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Selecting The Best Insurer For A Family Art Collection

Randall Willette and Katja Zigerlig

28 November 2013

Fine Art Wealth Management and AIG Private Client Group, a division of the member companies of American International Group, Inc. (AIG) examine how to select the best insurer for a private art collection in order that it may be preserved and protected for future generations. The authors are Randall James Willette, managing director, Fine Art Wealth Management, and Katja Zigerlig, vice president, Art, Wine & Jewellery Insurance, AIG Private Client Group. This paper delves into the causes of some of the most expensive art claims paid out to collectors and how families can take a more pro-active role in reducing the risk of loss and damage.

Foreword

Today’s global art community has evolved into an intricate web including international collectors, art market experts, art lawyers, and trust and estate practitioners. Insurance considerations often get overlooked, but even the most experienced collector can benefit from professional guidance.

The potential problems and pitfalls facing owners of art are numerous. Large collections, coupled with a global lifestyle, create an environment where incidents of accidental damage, theft or disappearance are more likely. Consequently, making sound insurance decisions for a family collection is a complex undertaking. One must take into account the international lifestyle of the collectors, potential exposure to risks, and interest in providing for heirs and other beneficiaries in order to chart a creative and sound course that will serve the family effectively over time.

There is more expertise than ever on the complexities of risk and coverage for art collections in the insurance industry. The first step in the process is to select an independent insurance broker, whose job is to advise the client on policy terms and conditions, point out the differences among the different carriers and policies available, and ultimately obtain coverage.

Having created or inherited a collection, a family will also want to ensure it is preserved both during their lifetime and for future generations. Collectors need to make provisions for the preservation of their collections and transmission of their works from one generation to the next. Working with an experienced art insurance carrier, collecting families can protect the value of their art through strategic estate planning. Against this background, this paper discusses the key considerations in selecting the best insurance coverage for a family’s valuable art assets.

The Rise of Art Wealth

According to the 2013 Capgemini/RBC World Wealth Report, art has become a significant element of high net worth individuals’ investments - comprising 16.9 per cent of their investment of passion allocation. High net worth individuals are re-drawing the map of the global art market in the 21st century. Many wealthy families are art lovers, own collections, or actively buy and sell in the art market. An art collection requires the same strategic planning as other investments and with the help of skilled advice can become an effective working asset.

However, once a collection has passed a certain threshold, a wide range of considerations come into play. Understanding the real value of one’s art assets is important, and having proper insurance coverage is one of the most critical aspects of building and maintaining a family collection.

Preserving and Protecting Art Assets

Art theft makes for sexy cinema. The dashing auction house expert who steals a Goya (“Trance”) to the millionaire art thief and the fashionable claims investigator on his trail (“The Thomas Crown Affair” remake). Adding to this celluloid presence is the extensive newspaper coverage of art and jewellery thefts from European institutions. Yet for private collectors, art theft is not the dominant threat.

Flooding, on the other hand, makes for an unsexy claims reality. However, dramatic damage to art and collectibles is more likely to occur from water damage and transit-related claims than theft. Over 50 per cent of the two hundred most expensive art claims handled by AIG Private Client Group resulted from “accidental damage”. This is followed by theft and deception (13 per cent), fire (13 per cent), water damage (10 per cent), mysterious disappearance (4 per cent), wind (4 per cent), all other damage (3 per cent).

Yet regardless of the cause of loss, families with art collections can take a proactive role in reducing the possibility of loss and damage. Appropriately insuring art makes it much more likely for future generations to enjoy the cultural, financial and philanthropic rewards of collecting.

Even though art insurance is readily available, some collectors have misperceptions that may prevent them from being adequately protected. For example, many collectors believe that purchasing an insurance policy or having an appraisal will result in a higher tax burden. This is incorrect. Sometimes there are tax implications for owning valuable collections, but holding an art insurance policy would not by itself increase one’s tax responsibility.

Of course, collectors should always consult a tax advisor for their specific situations. Many collections - whether of paintings, antique furniture or other prized items - have timeless value. Yet while most individuals make careful plans about how to disperse their real estate and stock portfolios, few are as diligent about determining the fate care and management of their collectibles. An appropriate insurance policy provides protection for the duration of ownership, from the moment a piece is purchased until it is de-acquisitioned.

Maintaining appropriate insurance on a collection ensures that the collector is compensated in the event of any covered loss or damage to the artwork, thereby preserving the value of the legacy that will eventually benefit heirs, family, the community or designated charities. In addition, an insurance carrier with expertise in protecting valuable art can provide the collector with suggestions about risk management and loss prevention. This will help prevent erosion of the collection’s value.

Risk Management and Loss Prevention

Damage to an art collection usually falls into in two categories: total losses and partial losses. Total losses are usually the most expensive losses, and they are generally caused by theft, fire or water. As mentioned, because thefts can be dramatic, they disproportionately get the most attention. But, when works of art are stolen from private collectors, they are usually crimes of opportunity (e.g. construction workers in the home or domestic employees).

To mitigate these risks, collectors can take measures such as upgrading security systems and running background checks on hired help. In some instances, one’s insurance carrier or broker can assist with these precautions.

Although total losses are the most devastating for collectors, the most frequent types of damage are referred to as “partial losses” - repairing the work may be possible, but extreme care must be taken to preserve or restore value. A work of art is never more at risk than when it is being handled, whether at the point of purchase, at off-site storage, or during moves between homes. As most partial damage claims occur as a result of accidental damage, collectors can ask their insurance broker and carrier whether they offer services aimed at reducing the possibility of a transit or installation loss. Transit protocols, adequate installation methods, traffic and sunlight patterns should be taken into consideration when installing their collections.

Under-insurance, although not a direct cause of loss, is an exposure with which all collectors must contend. A collection has aesthetic and financial value, so maintaining updated values is an important art asset strategy. As prices rise, maintaining adequate insurance coverage is crucial to recovering from a loss; it is impossible to completely indemnify a collector who is inadequately covered from the start. An insurance broker and carrier should be able to provide some referral sources for independent, appropriately trained appraisers.

Documentation is an additional factor that an insurance risk manager might consider when evaluating a collection. Proper documentation often can decide whether a painting has a lower or higher value, and good inventory records reduce the likelihood of loss or mysterious disappearance.

Scanning and uploading invoices, appraisals and pictures has become easier than ever with digital technology, and an inventory system with this information on file will expedite the claims process in the unfortunate event of a loss. Natural catastrophes including floods, hurricanes, wildfires and tropical storms can cause both partial and total losses to collections, but proactive emergency planning can significantly reduce the severity of these losses. Assessing the natural disaster possible at the location of every residence the collector owns is an important first step, followed by preparing a response plan and gathering supplies to enact the plan. Again, your broker and/or carrier should be able to offer assistance on assembling a plan.

How to Choose the Best Coverage for Your Family Collection

A homeowners’ policy is usually not designed for protecting unique valuable collectibles. A private collections policy should offer most of the following coverages:

• Automatic coverage for catastrophic perils

• Breakage and accidental damage

• Coverage for diminution of value

• Coverage for items while in transit

• No deductibles (typically)

• Worldwide coverage

Worldwide coverage is particularly important for collectors who have a global lifestyle, purchase art abroad and maintain multiple residences. While the private collections policy can cover broad risks, be aware that it will not protect against fraud or government seizure of works. Your broker will be able to advise on the standard exclusions of the insurance policies you are considering.

Another concern in today’s litigious world is over title. Title refers to who has legal ownership of the artwork. The most well know title claims stem from art work looted during political crisis and wars, from WWII to more recent looting of museums in the Middle East. An art insurance contract is considered a “property and casualty” policy, which will not cover claims against title. Coverage must be procured in a separate title insurance policy. Conversely, title policies only insure against title claims, not damage to physical property.

Families are in a pivotal position to protect their collections during their lifetime and beyond. Collections are not only culturally and aesthetically valuable, but they are also a tangible asset that should be addressed in wealth management and legacy planning as we will discuss in more detail below. Acknowledging (and clearly defining) the collection’s value and proactively caring for it can help ensure the owners’ legacy continues to benefit their heirs and community.

Selecting a Team of Art Insurance Partners

There is more expertise than ever on the complexities of risk and coverage for art collections in the insurance industry. The first choice a collector will make is to select an insurance broker, whose job is to advise the client on the policy terms and conditions, to point out the differences between carriers and policies, and to ultimately obtain insurance coverage. Insurance brokers are independent advisors, who earn a commission from the insurance carriers that they represent.

Some brokers are specialists who deal exclusively with art collections, while others sell multiple product lines including collections, homeowners, automobile, yachts and excess liability. An independent broker is different from a captive (or “direct”) agent. Captive agents represent only the company for whom they work, and can only sell its proprietary products and services. An independent broker will obtain quotes for a collection, and advise on the differences among carriers and their respective policies. As a collector, some questions to consider include: Does the policy offer international transit? What kind of coverage is there for natural catastrophes (flooding, tsunamis, earthquake, windstorms etc.)? Is there coverage for my collection at my various homes around the world?

Criteria for selecting a broker include:

• Ability to provide impartial advice;

• Knowledge of the art insurance market;

• Ability to identify insurance solutions based on a collector’s personal circumstances;

• Experience handling art claims;

Carriers are the insurance companies that provide the legal contracts, or insurance policies, for the purpose of transferring risk. These organisations are contractually obligated to pay for a covered loss in the event of a valid claim. Beyond the financial component, today’s sophisticated property insurance carriers often provide risk mitigation services and expertise in handling fine art claims. An art insurance carrier with art experts on staff will offer their expertise to minimise the possibility of damage or loss to a collection. They can also offer best practices on transit, shipping, storing and installation.

Reducing the likelihood of a claim means the cost for insurance premiums can be kept modest. In addition, some carriers may offer credits for the better protection of risks.

Factors to look for when selecting an insurance carrier:

• Ability to cover the full value of the art assets;

• Art expertise on staff, from underwriters to risk managers

and claim specialists;

• Financial security;

• Loss management and risk mitigation advice and/or services.

In the United States, the insurance industry is regulated by each state. Each company is legally required to meet solvency requirements, and their financial ratings are public information. In the United Kingdom, the insurance industry is regulated by two new regulatory authorities, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA is a part of the Bank of England and oversees the financial health and stability of financial services firms. The FCA is charged with protecting consumers, making sure that insurance products conform to specific regulations and that consumers receive full disclosure of their nature.

No Substitute for Sound Art Due Diligence

Over the past few years, provenance, or the history of ownership for a particular work, has become increasingly important. Provenance can help determine the authenticity of a work, establish its historical importance, and trace the work’s legitimacy. Undertaking comprehensive art due diligence also can help prevent or diminish family disputes in succession planning. However, dealing professionally with art requires time and extensive knowledge. Obtaining recognition as an art expert generally requires intense study, whether theoretical, academic or practical. It is not surprising that a new generation of technical experts sometimes come to a different perspective than their predecessors.

Information relating to origin, which often is several hundred years old, does not always prove as reliable as one would wish. Since the artist who created the work of art is no longer available, the expert must make an assessment as to the extent to which he believes the piece of work can be attributed to one or other artist on the basis of years of study and experience. Attributions of works to certain artists can and does change.

Authentication bodies exist around the world which are established to confirm (or deny) attribution of artworks. They usually are set up after an artist has died, however they are not without their own controversy. Fakes and forgeries abound in the art market. While careful checks ought to reveal any problem areas, even the specialists are fooled sometimes. There are a variety of experts within the art market, from art historians and dealers to valuers and restorers. When seeking out experts in matters of due diligence, credentials should include membership in officially approved associations or vetting committees of major international art fairs; being recognised leaders in their field; and serving as consultants to major museums and collectors.

Preserving an Art Collection for Future Generations

Having created or inherited a collection, a family will want to ensure it is preserved both during their lifetime and for future generations. Collectors and their families need to consider art as part of their overall financial and estate planning, especially in relation to other assets, such as real estate or investments. Often, the family’s overall financial needs may help to determine the specific vehicle chosen to transfer all or part of a collection from one generation to another.

Regardless of whether the children have an interest in a family collection, decisions about its disposal can be quite emotional. One key to making sure a collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in the decision-making process.

Important questions to consider include:

• Does the family wish to keep the collection intact?

• Where will the collection reside after it passes from the family’s control?

• Does the family wish to set up a private foundation or charitable trust?

• Do any family members want specific pieces in the collection for themselves or do they simply prefer to receive the proceeds from sale?

• Do the children have the organisational and financial resources to care for the collection?

The answers to these questions may have a major bearing on the ultimate art holding structure that is used. It also is sensible to take advantage of any tax breaks that may be available. For many collecting families, the ultimate strategy will be driven by a mixture of philanthropic and financial planning motives. In the case of a significant private family collection, an experienced art insurance provider can offer useful guidance to collecting families as well as serve as a reassuring check on the risks assumed by trustees.

Here are a few suggestions for developing a well-designed art succession plan:

• Maintain a complete inventory of the collection. When creating and updating a wealth transfer plan, proper documentation of the art assets is vital. Along with an up-to-date inventory, authentication documents and the provenances also should be included. Complex collections may benefit from specifically designed software designed specifically for collection management.

• Know the collection’s value and make certain that the art works are fully insured. For art and collectibles of any significant worth, an appraisal or valuation of each item in the collection should be obtained from a qualified professional every three to five years (e.g. one which meets industry standards of “best practice”).

• Plan in advance to minimise potential tax liability. With some forethought and expert art advice, careful planning can yield significant benefits in the future including financial security for the family, an opportunity to minimise potential tax liability and the chance for the owner to leave a lasting legacy through proper preservation.

• Consider charitable gifts. When philanthropy is one of the goals, begin discussions early and establish formal agreements with the recipient charities. Identify early on the charities that you want to benefit through gifts from the collection and what if any, restrictions you wish to place on the gift.

• Develop an orderly disposal strategy.

Disposing of an art collection is easier said than done. There are a relatively limited number of buyers for particular works of art, and achieving the appropriate price is not guaranteed. Work with an expert advisor to develop the best execution strategy.

• Avoid a forced sale. Relying on potential sale proceeds to pay the estate tax after a death is gamble that could hurt surviving family members. Consider the estate's liquidity and develop ways to pay the estate tax other than through a forced sale of the collection.

Conclusions

A new generation of collector is emerging for which art is increasingly becoming an important component of their overall wealth management strategy. The demand for high quality works of art with strong provenance and in good condition is making it particularly interesting as a portfolio diversification strategy for sophisticated investors. As art owners and their families develop and build an art collection, they need to protect it now and preserve it for future generations. Most importantly, they require comprehensive coverage tailor-made to their private collection so that they may enjoy their works of art at leisure. However, creating the right insurance policy for an art collection requires a personal touch, taking into account the unique needs, interest in providing for heirs and other beneficiaries in order to chart a creative and sound course that serves the family effectively over time.