Managing the Risks of Art Ownership with Insurance

March 2012Art & Advocacy

We all purchase insurance for our homes and cars. Those with valuable art collections, however, also need to consider properly insuring their artworks. Standard homeowners insurance may not be sufficient to protect fine arts and artifacts kept in the home.

Several leading insurers offer dedicated and comprehensive fine art insurance policies that provide broad coverage on a worldwide basis, even covering transportation risks, so that art owners can protect their treasured belongings and avoid sleepless nights.

Purchasing a Policy

There are several considerations an art owner should take into account when determining how to best insure his collection. First, the art owner should ascertain whether fine art is covered under his standard homeowners insurance policy, and if so, what the scope of coverage is. Under most “deluxe” type homeowners policies from large insurers, there is some coverage for fine art within the contents coverage. However, the scope of coverage for fine art under the contents coverage of a homeowners insurance policy is generally much more limited than under a scheduled fine art insurance policy. For example, under contents coverage, there would be coverage for the cost of repairs, but generally no coverage for loss of value of fine art following a loss, no transit coverage, and no off-site storage coverage. Most likely, a deductible would apply. People with significant art collections should, therefore, consider purchasing a separate fine art insurance policy that has broader coverage and may even have a much lower premium rate than a contents policy.

Second, the owner should consider whether a blanket policy or a scheduled policy is the best approach to insure his artwork. With scheduled coverage, every piece is individually listed on the policy for a stated insured amount. With blanket coverage, there is no stated insured amount for each piece, but rather a total insured limit that applies to any one piece or all insured pieces. According to Raymond Condon, president of risk services with Aon Group’s Private Risk Management team, scheduled coverage “makes for a simpler and faster claims process in the event of a total loss from, say, a house fire, since there would be no dispute over the insured amount.”

Whether to purchase scheduled or blanket coverage depends upon the insured’s particular circumstances. Mr. Condon gave the following example:

If an owner has a $40 million art collection, with the pieces located in four separate homes across the country, and the highest value in any one home is $15 million, then it might make sense for that owner to purchase a blanket policy covering the art at all locations with a $15 million limit, instead of a scheduled policy with a $40 million limit, because $15 million is the most that could be damaged in any one fire, earthquake, etc. With scheduled coverage, the claims process becomes easier in the event of a total loss because the insurer would pay the scheduled amount, and it gives the owner peace of mind over the insured amount.

In addition, some scheduled policies pay up to 150% of the scheduled amount when the market value of the piece has appreciated at the time of loss, so the insured can actually collect more than the scheduled amount under certain circumstances. An art owner should speak with an experienced fine art insurance professional to determine whether scheduled or blanket coverage is appropriate for his particular needs.

Third, the owner should consider what risks will be covered under an art insurance policy, and what risks will be excluded. The standard coverage in the marketplace for fine art insurance is “all risk” coverage. That means that the policy covers all risks, most commonly fire, water, theft, and accidental damage, except those risks that are expressly excluded by the policy. If the loss is not caused by an excluded risk, it is covered. Coverage is generally provided on a worldwide basis, including during transit. Examples of excluded losses are wear and tear, gradual deterioration, fading, cracking caused by natural or artificial light, and loss while the artwork is being restored.

Perhaps most important, the owner must decide how much to insure an artwork or an art collection for. Mr. Condon recommends insuring a piece of art for the retail replacement value so that the insured can attempt to purchase another piece of “like kind and quality” in the event of a loss. The retail replacement value could be significantly higher than the amount the insured paid for the piece. The insurer will likely request an appraisal to support the retail replacement value.

Lastly, the cost of insurance must be considered. Several factors generally drive the premium for fine art insurance. The location of the artwork is particularly relevant. For example, is the artwork located in a five-star building in Manhattan with a state-of-the-art alarm system? Or is the artwork located in a flood zone or an area susceptible to earthquakes or hurricanes? Other relevant factors include the fragility of the artwork, the presence of fire protection equipment, and the insured’s particular loss history.

Choosing an Insurance Company

When choosing an insurance company for fine art insurance, an owner should inquire as to whether the insurer has expertise in this area, including underwriters and claims personnel who understand the art business. Of course, a proven track record in paying claims to clients’ satisfaction is also desirable. Mr. Condon noted that “there are several ancillary services that the leading art insurance companies provide that are very valuable.”

For example, some insurers provide loss prevention services where they will send a representative to an insured’s home to advise about certain preventative measures that can be taken to minimize the possibility of a loss occurring. Insurers may also have a wildfire protection unit which, when alerted to an impending wildfire in the area, can quickly dispatch a team of personnel who will put emergency fire protective measures around the property in an attempt to prevent the fire from damaging the home and the art inside it.

Insurers can also arrange to remove art from a home to a secure location prior to a hurricane or wildfire that is expected to hit the area. As another example, an insurer’s loss control department can send someone to an insured’s home with an infrared camera to check for water situations behind a wall where a valuable painting is going to be hung. The top insurers in the art field are not just involved in the underwriting and claims side post-loss; they are also actively involved pre-loss to help the insured do everything possible to minimize the possibility of a loss occurring.

As with insurance providers, insurance brokers with special expertise in fine arts are also available. When experienced in this particular area, a broker can advise clients as to the most appropriate coverage, help secure the best coverage at competitive premiums, and assist in the claims process. In addition to helping the owner negotiate specific terms and conditions in an insurance policy, such brokers may also be able to recommend shippers, storage facilities, appraisers, and collection management systems all over the world.

Owners of fine art would do well to contact a professional, such as an insurance broker in the field of art insurance or counsel experienced in art matters, to assist them in examining and addressing their specific insurance needs.