Market ups and downs have affected the value of many artworks. Insurance experts explain why—and how—to keep appraisals current.
As the continued strength of the art market inspires renewed collector confidence, insurance experts say that properly appraising and insuring your art and, in some cases, taking added measures to secure or document ownership have never been more important.When the art market took a downturn, “many people just assumed it would take years for it to recover,” says Joseph C. Dunn, president and CEO of Huntington T. Block Insurance Agency, a division of Aon, in Washington, D.C. “People were caught off guard with some of the new heights” that were reached in the art market over the past year, and did not realize they needed to have their collections reevaluated.The area of the art market hit the hardest was the contemporary-art sector, Dunn notes. Other genres, such as Old Master, Impressionist, and modern were affected, but to a lesser degree. Many works simply retained their value and subsequently appreciated.Dunn says the insurer frequently finds it is “a bit of a challenge to convince collectors to secure a current appraisal because of the associated costs,” but adds that, through guidance and working closely with collectors, “we’ve had several situations where some of our clients realize the collection is two or three times the previous value” it was appraised at. One collector, who had not had his collection appraised in at least a dozen years, was “flabbergasted” to learn it was underinsured by a factor of ten, Dunn says.Noting the highs and lows in the art market in recent years, Mary Pontillo, vice president at insurance firm DeWitt Stern, says: “You definitely want to be insured for the value the current market would sustain.” She concedes that appraising an entire collection at once may present a daunting task. Her suggestion to collectors? Take a gradual approach.“For most people with medium-sized collections, the top ten items would represent most of the value,” says Pontillo. So pick a few of the higher-value objects, or works by the artists making noteworthy prices at auction, and start there as far as an appraisal, she says. While additional coverage might be necessary on some works, the appraisal will also help collectors determine which artworks have depreciated in value and perhaps need coverage adjusted lower, she says.Collectors can also opt to have “blanket” coverage, in which new items that are added to the collection are automatically covered. Or they can opt for fair- market-value coverage whereby the works would be appraised according to market value at the time of loss, albeit within the limits of the policy.However, Ronald D. Spencer, an art-law specialist and counsel to Carter Ledyard & Millburn in New York, says collectors sometimes falsely believe that just because they list a certain dollar-amount in their application for insurance, that the “valuation is going to be binding. Not necessarily. Not unless there is language in the policy that says so. The insurance carrier will generally pay the value at the date of the loss, not necessarily what the owner put down in the policy.” Spencer cautions: “Insurance companies are not in the business of paying you as much as they possibly can.”Elizabeth von Habsburg, managing director at the Winston Art Group in New York, said common collector mistakes include not getting the art valued often enough and obtaining appraisal information from a source who has an agenda and is not “totally objective.” Von Habsburg and other experts advise collectors to find independent appraisers who are certified by organizations such as the Appraisers Association of American (AAA) or the American Society of Appraisers (ASA). Von Habsburg is on the board of AAA, and Winston Art Group appraisers are all members or certified members. The Art Dealers Association of America (ADAA) also provides appraisal services.Von Habsburg also notes the importance of assessing and analyzing artworks on an individual basis. “There are so many subsections in each category of collecting that have to be looked at separately rather than looking at a broad-based index,” she says. Individual works, particularly at the higher end, “have changed value at different rates.” She says that “certain artists were affected less than others” during the downturn, and also notes that other collecting categories, such as jewelry, were appreciating the whole time.
Von Habsburg says that with the market back on the rise, they are already seeing increased interest from collectors in leveraging their art, including posting artwork as collateral. Correct appraisals and proper insurance coverage are crucial for such loans, she and other experts say.“People take loans against art for all different reasons,” von Habsburg says. “Maybe they need to pay for a divorce or want to invest in another company or business venture. There are many opportunities to make your art work for you and not be a static asset.”In many of these cases collectors are borrowing against a particular work specifically to buy more art. “The global art market has picked up so quickly,” says Suzanne Gyorgy, head of Citi Private Bank Art Advisory & Finance, noting particular interest from Russian and Asian clients. “I wouldn’t say they are speculating by any means. They are building really strong collections.” Gyorgy says that with the market becoming more active and major works becoming available, many of the bank’s clients like to have art loans in place in order to act quickly and take advantage of “once in a lifetime” opportunities when they arise. “Serious collectors get liquidity out of their art to invest,” she says.She adds that banks require “dedicated fine-art insurance policies for any art that is used as collateral,” as opposed to general insurance coverage attached to, for instance, a homeowner policy. The bank is named as loss payee on these dedicated policies as a way of securing its interest. Typically, the collector who has been thoroughly vetted by the bank gets the benefit of increased liquidity while the work still hangs on the wall. Banks will typically lend anywhere from 30 to 50 percent of the work’s value under these loan types.Perhaps equally important as obtaining accurate appraisals—and confirming what risks are covered—is looking closely at what is not covered by your policy, says Spencer.“My general experience is that when owners of art want to insure a piece in their collection, everybody gets bogged down in the dollar amount of coverage,” says Spencer.The problem, he says, is that the actual policy “arrives two months later, and the art owner files it in a drawer under ‘I’ for ‘insurance,'” without ever bothering to read it. “You don’t take it out of the drawer until you have a loss, and you find there are exclusions which no one ever talked to you about before you paid the premium.”The Philadelphia Museum of Art is currently in a legal dispute with its insurer, AXA Fine Art Insurance, over the company’s refusal to cover a loss stemming from the museum’s consignment of two paintings to the now-defunct Salander-O’Reilly Galleries. Dealer Lawrence Salander, now serving time in prison for his massive fraud—estimated at more than $120 million—sold the paintings and kept the estimated $1.5 million in proceeds. The Philadelphia Museum claimed the loss under its “all-risk” policy with AXA, but was rejected on the grounds that “conversion,” the insurer’s interpretation of Salander’s actions, is not covered under the policy it issued. As ARTnews went to press, the next court date for the case was scheduled for July 5 in Baltimore.One source, who did not want to be identified, said the Philadelphia Museum/AXA case is “the hottest current fine art-insurance legal action to watch.”A similar lawsuit was decided in early 2007 in U.S. District Court in Illinois, involving Chicago collectors Henry and Anne Marie Frigon and their insurer, Pacific Indemnity, a division of Chubb.The collectors consigned eleven paintings—which were covered under an all-risk “Masterpiece Policy” with Pacific Indemnity—to Chicago dealer Richard H. Love. According to the decision: “Unbeknownst to plaintiffs, the Gallery was insolvent and had been for years. . . . To stay afloat the Gallery had begun selling consigned items for less than the minimum agreed price and keeping the proceeds rather than remitting them to the consigners.”The judge, Robert W. Gettleman, ruled in favor of the Frigons, writing: “As far as plaintiffs are concerned . . . the conduct of the Gallery toward their paintings is no different than had the Gallery taken the paintings on consignment and destroyed them.” The judge ruled that the loss was covered by the Masterpiece Policy.The Salander case and other high-profile art fraud cases in recent years have prompted some art experts to encourage the use of Uniform Commercial Code (UCC) filings for art owners to document their ownership.The UCC, adopted by all U.S. states, governs the sale of tangible personal property, including art. Buyers interested in acquiring a particular work can search UCC filings to see if there are any liens on the work, such as would appear if, for example, a piece had been used as collateral for a bank loan or its ownership had been documented by a collector prior to consignment to a gallery. However, experts concede that UCC filings do not provide complete protection.Dorit Straus, vice president and worldwide fine-art manager for Chubb, says she has encountered resistance from collectors when encouraging them to file UCC documentation. Straus says there are two main reasons for this. “The first is emotional; they don’t want the dealer to think they don’t trust them,” Straus says. However, she points out: “This is a business deal. You are not lending to a friend.”The second concern is that filing a UCC on a particular artwork means the information is now part of the public domain. For obvious reasons, “a lot of art owners do not wish to let information about what they own out into the public,” says Straus. She suggests collectors consult with their attorneys and says one way around this is the creation of a limited liability company as a way of remaining partially anonymous.Eileen Kinsella is editor of the ARTnewsletter.