What we do first is talk to the customer and find out what they would like us to do. It’s their jewelry and their insurance policy after all, In talking to their agent they may find that their insurance company won’t insure a chipped diamond at all. That’s a good piece of information to have before spending money on an appraisal.
One method of figuring insurance replacement value is to figure what the retail cost to the customer would be to repair the diamond, usually about $300 per carat, and then value the diamond based on the projected weight of the repaired diamond. A round diamond with a noticeable chip confined to the girdle and that doesn’t affect the integrity of the stone, i.e. is not likely to crack or chip further, will usually end up losing only a few points, So in the case of a 3/4 ct. round with an eye visible but otherwise minor chip, I would probably figure the replacement price for a 0.70 carat and subtract another $300 or so.
Another method we have used is to note on the appraisal that the diamond has been damaged and that the value assigned is based on the diamond with no damage. This is appropriate for very minor but visible chips and nicks.
Whatever you decide, be sure to note the chip and note also whether you deducted for the damage or not. If you did reduce the value, it’s a good idea to describe how you valued it concerning the chip on the appraisal. It’s better to have too much information than not enough.
It’s important to remember that the sole purpose of the value on an insurance replacement appraisal is for the insurance company’s use. They use it for two purposes, the first is to set the upper limit of their liability and second, to set the premium paid by the customer. It has nothing to do with what they will pay out in the event of a loss beyond setting the maximum. Your customer will never see that amount in the event of a loss. They will either get a replacement piece or a check for what a replacement piece would cost the insurance company, usually straight up wholesale, regardless of what you assign as it’s retail replacement value.
So I would recommend talking with the customer and asking what they would like you to do. Increasing the value to what an undamaged diamond would be worth might make them feel good, but all it will really do is cost them extra money in premiums. They in turn, should ask their insurer for advice as to how they would approach the loss or damage of previously damaged insured property. That’s the only way they will know for sure that they are fully covered in the event of a loss without paying too much in premiums.
In any case and at the cost of being repetitious, you must make note of the chip on your appraisal, regardless of how you value it. It’s also wise to provide photographs that show the damage. If you don’t make note of the chip and the customer makes a claim, you could be found guilty of being complicit in insurance fraud and liable for any damages incurred.