Evaluating Damage Calims

A few years ago, a client chipped her diamond and needed a damage claim appraisal. I provided what appeared logical, namely an appraisal based on:

  • The stone’s value before damage.

  • The hypothetical stone’s value after recutting.

I judged the amount of the client’s loss to be the difference in value between the two and added the cost of cutting, resetting and polishing.

The insurer rejected the appraisal. It said it would not pay off on a hypothetical situation because the client was not going to recut the stone. My client just wanted the amount of money that equaled her loss.

Finally we agreed that the purest measure of loss was the difference between the original stone’s value and the value of the existing damaged stone. The insurance firm accepted my appraisal based on those numbers. In hindsight, I agreed this was the purest measure of loss, but it is not necessarily what would be called for in every insurance policy – which is a contract.

More recently I had another client with a damaged diamond – a marquise cut with the point chipped off. This time, before doing an appraisal, I told her to ask her insurance agent what her policy covered and what procedures the insurer followed. I didn’t want her to waste time and money on an appraisal if the insurer was simply going to replace the stone – which is exactly what its policy was.

The lesson in all of this? Don’t jump to make decisions on behalf of clients and third parties. The decisions are theirs. The appraiser’s role is to provide relevant appraisal or product-related advice and any information they need to handle their business.

A complex case history. Now let’s look at another claim involving an appraisal of damaged goods – one with a number of complicating factors.

A customer brings in a number of valuable items, all damaged. She wants to know her insurance options and how to follow them through. Included among the items are:

  • A 3-ct. diamond solitaire necklace in a 14k gold box setting. The diamond is chipped at the girdle. The client says she wants the stone repaired and the necklace modernized to today’s style, with a nicer chain and the diamond bezel-set in a platinum “bagel.”

  • A designer bracelet inlaid with large free-form pieces of onyx, with one piece cracked. The client wants an appraisal of the loss in value so she can file a claim with her insurer. She wants the appraisal to cover the cost of the modified necklace. She’s also considering using the same damage appraisal to file a federal casualty-loss claim for an income tax deduction.

At issue: should I write her an appraisal she can use for both the insurance and tax-relief claims? Should I base the amount of loss on (a) the amount of weight lost in recutting and setting the diamond in the new necklace and (b) the cost for a lapidary to cut a matching piece of onyx and reset it in the bracelet?

Many jeweler-appraisers and gemological-appraisers would follow these two steps. Such a course might appear quick, clean and logical. But it could be totally wrong and unprofessional.

Correct appraisal procedures suggest that my initial role should be to evaluate the nature of the loss. Then, before I provide relevant value-related information, my client and any other professionals she consults must decide how to proceed. When customers ask appraisers for insurance, tax or legal advice, we should make it clear that we are neither lawyers nor insurance or tax advisors. We should refer them to their own experts.

Consider some of the difficult variables in this case.

Repair or replace? Insurance policies usually reserve to the insurer the right to repair or replace a damaged item. If the parties need an appraisal to determine the amount of loss, a diamond damage appraisal could have two different types of value.

  • Value of the item as it existed before the loss, minus the value of the existing damaged item. This represents the purest form of the dollar amount of the loss.

  • Value based on repair, e.g. recutting. This approach offers at least two options. First would be cost and amount of loss if the item is merely “touched up” – polishing off a nick, for example – to restore it to its original quality. Second would be cost and amount of loss to repair the item to original quality and condition through recutting – with a possible decrease in value due to weight loss or loss in color or clarity.

How to proceed? The first step is to be aware of the issue of “betterment.” The customer in our scenario wants an appraisal on her diamond solitaire necklace that would result in putting her in a better position than she was in before the damage. Such betterment usually is prohibited by insurance policies and law. If we arrange to repair her diamond’s chipped girdle and make up the new necklace she wants, we need to limit an appraisal of the loss to that which originally existed or adjust the value of the loss to discount any improvements to the item and consequent increase in its value.

How about the broken onyx? If the only cost here is to replace the broken piece, the issue may just be a fractional appraisal. But this is a designer bracelet, so we must remember that when appraising a component part of a property we must not overlook the potential value-in-place. The value of a part usually is different when considered as part of the whole rather than on its own; the loss of a part can result in loss to the whole.

This is not just a loose piece of free-form onyx, and it should not be appraised as though it were. Doing so might cause the client to suffer a loss, while the insurer might not meet its obligation to make the client whole.

The answer here may be that the designer must do the repair to retain the piece’s integrity. But the appraiser still has to consider the loss of value for the whole piece because it’s now repaired and not an original. Whether such residual loss in value is covered depends on the insurance policy and often on the insurer’s goodwill.

Tax consequences. Clients always should consider the potential tax consequences of an insurance settlement. If an insurer declares an item a total loss and pays the insured the current worth of the item, any profit over the original cost may be subject to capital gains tax – unless the client uses the money to replace the lost item. A “virtual profit” that might arise if a current appraisal of a lost item shows a higher value than the original cost also might be subject to the capital gains tax.

The issue of filing a casualty loss claim for an income tax deduction is much more complex. It should not be dealt with using an appraisal written for an insurance damage claim.

Federal tax appraisals should be written separately and identified as such. A federal theft or casualty loss claim requires the taxpayer to provide information on any related insurance coverage and must be performed with specific knowledge of the federal regulations for such appraisals.

Other consumer appraisals should be identified as invalid for any tax claims.

(Author’s note: Personal property appraising is still a young profession. As with any profession, there will be differences of opinion on the application of principles to particular problems. Caution: Insurance regulations vary with jurisdiction, and any decisions related to this subject should be based on local requirements.)

Elly Rosen is a freelance appraisal principles consultant in Brooklyn, N.Y. His Appraisers’ Information NetWork OnLine (AIN) offers: subscriptions for appraisal consultations; The Appraisal Reporter (an appraisal principles journal) with gemological appraisal supplement; a Glossary of Appraisal Terminology; and a related Laws DataBase.


Few insureds (or appraisers) seem aware that an insurance policy often calls for “binding arbitration” in the form of an “appraisal clause” to settle disputes over damage losses quickly and cheaply. The insured gets an appraiser, the insurer gets one, together they determine the “cash value” and loss – using an umpire for disagreements.

What often is referred to as the “(New York) Standard Form Fire Insurance Policy” usually includes a clause similar to the one below. This particular clause is from the Insurance Code of Virginia, but similar ones are found in the codes of other U.S. states and of Canadian provinces.

The items actually appear as a single paragraph. They’ve been broken up and bulleted, with emphasis added, for the convenience of readers.


  • In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then,

    • on the written demand of either, each shall select a competent and disinterested appraiser

    • and notify the other of the appraiser selected within 20 days of such demand.

  • The appraisers shall

    • first select a competent and disinterested umpire;

    • and failing for 15 days to agree upon a such umpire, then, on request of the insured or this company, such umpire shall be selected by a judge of a court of record in the state in which the property covered is located.

  • The appraisers shall then appraise the loss, stating separately

    • actual cash value

    • and loss to each item;

    • and, failing to agree, shall submit their differences, only, to the umpire.

  • An award in writing, so itemized, of any two [appraisers] when filed with this company shall determine the amount of actual cash value and loss.

  • Each appraiser shall be paid

    • by the party selecting him

    • and the expenses of appraisal and umpire shall be paid by the parties equally;

    • (The Virginia Code also includes the following text, which is not included in the code of some other states.)

  • provided, however, if the written demand is made by this company, then the insured shall be reimbursed by this company for the reasonable cost of the insured’s appraiser and the insured’s portion of the cost of the umpire.