Bogus appraisals may be more common
than you think.

One necklace selling for $300,000 comes with an appraisal
valuing it at $575,950. That appraisal is meant for the insurer.

Here’s how it plays out:

Each piece of jewelry is displayed along with its appraisal, which shows a valuation well above the selling price. The customer is led to believe she’s getting a bargain, because the appraisal attests to the jewelry’s “real” value. And the seller seems to be doing the customer the additional favor of supplying an insurance appraisal beyond the jewelry’s price.

The underwriter then insures the piece at its appraised valuation. In the event of a claim, the insurer finds the cost to replace is far below the jewelry’s inflated valuation, and the policyholder feels cheated by the insurer. Or, the insurer pays the total amount on a valued contract and the policyholder comes out way ahead!

How commonplace are such inflated appraisals? The example above showed up on the website of one of the big box retailers. Wal-Mart — already the largest jewelry retailer in the country — has recently begun selling high-end jewelry. Other big-box retailers such as Costco are also big jewelry sellers. Even expensive jewelry is now mass-marketed, and the appraisal is a major marketing tool.

Such large retailers hire a lab to supply their appraisals. One New York City lab alone provides an estimated 200,000-300,000 bogus appraisals yearly! Often the valuations come it at twice the selling price. (Usually, the selling price is a fair retail price; it’s just that the the valuation is grossly inflated.)

Costco’s Web site and its in-store jewelry cases show pieces of jewelry accompanied by a GIA diamond certificate and an appraisal valuing the jewelry at well over twice its selling price. GIA (Gemological Institute of America) is a world-respected grading lab that describes/grades gems but does not assign value. Coupling an inflated appraisal with a GIA report lends an authority to the appraisal that is wholly unmerited.

Potential for Fraud

You can be sure that customers are not oblivious to the potential value of an inflated appraisal. Indeed, that’s one of its draws. Not only is the buyer getting a “great bargain” but, whatever happens, he “can’t lose.” One insurance specialist called that $300,000 Wal-Mart necklace with the $575,000 appraisal, “a claim in the making.”

Studies of insurers’ claims consistently show a spike of claim activity at tax time. There’s no explanation for increased jewelry loss at this time of year except: money is needed. It’s also been shown time and again that when one makes a bad investment, the easiest way to recoup the loss is from the insurance company, through a convenient claim.

The JISO Solution

It may be time for insurers to consider doing away with valued contracts on jewelry!

Instead of paying the appraised amount on a valued contract, the policy should state that the insurer will repair or replace with like kind and quality, or will pay in money the lesser of

  1. actual cash value (ACV),
  2. cash equivalent of the company’s cost to repair or replace, or
  3. an amount equal to the insured’s interest.

Under a valued contract, the insurer is bound by inflated valuations and policyholders are tempted to profit from false claims. Under an ACV (or replacement cost) contract, there is less temptation for fraud and the carrier does what insurance was intended to do: make the insured whole.

The industry will not go broke over paying inflated jewelry appraisals, but if policyholders see how easy fraud is, they will be tempted to file other bogus claims. The industry needs to actively use insurance industry appraisal standards and sponsor training programs to educate agents, underwriters and adjusters in spotting clues that suggest inflated valuations and false claims. The best solution is prevention.