Navigating the Property Insurance Landscape

Transcription

1 their settlement are not known. 20. See Michael Werner Gallery v. Rich et. al., No (Sup. Ct. N.Y. filed Jun. 7, 2011). The parties reached an out-of-court settlement: the gallery agreed to permit the buyer to sell that particular Doig work and the buyer agreed to donate another Doig work to the museum. 21. These cases cover diverse scenarios and range from lawsuits brought against the Warhol authenticity board, the Gerald Peters Gallery, and the accountants for the Salander- O Reilly Galleries, yet they have a similar theme in which collectors or investors seek to hold professionals in the art world liable for art market losses. 22. USPAP is the benchmark methodology on performance standards for appraisers, recognized by Congress for appraisal standards, qualifications, and federal transactions; these standards are also the controlling guidelines for valuing tangible and other types of property. See Financial Institutions Reform, Recovery and Enforcement Act of 1989; Pension Protection Act of USPAP also has been adopted by many professional organizations outside the United States, including those in Canada, Europe, and Asia. 23. Under IRS rules, penalties are levied up to 30 percent to 40 percent of the underpayment of taxes related to the overstatement when the value is found to be off by 150 percent to 200 percent; in addition, the IRS requires repayment of the adjusted tax with interest. 24. ARIS Title Insurance Corporation has tracked the prices of hundreds of artworks sold with art title insurance at public auction. 25. For other materials discussing the art market title risk, see archive of ARIS Alerts that track current news impacting the global art title risk at php; Directors & Officers and Errors & Omissions Liability in Managing Art Investment Funds, Art Fund Tracker, March 2011 edition; Smith, Theobald and McCarthy, To Give and To Receive: A Handbook on Gifts and Donations for Museums and Donors, AAM Press, American Association of Museums (2011) ( Title Insurance as It Related to Clear Title subchapter 9, p. 67); Art Title Insurance: Peace of Mind, The Economist, November 25, 2010; Clare McAndrew, ed., Fine Art and High Finance: Expert Advice on the Economics of Ownership (New York: Bloomberg Press, 2010); Emily Graefe, Note, The Conflicting Obligations of Museums Possessing Nazi-Looted Art, 51 B.C. L. Rev. 473 (2010). Navigating the Property Insurance Landscape Rand Silver and Katja Zigerlig The telephone rings at 5:00 pm on a Friday evening. It s Bill from the claims department at Protecto Insurance Company. He says that an appraiser is needed urgently at Mrs. Johnson s residence on Manhattan s Upper East Side. A valuable portrait was damaged after falling from her living room wall. To exacerbate matters, the picture knocked over a French bronze, which crashed to the floor and punctured an antique Persian carpet. As a topic of discussion among fine art appraisers, property insurance may not inspire the same emotional response as Abstract Expressionism, but whether personally or professionally, everyone has some involvement with insurance. Most of the time, fortunately, the scenarios are far less dramatic than the one described here. Appraisers play a crucial role in the insurance process, so increasing one s knowledge base can help the appraiser uncover opportunities to further his/her business, maximize capabilities, and protect mutual clients. The Players Bill of Protecto Insurance represents a large property insurance carrier. He informs the appraiser that Mrs. Johnson s insurance broker from Total Risk Partners, along with an independent adjuster, will meet you at the residence. The number of people involved in a large insurance claim can cause confusion, so gaining an understanding of the various roles is a logical place to start. 181

2 Brokers and Agents A broker (or agent) is the gateway to securing insurance protection. He/she advises on policy terms and conditions, helps clients weigh their options and facilitates the ultimate sale. An important distinction to note: captive (or direct ) agents represent a single company and can sell its proprietary products and services only. Conversely, independent insurance brokers represent multiple carriers and can shop around on behalf of their clients. They are compensated through commissions from the various carriers they represent. Some brokers are specialists who deal exclusively with art collections, while others sell multiple product lines that may include collections, homeowners, automobiles, watercraft, and excess liability. Carriers Carriers are the insurance companies that provide the legal contracts, or policies, for the purpose of transferring risk. In the event of a covered claim, these firms are contractually obligated to pay for the loss. Adjusters After the carrier is notified of damage to an insured item, an adjuster often is brought in to investigate the claim. The adjuster may be an employee of the insurance carrier or operate independently. In either case, it is his/her job is to determine the cause of the loss, verify that coverage applies, investigate liability, and recommend or provide compensation based on the damages. Adjusters who specialize in fine art losses can add value by immediately determining whether or not a work of art needs conservation or stabilization or by identifying other appropriate art experts to consult. More often than not, however, general property loss adjusters will not be art specialists. The Exposures Upon arrival at Mrs. Johnson s residence, the appraiser examines the painting and identifies a nasty tear in the canvas to the right of the central figure. The cause of the loss appears to be hardware failure. The adjuster states that the damaged picture was purchased through an art dealer some years ago and professionally installed on the dining room wall. The collector later decided that she would rather view the painting in her living room, but instead of hiring an art handler to ensure proper reinstallation, she called upon the building superintendent. With all good intentions, he simply secured the painting to the wall using a standard single hook. The facts of this scenario are very real and unfortunately not at all uncommon. The most prevalent causes of loss to a collection are often not understood. Consequently, owners unwittingly increase the likelihood of damage and impact long-term value as they live with their art. Knowing the potential risks will provide a context for an appraiser s work while giving him/her the tools to help the client prevent future losses. Art insurance claims fall into two groups: total losses and partial losses. Total losses typically are more expensive; and are generally caused by theft, fire, or water damage. Since thefts can be dramatic, they receive a disproportionate amount of media attention. Despite the headlines, art thefts are comparatively rare. When they do occur, they generally are not elaborately planned heists targeting museums à la The Thomas Crown Affair. A review of thefts with known victims registered with the Art Loss Register reveals that private homes are most likely to be targeted. 1 Usually these are crimes of opportunity (e.g., construction workers or domestic employees) that can be deterred effectively by combining vigilance with monitored central station fire and burglar alarm systems as a first layer of defense. 2 Although total losses are more costly, partial losses are more frequent. Most partial damage claims occur as a result of accidental damage, much of which could have been avoided easily. A work of art is never more at risk than when it is being handled whether at the point of purchase, at an off-site storage facility or during moves between homes. Damage sustained during transit also accounts for a large percentage of partial losses. To mitigate these risks, institutions or collectors must employ adequate installation methods that have considered proper hardware and traffic patterns and always adhere to a tight transit protocol. Natural catastrophes such as hurricanes, wildfires, and earthquakes invariably cause both partial and total losses to collections. Losses ProPerTy insurance 182

3 resulting from these catastrophes cannot always be avoided, but proactive emergency planning can reduce the severity significantly. Although not a cause of loss, documentation is a factor that an insurance carrier will consider when evaluating the exposures surrounding a collection. Good records reduce the likelihood of mysterious disappearance, and an inventory system with images helps expedite the claims process in the event of a loss. Underinsurance not carrying enough coverage is another exposure with which art owners and insurers contend. Maintaining adequate insurance coverage, particularly as market prices rise, is crucial to recovering from loss. Beyond aesthetic value, a collection is, of course, a financial asset. On a similar note, there are some exposures that insurance policies generally will not cover. Usually these include damage from sunlight, heat and humidity, mold, and vermin. Effective risk management can help collectors avoid uncovered losses where possible. The Coverage Protecto Insurance Company has hired an appraiser to prepare a pre-loss appraisal for Mrs. Johnson to opine on what the post-damage loss in value might be and to prepare a diminution appraisal once the item has been restored. To know how to approach the valuations in each instance, it is important to gain a general understanding of how insurance coverage works. The ultimate goal of property insurance is to indemnify the insured client for a covered loss. Indemnifying, or making the client whole, means restoring things to the way they were just prior to a loss. This can be achieved through financial compensation, replacement or repair, or a combination of these actions. For example, Leonardo da Vinci s Mona Lisa is probably insured. Since a one-of-a-kind work could not be replaced if stolen or lost in a fire, the motivation for insuring it may not be immediately evident. In a partial loss scenario, after work has been completed to repair damage, a post-restoration appraisal might determine that the piece has lost value. Insurance, therefore, can respond by compensating the Louvre for the cost of the conservation and the loss in value. It also should be noted that there is an increasing trend for wealthy individuals to spend a larger percentage of their net worth on investments of passion such as art, gems, jewelry, and other collectibles. 2 Since they are apportioning greater percentages of their portfolios into these tangible assets, specialty art insurance coverage is viewed as a real form of asset protection. Insurance Policy Language The insurance policy is a legally binding contract, usually with several distinct sections including Declarations, Definitions, Coverages, Payment of Loss, Exclusions, and General Conditions. The Declarations page often serves as the cover page of a policy document. It lists all of the relevant overarching information about the policy: the policyholder s name, the property covered and the coverage, and premium amounts. The Definitions section describes terms used in the policy. The terminology is crucial in defining coverage throughout the document. For instance, central to fine art coverage is the Valuation Clause. Most personal insurance policies will reimburse a client based on the amount for which the article could be expected to be replaced with one of reasonable similarity in a limited amount of time. Policies also may offer a Market Appreciation Clause to account for increases in value to an object since it was last appraised and added to the policy. Since various valuation terms are used in the appraisal industry (agreed value, fair market value, retail replacement value, and estate value), it is important that terminology is clarified and used consistently when working with insurance professionals. Also worth noting: a deductible is the amount that a client has to pay out-of-pocket before insurance will cover the remaining costs. Deductibles are intended to absorb the highfrequency, low-value losses that occur. By accepting a higher deductible on a policy, a client agrees to absorb a higher percentage of the loss in exchange for a reduced premium. Electing higher deductibles is a more common practice among high-net worth individuals, who can afford to pay for more incidental damage. Commercial vs. Personal Insurance Commercial insurance is a contract between the insurer and a business owner or an institution, such as an auction house, dealer, or museum. 183 rand silver And KATJA Zigerlig

4 Personal insurance provides coverage solutions for private individuals and families. Homeowners vs. Fine Art Insurance Most homeowners insurance policies limit the amount that will be paid in the event of a loss impacting fine art and collectibles. In most cases, fine art losses also are subject to high deductibles under a homeowners policy. For adequate protection, a collector should purchase a separate fine art insurance policy from a specialty carrier or from a homeowners carrier well-versed in art insurance. Both the scope and quality of fine art insurance can vary from company to company. In general, a specialist fine art insurance contract is a broad policy covering direct physical loss or damage to covered objects anywhere in the world, including loss due to earthquake, windstorm, flooding, theft, fire, transit, and terrorism. There is no deductible; coverage can respond from the first dollar. In addition, fine art policies address contingencies such as partial loss and loss to objects within a pair or set. Common exclusions perils not covered under the policy may include reparation and restoration, normal wear and tear, inherent vice, intentional acts, and government confiscation. Scheduled Limit vs. Blanket Limit Scheduled policies allow a client to place values on individual items and pay an appropriate premium for each. A blanket coverage option is a good choice for collections that include many items at moderate values. A sum is determined based on the total value, along with a maximum limit per item. Blanket coverage requires less administration than the scheduled option. Often a fine art insurance policy will provide a combination of scheduled and blanket coverage to achieve the most comprehensive, convenient, and cost-effective solution for the client. The professional input from the appraiser working on Mrs. Johnson s loss is crucial to ensuring that she is indemnified properly. All parties involved in the claims settlement process await an assessment. It is not just at time of a loss that an appraiser s skills are valuable to art owners and insurers. An appraiser can be engaged throughout the lifetime of art ownership. Before a Policy is Issued Most insurance carriers require documentation of value for higher priced items before, or soon after, a policy is written. While recent invoices are sometimes acceptable, an appraisal prepared using generally accepted research and preparation methods such as the Uniform Standards of Professional Appraisal Practices (USPAP) helps protect the client and the insurer from fraud. It also gives the carrier confidence that policy limits are being validated and the proper premium is being charged. The art owner gains the assurance that the insurance values will be appropriate in the event of a loss. After a Loss Professional valuations for art, jewelry, and antiques are needed for claims arising over items that are damaged, lost, or stolen. Claims managers and independent adjusters rely on an expert s input to ensure that the settlement is fair and that the client is made whole after a loss. In the event of a major calamity, such as a flood or house fire, insurance carriers also may hire salvage companies that subcontract out to art appraisers as needed. During a Disagreement Unfortunately, not all claims are settled amicably. Some may involve complicated discussions of valuation or loss of value or contentious issues of subrogation. For these situations, appraisers may be needed as expert witnesses. In a disagreement, the appraiser might be hired by attorneys working for any of the parties involved in the dispute, including collectors, vendors, institutions, insurers, or brokers. Ongoing Education With the art market changing constantly, the knowledgeable appraiser is in a unique position to share his/her experience with brokers, underwriters, risk managers, claims professionals, and collectors. Whenever an appraiser can take the time to give a presentation, or an informal talk; or participate in a panel discussion, his/ her expertise will be widely appreciated. As an added benefit, these opportunities are inexpensive ways to network and market the business. The Outcome Mrs. Johnson s painting is carefully conserved and it is ultimately determined that the damage has resulted in a 30 percent loss in value. The carpet has not lost any ProPerTy insurance 184

5 value, owing to a number of previous alterations, but sadly, the bronze is a total loss. Based on the appraiser s findings, Bill was able to indemnify his client by paying for the conservation and loss in value of the painting; for the full value of the bronze and for restoration of the carpet. The insurance carrier, client and broker were collectively pleased with the professionalism and prompt service of the appraiser and all look forward to a continuing relationship. The importance of understanding the basic principles of property insurance cannot be overstated. By having the confidence to speak about appropriate insurance coverage, the appraiser can demonstrate competency while ensuring that collectors and institutions are best positioned to be indemnified in the event of a loss. Insurance professionals, art owners, and appraisers all share the same goal of striving to protect collections. Working in tandem with one another will help ensure that assets are protected and material culture is preserved for future generations. 1. Art Loss Register, London, Capgemini World Wealth Report, 2011, p. 20. BIBLIOGRAPHY Kaplan Financial, Glossary of Insurance Terms, Life and Health, 6 th Edition, DF Institute, Inc. BISYS Education Services, Art Storage and Transportation Astrid P. Thorne Introduction The need for specialized art storage and transportation has become an increasingly important consideration for collectors, galleries, and museums alike. How works of art are handled between exhibitions or residences is crucial to its long-term survival. Conservators and the museum community have perfected various methods and materials to be used with moving or storing fine art. Art storage and transportation companies now incorporate these practices to preserve and protect collections around the world. Understanding storage and transportation is essential when working with a collection, and the knowledge of best practices for caring for artworks is helpful for any appraiser. Art storage facilities and transportation companies are informed and qualified when it comes to properly packing, shipping, and storing art and are excellent resources for the appraiser. Few collections stay in the same place forever, making storage and shipping constant concerns. When the time arrives, it is important to know how to evaluate and choose the proper art storage facility and a specialty transport company. While many people believe that theft is the number one cause of art loss, surface damage owing to poor storage and shipping practices are the most common type of loss that a work of art can suffer. Rips, tears, scratches, staining, and climate-related damages such as foxing, warping, and cracking resulting from natural disasters or improper temperature and humidity conditions are much more likely. The goal of an art storage facility is to return works of art to clients in the same condition as that in which they were 185