The purpose of this paper is to provide you with basic information relating to jewelry, fur, and fine arts claims. These claims are, at times, very difficult to evaluate. Many times, these claims involve not only the real value of the items taken, but also issues involving underwriting, policy language, security issues, and potential fraud. As a result, many challenges are presented to the professional insurance adjuster when tackling jewelry, fur, or fine art claims. The purpose of this paper is to highlight several of these issues for discussion.
Jewelry/Fur/Fine Art claims present special challenges to the underwriter. Many times, the insured items are unique, and the markets that buy and sell these items are relatively small and highly dependent upon intangible factors. Most of the time, underwriters depend upon appraisals made by professionals who are supposed to provide an objective evaluation of the item proposed to be insured. Unfortunately, the appraisals are sometimes used for purposes other than providing the real value of the item proposed to be insured. For example, many times appraisals are given as sales tools. Jewelry stores may provide an appraisal that greatly exceeds the purchase price in order to exaggerate the buyer’s perception that he/she is getting a “good deal.” Unfortunately, many times underwriters rely upon “sales pitch appraisals.” As a result, items are scheduled at a value much greater than their actual worth.
Appraisals can also be forged or otherwise altered. In addition, there are some cases involving collusion between the Insured and Appraiser in order to encourage an exaggerated value being placed on the item. Many times, insurance companies will actually market their jewelry/fur/fine art policies through sellers of those goods. Sometimes, there is actually a financial benefit to the seller when he/she exaggerates an appraisal.
Challenges are also presented to the underwriter because of the nature and fluctuation of market value of jewelry, furs, and fine arts. This is especially true of jewelry and fine arts. Since those items are “artistic,” they typically have a value that is much greater than the raw materials from which they are made. That value is subject to fluctuations in markets and the economy in general. For example, the value of a gold ring or watch may increase just because of economic issues involving inflation that may result in the raw price of gold increasing. Raw material costs also affect the evaluation of furs. In regard to fine art, economic conditions can certainly affect the market price of those items. Many times, fine arts are purchased for investments wherein investors believe that they will increase in value because of extrinsic market factors such as inflation, increase in money supply, etc.
Therefore, there are special challenges to the underwriter in determining the amount of insurance coverage to be placed on items of jewelry, fur, and fine art.
These underwriting challenges are relevant to the adjuster because they affect the legitimacy of any potential claim. There are numerous incidents of fraud in the underwriting process. For example:
- False statements made on policy applications;
- Fabricated or exaggerated appraisals;
- Insurance being written on non-existent items;
- Collusion between the Insured and the appraiser; and
- Multiple policies covering the same items.
Therefore, the first challenge to the adjustment of these claims is the determination as to whether there was fraud in the procurement of the policy.
INSURANCE COVERAGE ISSUES
Jewelry/Fur/Fine Arts policies typically come in two forms. The first type is a “floater” attached to a homeowner’s policy. The typical homeowner’s policy allows for the recovery for the loss of jewelry/fur/fine arts. However, the coverage for those items is typically limited to an aggregate of $2,500.00. By endorsement, policyholders can increase that aggregate amount. However, in order to insure jewelry of any significant value under a homeowner’s policy, the Insured must request a “floater.”
A jewelry/fur/fine arts floater is nothing more than a schedule of individual items to be insured. These items have separate policy amounts and policy premiums. Many times, “floater” to homeowner’s policies insure specific items on a “stated value” basis. Stated value means that, if there is a loss of the scheduled item, the insurance company is obligated to pay the full amount of coverage for that item, even if its replacement cost is much less than the stated value.
Stated value policies are, in many cases, an invitation to fraud because a policyholder can literally replace an item for cash in an amount equal to or greater than its actual worth. This invites fraud in the application process as well as the claims.
In addition to “floaters” written in conjunction with homeowner’s policies, there are companies who write personal jewelry/fur/fine arts policies outside of the homeowner’s context. Again, these items are usually scheduled with a set amount of coverage for each item and a set premium for each item. Typically, companies who write separate personal policies focus the policies on one area, such as jewelry, fine arts, or furs. It is rare to see an insurance company write a separate personal policy that covers more than one of these categories.
Just as in the floater, most individual policies are stated value. Therefore, the same inherent risk for underwriting fraud and claim fraud is inherent in these policies. However, some companies have been able to place a clause in their policies which gives the insurance company the option of either paying the stated amount in cash or replacing the item with like kind and quality. With this “replacement” clause, there is less of a temptation to try and convert an item into cash through a personal policy.
JEWELRY BLOCK POLICIES
Jewelry block policies are intended to insure retail or wholesale jewelry operations. These policies are extremely specialized and are accompanied with very detailed applications. Through the application process, each policy is customized for each operation.
For example, the jewelry block application will typically contain a number of security questions, such as surveillance cameras, alarm systems, etc. These security questions will also reflect procedures that the jewelry store undertakes when opening and closing its store and displaying merchandise. The underwriter considers all of the security measures in determining the type of coverage to write and the premium to be charged.
Once the policy is issued, the security measures set forth in the application become a “warranty” that the jewelry operation is required to comply with. Failure to comply will void coverage, even if the particular security measure that was not complied with is not the direct cause of the loss. For example, if a jewelry store represents that it has active video surveillance with a primary and backup recorder, and the store is robbed at gun point, coverage can be voided if it is discovered that the store did not have the video surveillance. Jewelry block applications also typically contain questions in the application concerning inventory. These questions are extremely important in the event the store sustains a burglary or robbery.
ADJUSTING LARGE JEWELRY BLOCK CLAIMS
When a jewelry store sustains a robbery, the extent of loss should be able to be calculated through the books and records of the store. This process follows the following formula:
1. Determine the physical inventory at a particular date (which is usually stated on the policy application);
2. Add the cost of items purchased between the date of inventory and the date of loss;
3. Subtract the items sold between the date of inventory and the date of loss;
4. Arrive at a pre-loss inventory;
5. Conduct a post-loss physical inventory; and
6. Compare the pre-loss inventory to the post-loss inventory.
In order for this formula to work:
- Policyholder must accurately state the physical inventory in the policy application;
- Policyholder must keep accurate books and records concerning sales and purchases; and
- The adjusting company must immediately take a post-loss physical inventory after receiving the loss report.
If all of these measures are taken, the adjuster should be able to accurately determine the cost of the merchandise taken.
Some jewelry stores keep a “running” inventory where they can theoretically determine the amount of inventory and the items in inventory at any particular time. However, the jewelry operation should also conduct a physical inventory to confirm and adjust the running inventory.
The formula breaks down when inaccurate information is given as to the initial inventory or the jeweler does not keep accurate records. Many times, jewelry stores under-report their inventory in an effort to save premium dollars. There have been cases where post-loss inventories have revealed a greater inventory than the pre-loss inventory.
Most policy applications contain warranties that the information provided by the jewelry operation in connection with its beginning inventory is accurate. Typically, the applications also make representations that books and records are kept accurately. If there warranties are not complied with, coverage can be voided, even if it is obvious that a loss took place.
Many times, there are discrepancies between inventories reflected on the policy application and the books and records (on the one hand) and income tax returns and schedules (on the other). Also, there may be discrepancies between the books and records as to items sold when compared to sales tax records.
Adjusting any claim for insurance benefits is seldom easy. When the claim includes jewelry, fine art or furs, special and unique challenges are usually presented. These challenges can be significantly minimized through a proper understanding of the issues that are common to these types of claims. Some of these issues have been identified above. While this paper does not and is not intended to identify all of the issues one may encounter when adjusting this type of claim or to provide a complete analysis of the issues commonly encountered, it is meant to provide helpful information analysis in spotting issues that are often encountered. Hopefully, this information will help the insurance professional separate the rocks from the stones.