A client files a claim after they lose a ring they have insured under a HO-61 (01-00) endorsement.

When the ring was originally insured, the agent sent the carrier an appraisal stating that the replacement value of the ring was $11,900. They then insured it for that amount. Several years later, the same jeweler completed a new appraisal  that valued the ring at $12,800. 

Now, however, the carrier's adjustor is only willing to either settle for $7,019, or have the ring rebuilt by a jeweler selected by the carrier. The insured is not happy about the settlement offer—she’s been paying an insurance premium based on a value of $11,900, and she does not trust an unknown jeweler to rebuild the ring for $7,019 when her own jeweler values it at $12,800. 

Q: How can the carrier justify charging a premium based on a value of $11,900 and then make such a low-ball settlement offer?

Response 1: Appraisals are more art than science. If you take the same piece of jewelry to five different jewelers, you will get five different values. Furthermore, appraisals are generally retail values.

Note the form’s wording: “…to be replaced with one substantially identical…" This means exactly that—the cost to replace the same color, cut, clarity, carat and karat as the lost item.

The premium is based on the maximum amount that will be paid, but the contract tells you it might be less. To live up to the policy language, the carrier must give back substantially the same ring that was lost. The insured is indemnified.

Response 2: You have repair or replacement or actual cash value coverage, not agreed amount coverage. The repair or replacement cost option is the default option on a scheduled personal property homeowners endorsement. It gives the carrier the option to replace an item at an amount lower than the value listed on the policy. This would happen if this lower amount would return the item to its original condition or replace the item with one of like kind or quality.

Although the repair or replacement option puts a customer in the same position as before a loss, the agreed value option provides a more satisfying claims experience for the policyholder because the settlement tends to match the expectations of even the most meticulous clients. For this reason, I typically recommend choosing the agreed value loss settlement option if it’s available.

Response 3: All insurance companies use wholesale jewelers and jewelry manufacturers, as the carrier is obviously doing here. In the settlement of losses, insurers basically use the difference between the appraised retail value and the wholesale cost of jewelry to their advantage. This is one of the reasons most insurance companies require photos of scheduled jewelry—to assist the wholesale jewelers in creating a new item if the insured, scheduled item is lost.

If I were in your shoes, I would advise the client to accept the carrier's replacement ring. I would further advise the client that once they receive the replacement, they should take it to another reputable jeweler and request a new appraisal. The client would then know whether the replacement ring is of the same or similar quality as the original.

Response 4: Under the terms of the endorsement, the insurance company has the option to replace the ring. That's all the insured is entitled to—unless the ring is so unique it cannot be replaced.

Response 5: You have learned a valuable lesson. The HO-61 values jewelry at the lesser of actual cash value, cost to repair or replace, or the amount of insurance. ISO has an HO-62 which values property on an agreed amount basis.

Response 6: The premium is based on the fact that jewelry is often replaced or repaired for substantially less than the insured value. If the insured isn’t happy with the work, arbitration is a possibility. But the bottom line is that the insurer will control what happens.

Response 7: This is not an agreed value form. Just because a ring is scheduled for $11,900 does not mean the customer is entitled to that amount. The only debate may be over whether the replacement ring is substantially identical.

Response 8: This is a very common misunderstanding about the HO-61. It is not a valued policy. Therefore, the carrier has the right to repair, replace or pay the limit—whichever is lowest.

In years gone by, carriers did not always exercise this right, but today, it’s a very common practice. There’s an enormous markup on jewelry, and you can't blame the carrier for being a good steward of company money. What you can do is accept the repairs and then reappraise the ring. If it doesn’t appraise at the original value, then you might have an argument.

The solution is an agreed value form. It’s more expensive, but you get what you pay for. Many carriers don’t offer this endorsement, so you may have to change carriers to satisfy your customer.

This question was originally submitted by an agent through the VU’s Ask an Expert Service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.