Are Fine Arts Floaters a Silver Lining in the Insurance Market Cloud?

Unlike many lines of insurance, the fine arts and collections market has so far managed to avoid the difficulties of a hardening environment. But is it robust enough to carry the industry through tough times? Maybe not, since the base of potential insureds has traditionally been limited to wealthy individual collectors, corporate collections, museums and galleries. However, the success of PBS’ “Antiques Roadshow,” the accessibility of collectibles and information over the Internet, and the economic expansion of the last 10 years have enlightened more people to the value and joy of collecting, whether it be fine works of art or teddy bears.

Unburdened by tremendous catastrophes and dramatic losses, and blessed with plenty of capacity in the Lloyd’s market, the business of fine arts insurance is profitable and competition is robust. A number of domestic insurers-Chubb, AIG, ACE, Zurich, and Atlantic Mutual to name a few-are pursuing the art insurance business and for at least one insurer, AXA Nordstern Art, insuring art is the only thing they do.

“We are all chasing the same animal,” said Dr. Dietrich von Frank, president and CEO of AXA Nordstern Art, “the affluent private collector, the $400 to $500 million exhibition, the $400 to $500 million museum, the $100 million art gallery, the $200 to $300 million corporate collection.” Dr. von Frank noted that a stable or slowly increasing market of collectors, museums and galleries has helped keep the market profitable. He said AXA Nordstern Art has enjoyed a combined ratio of 85 to 86 percent, on average, over the years.

While whispers of a tighter market are issuing from London, no such change has affected the market so far, according to John Tommaso, assistant vice president of the inland marine unit of Westchester Specialty, a division of ACE USA. “What I’ve been told,” said Tommaso, “is that Lloyd’s is tightening up on a lot of these things, but I’ve not seen it yet.” AXA Nordstern Art’s von Frank echoed Tommaso, stating, “reinsurers in Lloyd’s and also domestically have told us that the next renewal round we would face higher reinsurance rates.”

A key aspect of the fine arts market, and one that may serve to protect it from becoming overly difficult, is its global, dynamic nature. “It’s an international marketplace,” said Dorit Straus, Fine Arts Specialty manager for Chubb Worldwide. “There isn’t one market for Texas and another for New York. Fine arts falls under an international marketplace because fine arts is what we call a floating exposure-with things moving from place to place.”

“Internationally, fine arts hasn’t seen those kinds of increases that have happened in other areas,” Straus said, “but that’s not to say underwriters haven’t refused some of the pricing. Particularly on the commercial side-on museums and traveling exhibitions and galleries-where we’re beginning to hear of some changes happening particularly in the London marketplace about certain underwriters changing some of their underwriting criteria with respect to fine arts. I’ve been hearing some things about it, but it hasn’t yet had a great effect on the international market for fine arts.”

On the high-end, avid, serious collectors are usually well informed about the value and significance of their collections. They keep up with activity in the art world, and generally are aware of what’s hot and what’s not. But programs like the “Antiques Roadshow,” sponsored by the Chubb Group of Insurance Companies, have awakened many more people to the potential value of their heirlooms and personal collections. As a result, people are becoming more informed about fine arts, collectibles, antiques, and other valuable objects. “They are beginning to look at their collections and are beginning to think-maybe its worth more than I thought,” said Strauss. “There’s been a general awareness nationally and also internationally, because there’s a UK version of the roadshow.”

At a recent stop of the “Antiques Roadshow,” in Indianapolis, a previously unknown N.C. Wyeth painting of biblical subjects, including Christ, surfaced and was appraised at $250,000. It was one of the most valuable items uncovered in the show’s history. And Chubb found out, through a survey conducted at the Indianapolis show, that while attendees hoped the items they brought were worth a fortune, over 40 percent reported that their treasures were underinsured.

Coverage
Fine arts policies are often divided into three categories: personal collections, commercial accounts, and museums. The different varieties of policies tend to have different valuation clauses.

As a rule with personal collections each item has a scheduled value so there is a clear understanding of worth in the event of a claim. Strauss guessed that around 95 percent of all personal and corporate collections are insured with every item scheduled. “In many cases people want to have every item scheduled,” said Strauss. “Because they want to establish a value, want to agree to it beforehand with the company so in the event of a loss … you know exactly what you’re going to get.”

When an individual has a vast personal collection or is an avid collector that buys and sells frequently, some type of blanket policy or loss-limit policy may be more appropriate. “Some private collections are so large,” said Straus, “they are larger than museum collections and sometimes they tend not to be listed individually. But these are the more unusual collections-the top line of collections.” For these, Chubb may write the policy with loss-limits if they are extremely large or they may be written on a blanket limit to cover all locations.

For an individual who collects in various fields or one who tends to upgrade the collection frequently, a blanket approach may also be better. “Let’s say you collect contemporary paintings and sculpture,” said von Frank, “but you also collect antiquities, you collect French furniture and you collect…Mexican art…it would be a horrendous burden on the collector to constantly flood the broker and us with invoices.”

So AXA Nordstern Art’s approach would be to ask the collector to identify an average value for the collection — whether $50 million or $25 million — and establish coverage for that amount. Then, if the individual has occasional acquisitions valued at $1 million or $2 million per piece, additional identification would be required for those pieces. But the policy would “have a 90-day acquisition clause that gives them the leeway to acquire it and it’s covered automatically,” said von Frank. “After 90 days you would want to have some substantiation of the actual purchase.”

Personal collection insurance can be provided as an add-on to a homeowners’ policy or through a separate policy. Chubb offers two options. One is a broad homeowners form that would include a smaller collection in the homeowners’ coverage. “But if they wanted to have a floater or a valuable articles policy,” said Strauss, “which is not just for fine art, it’s also for other collectibles-people can have stamp collections, jewelry-that can be scheduled individually with specific terms and conditions to the collection itself.” She added that Chubb recommends “that people schedule their valuable articles on a separate policy so they can be sure that they are getting the broader coverage.”

Westchester covers personal collections primarily through the personal homeowners policy, but AXA Nordstern Art provides coverage on top of the homeowners’ insurance. “The brokers would select us for specific arts and collectibles insurance,” said von Frank. “Because these large, general carriers do have capacity issues. If we cover a $5 million home…in Palm Beach…and the contents are $1 million and you have on top of that a $20 million collection, I don’t think that the general carriers would be able to come up with the capacity. And that’s not just the case in Florida, it’s the case in Connecticut, in Illinois and California. It’s the case in Dallas. Its all a question of capacity.” Von Frank added that the majority of his accounts are personal collections.

Commercial accounts, including galleries, dealers and corporate collections, may be covered in various ways. Loss limits, inventory, cost-plus, selling price minus, base of evaluation, and transit limits on the gallery front, are all variables on which coverage for commercial accounts could be based.

Exhibits and museums with huge collections are almost always insured on a loss-limit basis, due to the improbable task of evaluating separately the hundreds or thousands of objects that a museum may own. “They (museums) can’t afford to insure every individual piece and have everything listed,” said Strauss.

“Take a museum you’re familiar with in Texas — say the Amon Carter Museum (in Fort Worth) —whatever they have on their walls is an insignificant amount of what they have. You’d have to duplicate the museum catalog inventory to list everything, so museum collections have to be done differently-they are insured on a loss-limit basis.”

Risks
Movies, such as 1999’s “The Thomas Crown Affair” with Rene Russo and Pierce Brosnan, like to glamorize the world of fine art theft. In “Thomas Crown,” super-suave, super-rich Crown (Brosnan) pulls off daring heists of famous Impressionist paintings just for the thrill of it and sweeps sharp-as-a-tack, tough-cookie insurance company investigator Catherine Banning (Russo) off her feet in a sophisticated game of cat-and-mouse.

But in the real-life world of insuring fine-art collections, theft, while it is certainly a concern for collectors and insurers alike, is not the number one risk to the security of a valuable object. Moving it around is.

Art moves around a lot-collectors and museums buy, sell and lend, and exhibitions travel-and damage in transit ranks at the top of insurers’ list of potential dangers to fine works of art. “Transit is definitely something that all fine art underwriters will agree is a potential for damage,” said Strauss. And the damage may not be a total loss, she added, stressing that items must be “properly packed and shipped with an appropriate carrier who knows how to ship fine art. Nothing against the U.S. mail, but if you’re going to be sending expensive works of art, you’d want to have additional protections and appropriate transportation means-a van equipped with air ride so it’s not going to get bumped.” Straus added that transit can also increase vulnerability to theft.

The risk of damage during transport is so severe that AXA Nordstern Art has excluded non-specialty shippers like Federal Express from its policies. “The most desirable collection from an insurance perspective is the private collector that quietly collects,” said von Frank. One “that sends one or two objects to an exhibition once or twice a year, but basically the collection is stable in his or her home.”

Water damage, smoke and fire, and changes in atmospheric conditions round out insurers’ list of top risks to works of art.

Risk Control
For Westchester Specialty, Chubb, AXA Nordstern Art, and presumably other players involved in the fine arts market, monetary coverage of valuables is only part of the game. Because of competition and the nature of the items being insured customer service is one area on which insurers rely to distinguish themselves from rest of the pack. The range of services provided to clients run the gamut from referrals for appraisers to advice on hanging, framing and environmental controls, and evaluation of security systems.

ESIS Risk Control Services, a division of ACE USA, works in tandem with Westchester Specialty to provide customers with risk management services. Christine Galzerano, national program manager for ESIS, said that when first working with a client, she conducts an initial interview, to find out about the clients’ operations, policies and procedures. Galzerano then does an actual walk through of the facilities-looking at things like the mechanical systems, the HVAC systems, basements, walkways, security systems throughout the entire facility. The client would receive a letter of confirmation and if areas needing improvement were found, Galzerano would provide recommendations, spelling out exactly what needs to be done.

“What we would do is … go to the home,” said Straus. “We would evaluate conditions, and either tell them everything is fine, or else we would make recommendations for improvements in how things should be displayed.” Areas of concern that the company looks for range from whether there’s an overabundance of daylight or direct sunlight that could fade a work of art to things like security and fire detection systems. “We definitely have people who are experts in knowing what to recommend to people about improving conditions at their homes.”

AXA Nordstern Art works with the broker and homeowners carrier on assessments of security issues. “If it comes to hanging, if it comes to framing, if it comes to advise on humidifying or dehumidifying or whatever,” said von Frank, “should the broker like our advice … we are happy to give advice. All we do is art insurance so we might as well give … advice.”

Von Frank said that the “claims aspect of our business is the most fascinating and the most difficult.” He added that collectors really need to make sure that the carriers’ adjuster is knowledgeable and warned that in the event of a claim, collectors should “stay away from public adjusters.”

Galzerano summed up the business of risk minimization saying, “the funny thing about risk control is that you never really know what might have happened, but if we fix something and prevent it from happening, we’ve done our job.”

Theft is an Issue
Although theft may not be the highest item on insurers’ list of concerns when it comes to fine arts coverage, it is by no means ignored. “It’s definitely an issue,” said Straus, “In New York, two months ago, a Chagall was stolen from the Jewish Museum. So theft is an issue, both for cultural institutions and for personal collections.”

Two major resources in the recovery and investigation of art theft are the FBI’s Art Theft Program (http://www.fbi.gov/hq/cid/arttheft) and the independent Art Loss Register (http://www.artloss.com). An essential element of the Art Theft Program is the National Stolen Art File (NSAF), a computerized index of stolen art and cultural property as reported to the FBI by law enforcement agencies throughout the U.S. and internationally. It consists of images and physical descriptions of stolen and recovered objects, in addition to investigative case information.

The Art Loss Register is private database of stolen and missing works of art, antiques and valuables. With offices in London, New York, Dusseldorf, and Dublin, one of the program’s main objectives is to assist law enforcement agencies in identifying and recovering stolen works of art. The Art Loss Register also maintains a schedule of art and other valuable items granted as collateral to banks and other financing institutions.

One of the most daring and still unsolved art thefts in recent U.S. history occurred in 1990 at the Isabella Stewart Gardner Museum in Boston. During the night of March 18 two thieves dressed as Boston police officers entered the museum and removed 13 rare art objects. According to the FBI report, the thieves gained entrance to the museum by telling on-duty security personnel that they were responding to a disturbance call within the compound.

Contrary to museum regulations, the security personnel allowed the imposters into the facility. The thieves abducted the security guards, binding them with duct tape and securing them with handcuffs in the museum’s basement. No weapons were used by the intruders.

Although a panic button was located behind the guards’ watch desk area, it was not activated and no actual police notification was made during the robbery, and the subjects took the video surveillance tape when they left.

The total value of the stolen artwork has been estimated at as much as $300 million. The confiscated pieces include the following:

From the Dutch Room Gallery

• Vermeer, “The Concert,” Oil on canvas, 72.5 x 64.7 cm.

• Rembrandt, “A Lady and Gentleman in Black,” Oil on canvas, 131.6 x 109 cm. Inscribed at the foot, REMBRANDT. FT: 1633.

• Rembrandt, “The Storm on the Sea of Galilee,” Oil on canvas, 161.7 x 129.8. cm. Inscribed on the rudder, REMBRANDT. FT: 1633

• Rembrandt, “Self-Portrait,” Etching, 1 3/4″ x 2″, (Postage Stamp size)

• Govart Flinck, “Landscape with an Obelisk,” Oil on an oak panel, 54.5 x 71 cm. Inscribed faintly at the foot on the right; R. 16.8 (until recently this was attributed to Rembrandt).

• Chinese Bronze Beaker or “KU”, Chinese, SHANG DYNASTY, 1200-1100 BC; height of 10 “, diameter of 6 1/8”, with a weight of 2 pounds, 7 ounces.

From the Short Gallery

• Degas, “La Sortie Du Pelage,” pencil and water color on paper, 10 x 16 cm.

• Degas, “Cortege Aux Environs De Florence,” pencil and wash on paper, 16 x 21 cm. (This and the above were originally in a single frame.)

• Degas, “Three Mounted Jockeys,” Black ink, white, flesh and rose washes, probably oil pigments, applied with a brush on medium brown paper, 30.5 x 24 cm.

• Degas, “Program for an Artistic Soiree,” Charcoal on white paper, 24.1 x 30.9 cm.

• Degas, “Program for an Artistic Soiree,” A less finished version of the above, charcoal on buff paper, 23.4 x 30 cm. (This and the above were originally in a single frame.)

From the Blue Room Gallery

• Manet, “Chez Tortoni,” Oil on canvas, 26 x 34 cm.

Elements of a Correctly Prepared Appraisal
(Excerpted from “Art & AntiqueValuation: Insurance for Fine Art Objects,” by the Inland Marine Underwriters Association)

Several elements combine for a correctly prepared appraisal. The name and address of the client/owner must be clearly stated, indicating that the client has a clear title to the object. The address implies that the object would have to be replaced locally, within a reasonable geographic area. Moreover, that the appraisal is written for insurance purposes must be clearly specified.

The most common insurance valuation is replacement value, defined as the amount it would take to replace an item with one of similar like, kind and quality purchased in an appropriate market. The appraiser must select the most suitable marketplace. Generally, the most common market for insurance purposes is the retail gallery marketplace or auctions.

The valuation approach often used in insurance is the market comparison approach or comparative market data approach, which requires the appraiser to determine value by comparing the appraised object with prices asked by dealers of similar objects. Another, less frequently used approach is the income approach, which may be appropriate if the insured object is used to generate income, such as in an art-leasing program, whereby the value should compensate for loss of income.

All insurance appraisals should contain a generic market analysis for the type of objects to be covered. The appraisal should state whether the market is stable or volatile, alerting the insurance carrier that more frequent appraisal updates may be required..

Also, the history and provenance of the appraised objects should be provided. The global environment of today’s art world has brought to light many areas of contested title. Additionally, a work whose title and provenance is undisputed will be worth considerably more than one that may be the subject of protracted litigation. The names of dealers who sold the objects to the client should be duly noted. There should also be a short summary of the appraiser’s qualifications included in the report and a curriculum vitae should be appended to it.

Certain critical dates should be memorialized, including the date of inspection, the date the report is finalized, and, most importantly, the effective date of valuation, which should be decided between the client, the insurance carrier and the appraiser.

It is preferable for insurance appraisals that objects be physically inspected at the premises where they are located. This guarantees the appraiser has checked the objects thoroughly, noted any prior damage and has viewed the objects in situ, thus providing an extra level of security oversight for the insurance carrier.

The appraiser’s fee structure should be clearly stated in the report. Appraisers may charge their clients on a set fee basis, an hourly basis, a per object basis, or other agreed upon method.

All appraisals should contain complete descriptions of appraised objects, as well as a list and related analysis of comparable objects of similar value. While ranges of value are sometimes unavoidable, specific values should be offered wherever possible.

A multiple page appraisal should have items numbered in sequence, with each page numbered “X of Y” then initialed or on the appraiser’s letterhead. The customization of each page prevents unscrupulous parties from inserting or substituting a page. The system of organization must be consistent throughout the document.

Appraisal Organizations
The profession of appraising personal property is largely self-regulated. Since personal appraisers are not subject to government licensing, there are no regulatory standards promulgated by state or federal licensing agencies.

The umbrella group of all major appraisal organizations-The Appraisal Standards Board of the Appraisal Foundation-has written the Uniform Standards of Professional Appraisal Practice (USPAP), as an authoritative document covering methodology for all types of appraising.

The three major U.S. based non-profit international appraiser organizations are the Appraisers Association of America (AAA), American Society of Appraisers (ASA), and International Society of Appraisers (ISA). Each group has written on aspects of appraisal methodology for all types of personal property appraising, including appraising for insurance purposes.

How to Describe a Work of Art
The Getty Information Institute commissioned the codification of a universal system for describing works of art, Object ID. This system has identified nine basic components: type of object, materials & technique, measurements, inscriptions & markings, distinguishing features, title, subject, date or period, and maker. The ASA and AAA have endorsed Object ID, as well as the IMUA for the insurance industry. All insurance appraisals should contain these nine elements in the description of insured objects of significant value.

10 Tips for Protecting Fine Art
(Source: Chubb Group of Insurance Companies)

Keep art collections out of direct sunlight. Bright light, especially ultraviolet light can cause severe and sometimes irreversible damage to many types of artwork. Particularly vulnerable are works on paper, textiles and photographs.

Install UV filtering protection on windows in rooms containing fine art items.

Do not place artwork or valuable objects above a working fireplace. Heat, smoke and ash are potential hazards to fine art pieces.

Install smoke detectors, not heat detectors in rooms with precious objects. Heat detectors will do little to protect against soot and smoke damage. Detector should be placed within 100 feet of the valued object.

Do not store fine art items or carpets in basements or attics. Atmospheric changes in these areas tend to be dramatic and these spaces are subject to flooding and leaks.

Hire a professional art hanger recommended by a trusted source. A professional art hanger is more likely to use proper hardware and structural supports than a general contractor.

Keep home at a constant 75 degrees Fahrenheit and 55 percent humidity. Install a compact and inexpensive digital thermohygrometer to monitor temperature and humidity.

Frame all art, especially works on paper, textiles and photographs. Use “museum quality” materials such as shatter-resistant fronts and corrugated polypropylene backings.

Install water alert sensors in areas of the home with high potential for water damage. These areas include above ceiling trays and underneath washers, dryers and radiators.

Avoid installing a valuable object on a façade wall or one with exterior exposure. Façade walls may be unstable and perimeter walls are more vulnerable to water seepage from the outside.

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