Fine Jewelry Appreciates in Value

For high-net-worth individuals, precious jewelry is primarily an emotional investment. Lately, fine gemstones are being cherished for another reason — their skyrocketing value.

Rare diamonds in vivid blues, pinks, greens and especially red colors have rung up record prices in recent auctions. The eye-opening sales include a record $57.5 million for a 14.6-carat blue diamond at Christie's in May 2016, and $31.6 million for a pink 15.4-carat diamond at Sotheby's the same month. Even great grandma's precious diamond brooch, handed down through the generations, may be worth a lot more than it was just a few years ago.

While both raw and finished gemstones are more volatile investments than stocks, bonds and real estate, their rising value gives pause for consideration in another context — adequate insurance limits that keep pace with this appreciation.

I recently chatted about the rise in the value of high-end gemstones and jewelry with Stephanie Staley, regional director in the private client practice of insurance broker Arthur J. Gallagher & Co. One of the topics we discussed is the need for owners to obtain more current appraisals of their jewelry collections.

Staley offered an example of a Chubb-insured client that underlined this importance.

"One of our clients has a five-carat round, internally flawless diamond ring that was appraised and insured in August 2000 at a value of $300,000," she said. "However, Chubb provides an annual inflation factor to help offset the rising cost of precious metals and gemstones; as a result, the value of her ring increased to $448,000 by 2014."

Had the ring been lost or stolen that year, Staley's client would have received a check for that amount. Fortunately, no claim had been filed.

"We had a meeting with the client at our Dallas office in 2014," said Staley. "Chubb's jewelry expert, who just happened to be visiting us, looked at the ring and estimated it had a value of about $800,000, much to the client's delight. The ring was subsequently reappraised for just under $900,000, and is currently insured for about $935,000. It had gone up exponentially in value."

With pieces that have larger gem stones, a good rule of thumb is to have the items reappraised every three years.

All That Glitters Isn't Gold

No one is advising that readers invest hundreds of thousands of dollars in a colored diamond, since even top-quality gemstones are volatile investments at best. But the recent hike in jewelry prices does indicate that owners need to reassess the value of their collections, which may be worth a lot more than they think.

The four most important factors in determining the value of a diamond are its clarity, color, cut and carat weight (one carat is about 200 milligrams).

Another factor is provenance — who owned a gemstone in the past. For instance, jewelry from Elizabeth Taylor's estate was auctioned at Christie's in 2011 and sold for $115.9 million; many pieces sold well beyond their initial estimates. The bottom line: Two exact gems, only one of which has an interesting history, may have different values.

More than just diamonds are rising in worth. Record prices have also been fetched for both high-quality sapphires and rubies of rare colors, which have jumped approximately 20% and 52% in value, respectively, in the last two years. Again, the market is volatile and difficult to predict, so the prices may return to where they were two years ago. The important thing is to insure fine jewelry pieces at their current value.

Take Care When You're Promenading

Theft and loss are the primary risks confronting owners of top-tier gems. Unlike fine art, most stones will survive a fire relatively intact. Damaged gems also can be recut to preserve much of their value.

Theft is front of mind in the aftermath of the heist of a reported $9 million to $11 million in jewelry owned by Kim Kardashian. The reality TV celebrity was reportedly bound, gagged and robbed at gunpoint in a Paris apartment in early October. The stolen gems included a ring valued at $4 million. Kardashian apparently had flashed evidence of the ring on social media in the days before the robbery.

Many affluent individuals wear valuable jewelry at formal events, and they should take precautions not to broadcast the jewelry worn on these occasions. In addition, many celebrities borrow expensive pieces to wear at award ceremonies and other galas, often resulting in the lending jeweler providing a security guard or requiring that one be used during these events. Affluent individuals should consider using a security guard when transporting large values of jewelry to and from a bank safe or when bringing large values to a jeweler for repair or appraisal.

It is important to always put pieces away immediately after being worn and not leave them on a dresser or bathroom sink counter, whether at home or in a hotel room. "As soon as you take jewelry off, put it in the safe," Staley said. "If the piece is extremely valuable and you don't wear it on a regular basis, have it taken to the bank and stored in a safe deposit box."

This also serves to reduce the owner's insurance premium, as the jewelry will be insured at what is called an "in-vault rate." However, there are specific coverage restrictions that come with this reduced rate regarding when the jewelry can be removed from the safe deposit box.

"Typically, you're only allowed to remove the jewelry three times per policy term and for no more than a week at a time," said Staley. "The owner also has to include the date the piece was taken out of the vault and put back in."

Insurance Nuances

Typically homeowners policies have very minimal coverage for jewelry so it's best to insure jewelry items separately. For particularly valuable pieces, insurers may require a qualified appraisal that describes the item and estimates its value.

Blanket insurance coverage is another way to insure expensive gemstones. Typically, the policy provides an overall financial limit covering all the jewelry, with sub-limits of coverage for individual pieces. For example, a $1 million blanket jewelry policy provides up to that amount of coverage for a collection, but may limit coverage for any one item to $50,000 or $100,000, depending on the contract.

One reason why wealthy people buy blanket insurance protection is to avoid having to notify the insurer each time they buy a new piece of jewelry. The perceived downside is that owners must provide proof of ownership when filing a claim, which can be challenging if a piece of jewelry was inherited or not photographed and documented.

The solution is clear. "We have a client with a significant amount of blanket coverage who keeps impeccable records, emailing the receipts to us every time she buys something," said Staley. "We keep them on file, and then every six months or so when we review her policy, we make a determination if the current blanket limits of protection are still adequate. If not, we add more coverage."

Insurance agents can help their high-net-worth clients understand these and other insurance nuances. For instance, some policies have a personal conveyance clause, meaning that jewelry loaned to a friend to wear may not be covered if the piece is lost or stolen. "Some policies require that the item be in the owner's 'care, custody and control,'" Staley explained.

Some policies also have a "hotel-motel" coverage exclusion. In such cases, the policy requires that when the insured is lodging at a hotel or motel, the jewelry either has to be on the person's body, in the person's possession or in the facility's safe. "If it's left on the nightstand and is stolen while the policyholder is at dinner, there's a strong chance of no coverage," Staley said.

There's also the emotional impact of losing what may become a family heirloom. While diamonds may last forever, it's important to ensure you have the right, up-to-date insurance coverage.

— Read The Collectibles Market: More Than a Labor of Love, Potentially Very Lucrative on ThinkAdvisor.