Critical Considerations When Insuring Fine Art
When procuring casualty and theft insurance for your valuable tangible assets, it is important to realize that you should not approach that task in the same way that you might when insuring general household contents. Most standard homeowner’s policies will exclude certain items from indemnification, such as fine art, furs, jewelry, and weapons. In such cases, many insurers will offer a "floater" to the prospective insured to cover items that are usually not covered under standard loss policies, and the insured must pay higher premiums for that right of indemnification.
However, a better approach is to acquire insurance from a specialty fine art insurer. Some large insurance companies have divisions for such fine art, while some other insurance companies deal exclusively with such high-end, luxury items. Why is this the better option? You and the specialty insurer will agree up front before you buy your policy as to the fair market value of your specialty assets. Afterwards, if you have a theft or total loss, there is no haggling about the amount of indemnification to which you are entitled since that amount had already been contractually agreed-upon. After purchasing such a policy, you should regularly obtain updated appraisal reports for the insured assets to be submitted to your insurer so that the amount of your indemnification (and premiums) can be appropriately adjusted. While the frequency with which you obtain updated appraisals depends upon the market for your fine art, as a general rule, Arcadia Art Consultancy suggests that updated appraisals should be obtained every one to five years, depending both upon the value of the assets, and the current state of the market.
Before issuing a casualty policy, specialty insurers will want to know how you plan to protect your art from destruction and theft. They might ask questions like:
What kind of security system do you have?
Are your assets exposed to hostile environmental conditions such as excess humidity, temperature fluctuations, direct sunlight, smoke, etc.?
Do you have an emergency preparedness plan in place if your collection is in a region prone to wildfires or hurricanes?
What arrangements are you going to be making for shipping your assets and installing them in your home?
Hiring a tangible asset consultant, that specializes in risk management, who asks these questions and takes the appropriate measures to protect your collection from preventable damage and loss, will often result in your specialty insurer reducing the amount of your premiums.
Don’t settle on an insurance company for your specialty assets simply because it offers the lowest premiums! Savvy insureds know that by far the most critical consideration when obtaining insurance of any kind is the financial security of the insurer. Many insurance companies are working near the margins of solvency that offer low premiums to get business and thereby keep their heads above water. But when the next big hurricane or other disaster strikes, they can’t meet their obligations, fail and file for bankruptcy. In the end, a bankruptcy court might award you just pennies on the dollar for your destroyed or stolen art. Arcadia Art Consultancy recommends that you procure coverage from insurance companies with at least an “A” financial rating.
Carefully read the terms and conditions of your policy. Let’s face it. Insurance policies are written chloroform, and it’s tempting to gloss over them. This is a mistake. To take one example, suppose you, like many investors, want to participate in gallery shows and exhibitions to make your artwork known to the public and thereby create some "buzz" in the market place. You hire a standard home-furnishings moving company to ship the piece, but it is damaged in transit. After you make your claim, your insurance company might well refuse to reimburse you for your loss because the policy required you to use an approved moving company that specializes in the transportation of fine art. Such moving companies have the resources to construct custom-fitted containers for your art and can transport it under temperature and humidity-controlled conditions that your insurance company might require.
You absolutely must obtain regularly updated appraisals for your fine art. Demand for particular artists sometimes skyrockets after a successful gallery show or museum exhibition. Consequently, the artist’s realized values, particularly at auction, can be volatile. Suppose that you held your art for three years after you acquired your insurance, at which time it was destroyed or stolen. During that time, the work’s fair market value might have appreciated ten-fold! However, because you failed to obtain an updated appraisal and renegotiate your insurance contract, you will receive an insurance payout that is a fraction of your artwork’s current fair market value. Therefore, you should regularly consult an art advisor as to market trends for your collection, and you must periodically hire a fine art appraiser to prepare and submit to your insurance company current appraisals.
In our digital age, the chances of you recovering stolen art has dramatically increased, and it is harder and harder to fence stolen art. Stolen art registries have become increasingly instrumental in recovering stolen assets and, as a result, more and more stolen art is being successfully reclaimed. Let's suppose that in year one, your $250,000 painting was stolen, which was the agreed-upon value you had with your insurance company. Your insurer pays you $250,000 in claims. Suppose further, that in year ten, your painting is located, and its fair market value has climbed to $1,500,000. In such a case, under typical circumstances, you do not have the standing to sue for "replevin," that is, for the return of the stolen piece. That is because when the insurance company paid your claim, it became the title holder to the painting as a matter of law. As a result, only your insurer is entitled the return and to profit from its dramatic increase in value
Specialty insurers of fine art often have a solution for this problem. For a substantial, additional premium, you may obtain a rider entitling you to possession if your stolen work is later recovered. In such an event, you, not your insurance company, will benefit from the dramatic increase in the painting's fair market value. Of course, you will be required to return the $250,000 of insurance proceeds to the insurance company with interest thereon, but you will be made whole. Arcadia Art Consultancy cannot overstate the importance of obtaining such a rider for high-end fine art.
If you intend eventually to consign your art to a dealer for resale, you must make sure that either your insurance policy or the gallery’s policy will cover you in the event of casualty or loss. Most of the time, specialty art insurers will indemnify you if the art remains in the insured’s residence or other location identified in the insurance contract. If you are unsure, contact your insurance agent. Alternatively, you have the right to ask the dealer for a copy of its current policy to make sure that you, the consignor, are insured. In any event, you must carefully read such policies to determine whether you are covered for damage to your art during its transit to a dealer.