Insurance Replacement Appraisals:’Used’ Isn’t ‘New’

A customer brings in a four-year-old Rolex watch and a platinum and gold wedding band for an insurance appraisal. The Rolex is in “like-new” condition, and the wedding band is in good but obviously used condition, with some nicks and a worn shank. Should you appraise the items for replacement with comparable new items? Isn’t that what the client needs for insurance purposes?

Not necessarily. If the client has a “cash value” policy, such an appraisal probably will result in higher premiums, but reimbursement in the event of a loss will be based on the condition of the actual items.

That’s because cash value policies usually call for the value of an item to be determined at the time of loss. If a loss occurs, the insurer is obligated to do one of the following, whichever costs less: replace what the client lost; pay the client the actual cash value of the loss; or pay the client what it would cost the insurer to replace the loss.

If the client wants to replace used items with similar new ones—“modern equivalents”—he usually can take out a “replacement” policy or floater. (Insurance professionals also use the terms “full value,” “valued,” or “agreed value” when referring to such policies or floaters.) But the decision belongs to the client, not the appraiser.

Why, then, do so many appraisers base their assessments on the notion of modern equivalents? First, appraisers may be jewelry retailers who assume that the types of items they sell are typical of replacements. Or, they might be unfamiliar with the market for old or used items and “convert” the piece to one they are familiar with. Finally, a “gemological appraiser” who has gemological training but limited market knowledge might believe the only option is “appraisal by formula.”

Goodwill vs. obligation. Insurers often replace an old item with a similar new one, even under cash value policies. But don’t confuse goodwill—or convenience—with contractual obligation. The insurer’s obligation extends only to the provisions of the policy.

Many believe that insurers take advantage of consumers by basing premiums on retail costs but paying off at near-wholesale costs. Some may be tempted to balance this supposed injustice by appraising a used item at the cost of a new replacement. Others may use the argument as justification for overvaluations. In either case, the result will be higher premiums with no guarantee of insurer goodwill in the event of a loss.

Procedures for handling the client’s options. If a client has a used or an old item to be appraised for insurance purposes, explain that insurance policies typically have options and suggest that he discuss his policy with an insurance adviser or agent. Let him know that you can provide different appraisals for the item: as is, for replacement by a modern equivalent, or both.

Explain that two appraisals will cost more but can be done if the client needs the information to make a decision. But if you’re familiar with only one market, acknowledge the limitation.

Keep in mind that today’s obsolete articles often become tomorrow’s antiques or collectibles. These include “functionally obsolete” items that have become desirable because their utility has changed. For example, an article that no longer serves its original purpose may have a new use as a decoration. You need to let your clients know when that line has been crossed.

Replacement with either new or used items is inappropriate for antiques, old or used art objects, and old or used designer pieces. To cover the “extrinsic value

elements” of such items, the category “replacement with a comparable item” is advisable.

Avoiding potential problems. To prevent possible abuse by insurance agents, insurance appraisals should include the following statements:

• “This report must be used in its entirety and is otherwise invalid.”

• “This report is valid only for the stated intended use—including labeling as to the cost of replacement with a (new/used/comparable) item. Any other use invalidates the opinions provided.”

• “Any infringements of stated contingent and limiting conditions are a violation of the appraiser’s proprietary rights and a violation of intellectual property protection laws.”

In addition, all descriptions of individual items should end with a clear statement of the “retail replacement cost estimate for new/used/comparable,” as decided by the client.

It’s also advisable to caution your clients about the potential for abuse. Let them know they are responsible for dealing with their insurance agents. You may want to include a clause in the contract for appraisal services that indicates client responsibility for preventing abusive or inappropriate use of the report.

Finally, appraisers should add a copyright notice to their reports.

Preliminary report. Some situations call for a preliminary report, a less costly option than a full appraisal. Such a report could include an initial opinion about the various replacement options, which might help the client and his agent decide which is appropriate for an eventual appraisal. The client might also use it as the basis for obtaining temporary insurance through a (usually) 30-day binder.

The preliminary report is brief—often one page—and is not a “considered opinion.” Note that it might require additional work, such as identification, authentication, or research.

Describing what exists. It’s important to describe a used item as it currently exists, even if the appraisal is for replacement with a similar new item. At the very least, the report should mention that the item’s description can be found in the worksheets of the client’s file. Label as “hypothetical” any description of a contemplated new item or modern equivalent, and pay special attention to any differences in quality and condition between the actual and the hypothetical.

An appraisal that fails to mention the actual piece being appraised is an easy vehicle for fraudulent use. Moreover, such a report would hinder recovery of the item if it’s lost or stolen.

Appraisal reports should include a paragraph discussing the state of the market, the replacement item’s position in the market (that is, its desirability), and its availability.

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