OF PROPERTY (BENEFIT OF THE BARGAIN)

A person, injured by intentional misrepresentation in the sale [exchange] of property, is entitled to be fairly and reasonably compensated for any damages the person sustained as a result of the intentional misrepresentation.

In answering question _____, you should determine the amount of money, if any, which represents [either:]

the difference between the fair market value of the property in its condition when purchased by __________ and the fair market value of the property if it had been as it was represented to be by ( __________ ) [or the reasonable cost of placing the property in the condition in which it was represented to be].

'Fair market value' of property is the price paid by a willing buyer and accepted by a willing seller, neither of whom is then under obligation or force to buy or sell."⁵

        Which One to Use?

Some states use both methods of compensation, depending on other conditions. Some states use one or the other exclusively. Rather than research the requirements for the state having jurisdiction in a fraud or misrepresentation case and trying to decipher the legal parlance detailing the other conditions, simply render an appraisal with both out-of-pocket and benefit-of-the-bargain approaches.

State the value of the property as is. Then state what it would be worth if it were as represented.

Written by Bill Hoefer

<sup>1. https://accountinginsights.org.    Back to Text ↑ ↑ ↑
2. Black's Law Dictionary, Fifth Edition, page 594.    Back to Text ↑ ↑ ↑
3. 28 Ga. 507, 1859 WL 2599.    Back to Text ↑ ↑ ↑
4. Pennsylvania Suggested Standard Civil Jury Instructions §7.275.    Back to Text ↑ ↑ ↑
5. Wisconsin Civil Jury Instructions - 2405.    Back to Text ↑ ↑ ↑
6. Published in Gem Guide, September-October 2025, Volume 44, Issue 5, pages 19-20.
7. Article illustration by Bill Hoefer.
8. Other illustrations - IStock.com.</sup>