The 1991 ISO homeowners forms limit coverage for theft of jewelry, watches, and furs to $1,000, and the 2000 forms limit coverage to $1,500. 

The question then becomes whether this loss is actually theft, which is covered, or something else. Your insured was induced to part with money for the watch by a fraudulent trick, not theft. Although theft and fraud are similar in meaning, the difference between the two is enough to preclude coverage for the insured's loss.

Webster's Collegiate Dictionary defines fraud as: “deceit; trickery; specif.: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.” Theft is “the act of stealing; specif: the felonious taking and removing of personal property with intent to deprive the rightful owner of it.” Black's Law Dictionary clarifies this latter definition: “The taking of property without the owner's consent.”

In the situation you describe, the owner of the money—the insured—consented to send the money. He was induced to part with it by a trick, but the money was not stolen. And, since he never had the watch in his possession, it cannot be said to have been stolen from him. Therefore, the loss is not covered.

By the way, this particular auction company's site has information regarding what a customer can do in event of fraud, which is described as “paying for an item and never receiving it.” There is a recommendation that purchases in excess of $500 be made by means of escrow through a third party, who agrees to hold the money until the purchaser has examined the goods, and, upon finding them satisfactory, notifies the escrow agent to release the money. The company provides fraud protection, but only in the amount of $200.