Adjusting a loss of an item that is normally measured in millimeters and milligrams can give property adjusters a bit of a headache. Add to this replacement costs that routinely climb into the tens of thousands of dollars and a valuation "system" that is almost completely based on the whims of a few retailers rather than on actual scheduled costs, and it's time to reach for the migraine pills. Welcome to the world of jewelry claim investigation.

Many insureds are unaware that since the value of jewelry can be extremely high, almost all homeowners' policies place strict limits on jewelry coverage. The highest-priced items are almost always placed on rider all-risk policies that specifically enumerate each individual piece of jewelry.

"Most of the time, they're just not insured," said Amy Thomas, a claims analyst for Allstate's Orlando, Fla.-area office. "Most people with homeowners' policies think they're covered but they're not. Their home gets broken into, and $5,000 worth of jewelry gets stolen, but they don't have a rider -- 'sorry, but you're not insured.'

There is hope for jewelry claim adjusters, however. While replacement costs are normally tied to wholesale costs -- which are determined on a global scale, much like the price of gold -- there are highly competitive markets in different areas of the country for replacement jewelry, which drive the costs down.

Here's how it works: In an average retail setting, a jeweler will purchase a piece of jewelry, such as a diamond, from an international merchant for a wholesale price of, say, $1,000. To make a sizable profit on the sale, the jeweler highly inflates the appraisal value to $3,000 and lists that as the retail price. Then, to give an incentive to interested customers, the jeweler will offer the diamond at the "discounted" price of, say, $2,000. Once the sale is made, the jeweler comes out ahead, clearing a $1,000 profit.

Insurance companies, at least initially, come out ahead as well, since they can charge premiums based on the inflated $3,000 appraisal figure. However, if the diamond is stolen or damaged, the insurer is then liable for the $3,000 amount on the appraisal.

Many of the problems adjusters face when handling jewelry claims can be addressed far more easily on the front end by the underwriters, Thomas said. But insurance agents, who do not want to appear distrustful of potential insureds, rarely ask consumers to pay the extra fee to have a professional gemologist give a second opinion.

For the many claims involving chipped, scratched or otherwise damaged jewelry, the story appears quite different. Since the item can be examined in these cases, the quality of the appraisal can also be reviewed. For instance, at some of the larger insurers, such as State Farm, based in Bloomington, Ill., there are in-house appraisers who can help determine if an appraisal is correct, said Dick Luedke, State Farm spokesman.

(Thomas added that, along with the regular burden of determining replacement value, other Florida-based adjusters must also beware of an unusual statute that requires insurers to reimburse policyholders the pro-rated premium amount if the insurer can find a replacement item that is valued less that the insured item. "If we replace a $5,000 ring for $4,000, we have to write up an extra $1,000 worth of premium to rebate to the policyholder," she said. "You don't see that much elsewhere in the country, and it's something that a lot of people forget, I think.")

Though jewelers and replacement services encourage policyholders to re-appraise their jewelry every two to five years, Thomas recognizes that most people will not. "That's always the catch-22 -- the item may be undervalued but [insureds] don't want to get charged the $20 fee for appraisal," she said. "They also don't want to pay the extra premium on a higher-price ring. But if it's an older piece, we might be dealing with a limits issue."

"It's also good to ask for a photo of the insured actually wearing the item, if possible," said Kitty Miller, spokesperson for Los Angeles-based Farmer's Insurance.

Once adjusters have the airtight appraisal in hand, the vigilance for fraud can begin. Unlike other types of insurance fraud, such as auto insurance accident rings or health care scams, jewelry fraud is very disorganized and amorphous, adjusters said. In almost all instances, the perpetrator is a lone individual who may not necessarily have a criminal record, but who happens to see an opportunity for quick cash.

"You're always looking for fraud," said Robert Ianello, an adjuster with International Adjusters in New York City. "Not every claim is fraudulent, of course, but it's a high-value item, so fraud is always going to be a concern."

Though the value of other specialty items, such as fine art paintings, are much higher, Ianello said there are more incidents of fraud with jewelry. "Because of its small size and high value, the chance for fraud is very high," he said. "They're very easy to pocket." According to the Federal Bureau of Investigation, national jewelry thefts reached $1.1 billion in 1996.

The new diamond substitute, Moissanite has the potential to be a major problem in the insurance industry, there are newer methods of electro-analysis that many of the larger jewelers can perform to detect the substitute, Karten added.

"We always ask for an appraisal, but after we talk with the actual insureds, we also try to interview friends and relatives," said State Farm's Luedke. "Sometimes these items are received through inheritance, and the family can be a big help. Maybe taxes were paid on the items, and we can check those records, too."

"If it was a robbery, was there forced entry? Did they have an alarm system and was it armed? Where were the insureds at the time? Get as many facts about the case as possible about the claims," said Safeco's Wallace. "Some parts don't always make sense when you add them up."

Note the reaction from the insureds when they are told there is a limit on their coverage under their homeowners' policy. "If they look shocked or angry, that might tell you something," said Miller.

If it is a theft claim, review what other merchandise was stolen. The list should contain other high-priced items like VCRs, TVs and stereo equipment, Wallace said. "Most jewelry that is stolen is costume jewelry," Miller added. "The most valuable stuff is usually better protected, so it's not often thieves will steal only the most valuable pieces and leave the rest behind."

Look for patterns with other types of insurance claims. "You might find that they'd requested a large number of cash settlements instead of replacements for other items they claimed as lost or stolen," Fisher said. "There's sometimes a pattern of 'for sale' signs on real estate transactions, indicating that the insured might be in dire financial straits."