Basic to all insurance - and so also to valuations - is a foundation based on achieving indemnity. It is a principle that will be the map to your quest of rendering proper appraisals rendered for obtaining insurance.¹

Barron's Dictionary of Insurance Terms defines indemnity as, "Compensation for loss. In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss. But the insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after loss."² In essence, the insured is not to make a profit or sustain a loss but to break even in the event of casualty loss.

        Lloyds of London

Let us drift back in time and first relish the history of insurance. In a London coffee house called Edward Lloyd's of London, starting in 1688, investors would gather and underwrite ships and their cargos. Three years later, these investors became organized and called themselves Lloyds of London.³ Ships were graded, so to speak, as to their seaworthiness. A ship that had a grade of "A" was the best. The cargo was also graded, with the number "1" being the best. To this day we use the term "A1" to signify the best.

We now know that the first insurance was marine insurance. Today, you will see marine insurance policies used for jewelry. That may seem weird, but it is historically logical. The first insurance policies for cargo were called marine insurance. These are also called "floaters" since the property floated via a ship. Then came the American version, property transported by trains. Thus, the term inland marine policy and the jargon "riders" came into use. All four terms are synonymous. Since jewelry can be moved, it is logical that it would involve a marine policy.

        Ben Franklin

A vast majority of policies for insuring jewelry are connected to Fire Insurance (also called Homeowner's Insurance). How did this come about? Ben Franklin, an American historical figure, in 1751 met with others and formed a fire insurance company.⁴ Prior to that event he formed one of the first volunteer firefighting companies in America in 1736 - a private fire department.⁵ Thus, fire insurance and homeowner's policies are one and the same.

        A Matter of Policy

Homeowner's policies are for real property not personal property, right? Well, eventually some homeowner's policies evolved to include contents. Now you know that there are two types of property insurance, namely real (not transportable) and personal (moveable). Same division applies to appraisers. We have real property appraisers and personal property appraisers. If you can move the property, it is not real property. The two most often used policies for personal property insurance are (1) actual cash value and (2) agreed value⁶ policies. The later merely pays the amount insured regardless of changes in value during the period the property was insured. The most common policy is the actual cash value policy. It basically means that the insurer will determine the value based on the date of loss and use that amount to settle the claim.

Knowing the policy type should not influence an appraiser's value conclusion in an appraisal used for obtaining insurance.⁷ Both policies must achieve indemnity, thus an agreed policy is also a policy of indemnity. The burden is on the appraiser to determine a value conclusion that will achieve indemnity regardless of the policy type. Always render a value conclusion that both the insurer and insured can rely on to achieve indemnity.

This one principle, the principle of indemnity, is not just an insurance directive but also applies to appraisers. We as appraisers must apply the same principle to our appraisals to avoid professional liability. When asked about indemnity, David Federman, an award-winning writer, stated, "In 1993, I co-wrote a book with the best and brightest minds in the field about jewelry insurance appraising, and like every other book on the topic, it made no mention whatsoever of liability. In hindsight, this is scandalous idiocy. Insurance appraising is about three things: liability, liability, and liability. Ignore this crucial fact, and factor, at your own peril."⁸

        First Indemnnity Rule

Do not inflate your values. Insurers will use your value conclusion as a basis to set their premiums as well as ascertain risk. Aside from the fact that your appraisal client will be paying inflated premiums for no reason, and if a casualty loss occurs, the insurer (assuming they have an actual cash value policy) will recalculate the value at the time of loss. Why will the insurer do so? To achieve indemnity.

Is a value conclusion enough? When the insured replaces the item, they may have to pay sales tax. Is sales tax part of indemnity? Appraisers do not customarily add sales tax to their value conclusion and instead make a statement that it is the insured's obligation to do so. Sales tax is not unlike a second deductible. Not including sales tax may suffice but it is borderline ethically. I would recommend adding the sales tax. The insurer will take the bottom number (value plus sales tax) as the basis for insurance. The odds of the insured understanding the problem of adding sales tax to your value conclusion is close to nil. As an appraiser, this simple gesture will save your client money and achieve indemnity.

        Second Indemnity Rule

You will encounter jewelry with valid copyrights, as evidenced by a stamp in the metal. Of course, knockoff pieces with a fake copyright stamp do not apply. The rule is, only the copyright holder or their authorized agents can sell the item. To achieve indemnity, the replacement must embrace the copyright. You cannot research market activity for a comparable item not holding the identical copyright.

Brands, often seen as trademarks are important. As stated in the American Gem Society (AGS) magazine Spectra, "A trademark is a form of provenance. If you're not going to take some time to research and note it in the appraisal, you might potentially miss a rare or unique designer. With literally tens of thousands of trademarks, there's no way to keep track of them all or know when you might have a designer piece that would command a premium."⁹ In other words, to not research a trademark might undermine indemnity.

        Third Indemnity Rule

In today's jewelry market, center diamonds are commonly accompanied by a laboratory grading report, referred to in trade parlance as a "certs." Certs from industry recognized diamond grading laboratories, like a trademark, are a form of provenance. (The proper term when dealing with the public is of course, "report" or "lab report.") To fail to mention and detail a laboratory grading report in the appraisal undermines the principle of indemnity. If a casualty loss occurs, the replacement must include replacement of a diamond with the same type of report. That is what indemnity is.

        Fourth Indemnity Rule

Elemental to the process of determining a value is to first determine an item's value elements. A diamond, for example, has the proverbial four Cs which are the value elements for a diamond. Well, almost, a diamond, as mentioned above, a fifth C called "cert." An item of jewelry has value elements, such as the metal quality, trademarks, copyrights and so forth. An appraiser must state all value elements in the appraisal. Why?

In the event of a casualty loss, under an actual cash value policy, the insurer will determine the value on the day of loss.¹⁰ This can only be accomplished if the adjuster has all the value elements. The description of the item is very important to detail each value element.¹¹

        Fifth Indemnity Rule

There have been several theories presented by courses and gurus about how to handle old cut diamonds. Regardless of what you may call the round brilliant cut from the early twentieth century,¹² you must seek the market and prices realized for the old cuts and not project it as recut or equal to a contemporary cut. After all, it is what it is. "The GemGuide has a price matrix for old European cut diamonds, just for the purpose of comparing apples to apples," points out Stuart Robertson, Gemstone Editor for Gem Market News. If you merely use a modern cut diamond equivalent, you are undermining the principle of indemnity. And calculating the recut weight of an old cut diamond makes it something it is not and, again, undermines the principle of indemnity.

        In a Nutshell

Remember, a skimpy description equals a skimpy check! Remember, a value conclusion equal to achieving indemnity is always defensible!

Written by Bill Hoefer