Understanding Jewellery Appraisals and Insurance
If you’ve just paid to have your diamond ring appraised, no doubt there is a value on the certificate. But what does this value really mean? And why do some appraisal values differ so much from what was actually paid for the item?
Price, Cost and Value
The general public has long had a misunderstanding about price, cost and value. In everyday language, the terms are used interchangeably in most circumstances. One assumes an item’s value is what was paid, and in turn what was paid was the cost. But in reality these are three quite different concepts.
Prior to the conclusion of a sale, price is more or less negotiable. Price tags merely represent the asking price. This price only becomes the cost or selling price when an item is actually sold after a customer pays and accepts the article in exchange. So if a discount given, then one can see that the cost will be less than the asking price. Still, these are everyday terms with a subtle distinction, but value is different. Its definition is very specific: perceived “worth” to a defined purchaser from a defined vendor in particular circumstances at a specified time with both parties having reasonable knowledge.
The Garage Sale Monet
Value is not chiefly related to either price or cost. Could it ever be that the value of a Monet was $100? The answer is no. But its cost could be and so could its price because cost and price can both be set without the requirement of reasonable knowledge. Suppose that an individual held a garage sale and among their wares was an original painting by Monet; but they did not know it because they had originally purchased the item for $100 for its antique frame from someone else who did not recognize the Monet. The cost of the item was $100, and it may even have a resale price at the garage sale of $50 but regardless of the backstory, reasonable knowledge is the key with value. And in this way, price and cost do not change value. The value of a Monet is millions of dollars regardless of whether or not someone paid $100 for it. This is why the value on a jewellery appraisal sometimes has little relationship to what was paid. If you got a very great bargain, then the value will be more than your cost; and if you were unfortunate and did not do as well, then the value will be less than your cost. Only when you have made a fair deal and were sold an item with reasonable knowledge will price, cost and value be closely related.
There is no single value for a diamond. What your diamond is worth depends on the circumstances – according to the definition: who the defined purchaser is and who the defined vendor is going to be when the exchange takes place. Your diamond will be one value for insurance, another value for collateral for a loan, and still yet another value if it were probated as part of an estate. Why? Consider these common transactions. A wholesaler sells a diamond to a dealer, the dealer then sells it to a retailer, who then resells it to a final customer. What would be the value of the stone? It is not one single value; there are three values, one set at each of three transactions.
Am I Covered?
The only value you should ever use for insurance coverage on a jewellery item is Insurance Replacement Value as this is the only value which specifies the correct purchaser and vendor to ensure that you: (a) pay only what is necessary in premiums and; (b) have enough coverage to get an item identical to that lost. The value on your appraisal sets the basis for calculating insurance premiums. Therefore, if the appraisal is purposely too high, it will leave you paying too much for coverage. There is no advantage to this, particularly if the insurance company’s liability in the case of loss is limited to the lesser of the cost of replacement or the stated value for insurance. If the replacement value is $10,000 that means that the appropriate jeweller would charge $10,000 for that exact item. It does not matter if you overpaid at $14,000 or if you got a great deal and bought it for $5,000. When a ring worth $10,000 is lost, you will get that $10,000 back in return. The purpose of insurance is to make you whole again – to even you out in the event of a loss and Insurance Replacement Value is the only value appropriate for insurance coverage.
DeeDee Cunningham FCGmA, FGA, DGA