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    Superstorm Sandy Creates Paradigm Shift for Insurers

    The impact from Sandy includes changes in practices and prices for the art-insurance industry and its clients

    As Hurricane Sandy approached New York City in late October last year, the residents in Zone A—the low-lying areas with the most potential for flooding—were ordered to evacuate by Mayor Michael Bloomberg. Based on its geographic footprint, Zone A could be an abbreviation for Zone Art: it includes Chelsea, home to one of the world’s largest concentrations of contemporary art galleries, as well as Red Hook in Brooklyn and Long Island City in Queens, places teeming with art-storage facilities and artists’ studios. So the people left, and the art, for the most part, remained. Then the storm came.

    Thatcher Projects during post-Sandy repairs, with Bill Thompson’s wall sculptures protected under plastic. ©2013 CLAIRE VOON

    Thatcher Projects during post-Sandy repairs, with Bill Thompson’s wall sculptures protected under plastic.

    ©2013 CLAIRE VOON.

    The next day, Jennifer Schipf, an art-insurance underwriter for the XL Group, visited Chelsea to see how her clients had fared. “It was like a ghost town,” she recalls. “It was very disturbing to walk through water to see the art. The gallerists were distraught, like deer in headlights.” For weeks, art lay on gallery floors and rested on blocks in an attempt to dry it out; conservators worked frantically to salvage what they could from the effects of mold, salt water, and chemical residue.

    John Thomson, co-director of the gallery Foxy Production on West 27th Street between 11th and 12th Avenues, was also in Chelsea the day after Sandy. “The water had already gone away off the street,” he says. “But there was flooding in the basement, all the way up to the ceiling,” which he estimates at seven feet. Artist Sascha Braunig’s paintings in the street-level showroom were not harmed, but the art in the basement remained submerged until the building’s landlord came to pump out the water. Damages to that artwork are still being assessed, Thomson notes. He no longer stores anything important underground.

    The total insured losses from Hurricane Sandy are estimated at around $35 billion, and approximately $200 million to $300 million consisted of losses to art—a huge hit for art insurers, who had already seen their worst year for catastrophic losses on record in 2011. “There’s been an uptick in the frequency and severity of weather-related catastrophes,” says Joe Dunn, president and CEO of Huntington T. Block Insurance Agency, which covers works of art, artifacts, and scientific specimens. With the cost of art insurance being low—or soft, as they say in the industry—some companies took a big hit.

    Christiane Fischer, president and CEO of AXA Art Insurance, says that insurers are adjusting their underwriting in consideration of a redrawn flood map for New York. AXA will no longer insure art that is kept in basements in Chelsea in order to discourage galleries from using subterranean spaces for storage. “Sandy was a wake-up call,” she says. “People are much more aware of how much New York is in the path of hurricanes.” She calculates that AXA’s claims from the storm will probably end up being between $36 million and $38 million.

    Christie’s Fine Art Storage Services, a six-story warehouse with 235,000 square feet of storage space on the Red Hook waterfront, experienced flooding on its ground floor. Melissa Abernathy, a spokesperson for the company, says a few clients suffered losses, and Christie’s is working with them and their insurers. She declined to discuss the value of the art that was damaged, but says that Christie’s is reviewing its procedures regarding where art is kept. SurroundArt, a 160,000-square-foot storage facility in the Brooklyn Navy Yard, also sustained damage, with art losses estimated at $40 million. They quickly offered their space to the art world as a hospital for damaged work.

    “Some of the warehouses made representations that they would take care of the art, and things didn’t get protected,” says Michael Fischman, a broker with Wells Fargo Insurance. Gregory Smith, executive vice president at Berkley Asset Protection Underwriting Managers, notes that because collectors from around the world had art in New York—on consignment to galleries or stored ahead of the fall auctions—the impact of Sandy was global. What’s worse, Smith adds, is that “galleries and their warehouses 20 miles apart sustained damage from the same flood.”

    J. Cacciola Gallery, on West 23rd Street in Chelsea, in the days after Hurricane Candy hit. ©2013 CLAIRE VOON

    J. Cacciola Gallery, on West 23rd Street in Chelsea, in the days after Hurricane Sandy hit.

    ©2013 CLAIRE VOON.

    Sandy caused a paradigm shift for insurers, says LeConte Moore, a managing director at the insurance brokerage DeWitt Stern. “It showed how far the water will come into the island,” he says. The total loss from Sandy is a bit of a moving target, he adds, because some of the works initially believed to be restorable could not be saved. “We had a painting insured for $13 million that was damaged,” he recalls. “With restoration, we thought the value would go down to $5 million. But it was a total loss. Sixty percent of the art that got wet is turning out to be a total loss.”

    So now that everyone knows how far inland the water can go in New York City, how will this affect the cost of art insurance in general? Insurers can react to the awareness of a new risk in three ways, says Joe Dunn. They can exclude certain coverage, such as flood or earthquake, in specific areas. They can assign higher deductibles, or retentions, so that instead of having to pay for damages over $2,000, the new number becomes $5,000. Also, they can increase premiums.

    The industry’s initial reaction to Sandy echoes what it was after Hurricane Katrina and 9/11, says Robert Salmon, a managing director at Willis insurance. “It’s mainly knee-jerk: restrictions, huge deductibles, and rate increases,” he says. “As we get further from the events, insurers are going to have to tone down that kind of reaction or lose too much business.”

    Norman Newman, first vice president of the fine-art division of HUB International Northeast, notes that it’s been a buyer’s market for the past seven or eight years. “That’s changing,” he says. “No one has been making money insuring art. Unfortunately, these companies haven’t made money on their investments either, with interest rates so low.”

    Dunn explains that the industry has been hit hard in a very-low-interest-rate environment. “What’s been protecting the primary and secondary market up until now has been fresh capital that keeps flooding into the market as investors look for return,” he says. “The stock market has been volatile and disappointing until fairly recently, and that’s been holding back the onset of a hard market.”

    Terms and conditions will be looked at more carefully as well. “That includes wind in Florida and earthquakes in California,” Gregory Smith says. “An event makes you look at all category-exposed areas.” Some insurers are adding clauses stating that galleries must keep art four feet off the ground, and many industry experts expect that art-related businesses will not be able to get any flood coverage for basements.

    “It’s not a good idea to keep millions of dollars of art in basements with electrical and water,” says Jennifer Schipf. And even flood insurance for aboveground spaces will be limited. “There could be flood-specific deductibles that are higher than for theft and other losses,” she explains. “For example, you could have $10 million of all-peril insurance, but only $2.5 million for flood.”

    Schipf thinks that “New York should take a few notes” from the playbook of Miami, by devising disaster plans that can be implemented quickly. She mentions one Chelsea dealer who has been clever about rebuilding. The file cabinets are on rolling pedestals, so they can be easily moved out, and information-technology equipment is kept ten feet off the floor and in a closet. “There are sometimes simple solutions,” Schipf says. “Many galleries have very tall ceilings.”

    Despite all the tumult over weather-related catastrophes, 60 to 70 percent of all damage to art is caused in transit—once it’s off the wall, the troubles begin. And then there are the unusual claims. Robert Salmon recalls a recent case in which a sculpture of the Three Graces kept in a garden had continual damage to the women’s toes. “It was determined that squirrels were biting them,” he says. Michael Fischman reports that one of his clients had a Thomas Hart Benton painting blow into the ocean, along with the front of his house. That was during Hurricane Sandy.

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