The IRS defines fair market value as the price that property would sell for on the open market, as agreed upon between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. Usually this means the auction market (buyer’s premium included), because auction is the predominant market of open exchange. If the property in question sells predominantly or exclusively at retail (i.e. in a gallery), however, retail is the market used by the appraiser. All IRS appraisals are fair market value appraisals.
Insurance appraisals have a different criterion for valuation. Here the assumption is that the insured item needs to be replaced in a timely manner. Waiting for a like item to come up for auction could be unreasonable and impractical. So instead of a valuation based on the auction market, retail replacement is the most appropriate valuation. This is the price that one would expect to pay for the same or similar item in a retail setting at the present time. Oftentimes the insurance value is even a bit higher than retail to accommodate for shipping and other costs related to the purchase.
Sebastian Clarke, Director Trust and Estate Services, RAGO Arts and Auction Center