This is the second part of a feature examining how captive insurance can be of use in protecting family art collections.
This is the second part of a feature examining the rise of private art collections. It is written by Randall Willette, founder and managing director of Fine Art Wealth Management, and Paul Bailey, co-founder and non-executive director, Private Captive Insurance PCC. To view the first part of this article, see here.
The process of insuring art has little changed, involving a valuation being sought, an insurance broker being engaged and a policy written by the insurer using a standardised policy. However, with the growth of substantial family art collections, insurance requirements are much more complex, as the collection may be located globally. Levels of security may vary from location to location and the art may be regularly transported or loaned to exhibitions.
It is now common for there to be gaps in the historic types of coverage as the commercial insurance providers will not provide the cover based upon the specific requirements of the collector, and if they do, it may be uneconomic. As it can be difficult, costly and time consuming to obtain the precise recover required, a recent innovation in art insurance has been developed to overcome these problems with the added benefit that it can lead to a substantial discount in premiums.
Developed for the commercial world, captive insurance provides the ability through a regulated private insurance structure to obtain a personalised policy directly from the re-insurance market (i.e. the underwriters). Of the Fortune 500 companies, more than 350 have their own captive insurance structure to provide flexible and cost-effective risk management and this has been adapted into a specialised innovative solution for art collections and other private assets.
There are five main benefits. First, each policy is unique and built around the specific requirements, so the gaps in coverage detailed above can be filled. Second, direct access to the re-insurance market rather than using a broker and standard policies can provide a substantial reduction in premiums. Clients also benefit from the collective buying power of the captive insurance manager. Third, the premium is assessed based upon the specific risk and claims history, not a general market rate. So where there is especially good security and a low claims history, the re-insurer will reduce the premium rather than the family subsidising other people’s losses. Fourth, the ability to set the level of deductibles and self-fund part of the risk which, even if modest, can lead to a disproportionate fall in premiums. Finally, simplified administration as one policy and one annual premium covers all the assets insured by the captive (both art and other assets owned by the family). Captive insurance therefore provides flexible and cost-effective risk management for a broad range of a family’s assets.
Structuring a captive insurance programme
As detailed above, captives were developed for the management of commercial risks and therefore the cost of creating and using them has been uneconomic for privately owned assets. However, several jurisdictions have created a type of captive that is cost-effective and therefore accessible for the management of insurance for private assets such as art collections.
Rather than creating a separate captive insurance company for each family, the cell of a protected cell company (PCC) is used. The PCC is regulated in its jurisdiction and has the fiduciary oversight of its board of directors. The PCC creates cells (similar to subsidies) which are segregated from all other cells, and in the case of Guernsey each cell is regulated as a separate insurance entity wholly owned by the family, trust or foundation. The cell is separately audited and has its own bank account. The cost of creating and establishing a captive cell is substantially lower than a stand-alone captive, as the “core” of the PCC has a management agreement with the cell which therefore does not need its own board of directors.
Once established, the cell issues the policy to the family (or trustees) to cover all the risks based upon the specific requirements and a single premium is paid. The captive insurance manager then places the risks directly with pre-selected re-insurance companies and it is at this stage that, if preferred, some risk can be retained within the cell (i.e. the deductible). However, many families do not wish to have deductibles and the collection is fully insured.
In the event of a loss, the captive insurance manager claims against the re-insurance company on behalf of the captive cell, which subsequently pays out under the policy provided to the family. In the traditional insurance model, the process of claiming in the event of a loss can be difficult and time-consuming for families but the use of the cell and captive manager much simplifies this process, which is undertaken by the captive manager. Again, the buying power of the captive manager can be beneficial.
Fiduciary risks and liabilities of holding art in trust
Just as trustees and executors must undertake proper due diligence with regard to financial assets, they must do the same for art assets owned by the estate or trust. Where a formal fiduciary relationship exists, a trustee could be exposed to a claim for breach of fiduciary duty and negligence for failing to obtain insurance based on current valuations and/or maintain adequate records regarding provenance and condition of the art works.
The ability to establish and prove ownership of artworks is essential. There is no central registry of art ownership but there are various stolen art databases that have varying degrees of utility. Although not a universal practice for art theft losses, failure by a trustee to register stolen art may in some circumstances be negligent.
A trustee’s role may include buying, selling, exhibiting, maintaining, moving or loaning clients’ art. In each case, different considerations arise that require detailed and separate examination. The use of carefully drafted agreements for transacting around the art is one way to limit the trustee’s exposure. Such agreements cover, for example, liability for tax, compliance with import and export regulations, and payment of artists’ resale rights, copyright, risk and insurance. However, the efficacy of such agreements may be limited, as the art market does not always embrace such agreements.
Few collections are thoroughly vetted by trust and estate practitioners. It is unusual to find a full inventory of art appended to a trust deed or elsewhere. It is also rare to see complete documentary evidence of sale and purchase, ownership history, an accurate description of the artwork with images or up-to-date valuations. All of this information needs to be sought out and regularly updated. If art is lost or stolen, the chances of recovery or adequate compensation are greatly reduced without such organised information.
As the risks associated with family art collections tend to grow more complex with the passage of time and with collections becoming a greater part of overall personal wealth, high net worth families and trustees would be prudent to consider carefully the management of these assets and the risks associated with them. Creating a captive insurance programme for a family art collection can provide an effective means of lowering the cost of the art insurance and maintaining greater control of the risk management process.
About the authors
Willette is the founder and MD of Fine Art Wealth Management, a professional membership-based advisory firm that provides independent consulting to wealth managers and their private clients on wealth structuring for art assets. Prior to establishing the company in 2003, he was executive director and head of art banking for UBS Wealth Management in London, responsible for helping to build its global art banking franchise in Europe and America.
Bailey is co-founder and non-executive director of Private Captive Insurance PCC. He has 28 years of experience working with international families and trustees, primarily in the field of wealth management. He started his career working for Schroders in London and after 12 years joined GAM, where he was a client director both in London and Bermuda. He has been a regular speaker at conferences on a broad range of topics related to private wealth.