Determining Replacement Costs in Insurance Appraisals

Your job is to provide an estimate for replacement with a comparable item — not an exact duplicate.

A customer brings in a new cocktail ring and asks for an insurance appraisal. Should you base your estimate on the amount it would cost you to make another one like it? Ask yourself the following questions before you decide:

  • Is your store’s reproduction cost typical of such costs in the market? The Uniform Standards of Professional Appraisal Practice (USPAP) makes a distinction between the value of an item existing in the market (value estimate) and the cost to reproduce it (cost estimate). USPAP makes clear that any appraisal, whether value estimate or cost estimate, must be based on the typical range of prices in the market. Many erroneously believe that a cost estimate is what it would cost any merchant to produce the item.

  • Is the ring a commercial-quality, mass-produced item? If you provide an estimate to produce a single, custom-made ring to replace a mass-produced piece, your estimate will be too high. It’s less costly to buy another ring than to custom-make a replacement. Even if you don’t figure on starting from scratch and providing a “handmade” replacement, your estimate still will be wrong. The mass producer not only had lower labor costs but also purchased the components at a cost far less than you’ll be able to.

Remember, your job is to provide an estimate for replacement with a “comparable” item. Comparable means “equivalent” or “similar.” It doesn’t mean “exact duplicate.” The quest for exactitude can produce an inaccurate estimate.

For example, if a commercial-quality, mass-produced 3-ct. t.w. yellow gold bracelet has 60 stones hovering around 2.5 mm in diameter that are commercial white and first to second piqués, your goal is to provide the cost of buying another readily available, similar, commercial-quality piece. It is often unjustified and a waste of the client’s time and money to measure the diameter and depth of every stone and attempt the impossible task of color-grading each one.

  • Is the ring a high-quality product of a firm that uses high-tech fabrication techniques not available to you? If so, your estimate could be too low. You might unwittingly ignore higher “value-in-place” for provenance-related elements extrinsic to the piece. Similarly, using reproduction cost for appraisals of estate, period, and designer pieces also results in low estimates.

  • Are there copyright or patent issues? When using the reproduction cost approach, take care to avoid the liability that could come from recommending violation of intellectual property rights. Many appreciable items of personal jewelry—even of commercial quality—have such protection, even if it isn’t noted on the piece itself. Designs often are copyrighted or protected by a design patent, and the procedure for fabricating the item often is patented as well. It’s hardly the role of the appraiser to recommend production of a knockoff, which could result in civil or criminal penalties.

Additional liability can come from ignoring the added value of provenance. If you appraise a designer piece by reproduction cost, your estimate will not take into account the designer’s value in the marketplace. The result could be an undervaluation that kills a legitimate sale and disparages the designer’s work.

Elly Rosen is a freelance appraisal consultant in Brooklyn, N.Y.