Elevating Underwriting to a Fine Art Form

The Sistine Chapel was not Michelangelo’s first creation. Roy Lichtenstein and Jackson Pollack did not develop their distinctive artistic styles the first day they picked up a paintbrush. Monet, Renoir, Degas and van Gogh did not become Master Impressionists overnight. It is therefore no wonder that underwriting insurance coverages for these forms of fine art requires its own special mastery.

Insuring fine art is an art in itself. Renowned artists honed and cultivated their skills and style over time, carefully studying light, texture and all the other elements that distinguish the final accomplishment – a work of art, a masterpiece, a one of a kind. Because of its focus on insuring distinctive items with unique values, fine art underwriting requires a finely tuned expertise.

To the uninitiated, insuring fine art could be construed as insuring someone’s property. Insuring fine art, however, requires distinctive underwriting treatment because of the distinct characteristic of what is being insured. It is not the same as providing coverage to a building, which, if damaged or destroyed, can be rebuilt at a specified cost. If damaged, stolen or lost, artwork can rarely be “rebuilt” or “replaced.” That’s because art’s value often centers on its uniqueness.

PRESERVING VALUE

If possible, the value of artwork can be preserved or, at the very least, a collector can be compensated for a lost treasure. The rising value of artwork, a growing passion for art collecting, and a fear of terrorism or natural disasters destroying unique treasures all contribute to an increasing interest in and demand for specialty fine art coverage – and, of course, the right underwriting expertise to properly provide it. These factors are encouraging museums, private and corporate art collectors and others to seek knowledgeable underwriters who are involved in the art market. Fine art underwriters can provide appropriate risk management services to help reduce potential exposures to one piece of art or a collection.

Specialized brokers and insurance carriers often help keep insurance coverages in line with rising art values; at the same time, they offer valuable suggestions for minimizing potential risks to artwork. They may, for example, give advice on security systems, climate controls, transporting, lending practices and appraisals.

Fortunately for insurance companies, most museums and collectors are deemed a “good risk.” Because of the high value of artwork and its ‘priceless’ nature, they are habitually meticulous about displaying, lending, and handling artwork. Additionally, many insurance companies view Canada as an especially attractive market because clients:

* Pay attention to risk management practices.

* Benefit from a lower crime rate.

* Are less susceptible to natural disasters and other exposures that pose greater risk to art collections located elsewhere.

In general, Canada takes the preservation of its fine art collections very seriously. It is home to an impressive network of museums, largely due to government initiative. The Canadian government places a high value on establishing a cultural policy and preserving its art, artifacts and heritage. According to the Canadian Museums Association (CMA), there were only 838 museums, galleries and related institutions in Canada in 1972. That year, however, the Canadian government announced a national museums policy that called for the contribution of significant funds to help establish other museums. Several programs developed at this time included the Museums Assistance Program, the Canadian Conservation Institute, and the National Inventory, which later became the Canadian Heritage Information Network. Despite the government’s record of fluctuating funding levels for museums, the CMA touts Canada’s prominent role in museum operations – operations that are respected internationally for their public programming, professionalism and quality facilities.

Today, many of the 2,500 museums and related institutions in Canada employ comprehensive risk strategies, including the exercise of insurance purchasing power through a CMA insurance pool.

MANAGING EXPOSURE

Despite taking all precautions, employing the highest levels of security and providing the safest possible environment, art collectors cannot completely eliminate all risks. For example, in one highly publicized incident, Norwegian painter Edvard Munch’s famous painting “The Scream” was recently stolen from the Munch Museum in Norway by armed robbers in broad daylight. Ironically, the museum had not insured the painting for theft; it had insured the painting for fire and water damage, and for restoration costs incurred to repair the paintings if they were damaged. While art theft may grab media attention, it is certainly not considered to be the greatest risk to artwork.

In reality, the most common reasons for the loss of artwork include fire and smoke damage, water damage, and breakage or damage during transit. Since artwork is often enjoyed and displayed publicly, qualified fine art underwriters regularly help their clients take extra precautions in the eventd of displaying, transporting and/or lending their collections.

While insurance firms may not encourage their collector clients to lend artwork too readily, they will – once the artwork leaves the collector’s possession and is transported to be enjoyed by others – work with clients to make sure the artworks are insured appropriately or “nail-to-nail.” During this process, insurance carriers and brokers can recommend coverage options, including separate coverage or having the collector become a “named insured” on the borrower’s policy. Fine art premiums are typically calculated on probable maximum losses. Two paintings displayed in one place, such as an individual’s private collection stored at home, could be entirely destroyed in a fire. It is less likely an entire $150-million museum collection, housed in several locations, would be destroyed at once. Therefore, large collections, such as those of museums, may only purchase a certain percentage of the value of their entire collection. A private collector, on the other hand, may purchase insurance to cover an entire collection.

COMPREHENSIVE COVERAGE

Overall, insurance premiums have climbed from what were once historic lows. Fine art coverage was once perceived as being very expensive. Now, in light of increasing art values, it is considered one of the most comprehensive coverages available on the market.

Many museums and collectors choose to insure their artworks under All-Risk policies, which offer broad coverage and few exceptions to exclude coverage. Under these specialized All-Risk policies, artwork is offered protection against flood, earthquake, vermin, mold, fire and other potential exposures.

Another option is a Named-Peril policy, which may be similar to the coverage employed by the Munch Museum in Norway. Note that the Munch Museum policy offered flood and fire coverage, but did not include theft under its policy terms. Most fine art underwriters and their claims departments have their share of unusual claims stories to tell. In one recent incident, for example, a protestor in a German museum did a handspring right through a work of art. In-house claims expertise, including the know-how to handle unusual circumstances, is another important consideration when deciding on fine art coverage and the right provider. Choosing an insurance company that specializes in fine art – including a consideration of the company’s capacity to handle restoration or reparation quickly should damage occur – will help to avoid complete loss in case of damage. Remediation of a piece of art often needs to begin immediately; if the insurance company is not equipped to handle fine art, the claims adjuster will not know the proper professionals to call.

Until recently, insurance companies based outside of Canada provid
ed most of Canada’s fine art coverage. As a result, insureds faced the possibility of paying a federal excise tax. In Canada, XL Insurance Company Ltd. is offering fine art coverage on domestic paper, eliminating the need to pay this federal excise tax and contributing to the affordability of coverage.

VALUE PROTECTION

Documenting value is one of the initial steps in underwriting fine art protection. The constantly fluctuating art market is a substantial factor in determining the value of an individual piece or a whole collection. Over the years art prices have soared – increasing more than 20-fold since 1985, according to some experts – increasing the value of most artwork across the board, and forcing the need to properly insure. As the value of art goes up, so do insurance premiums, which are calculated on the value of the artwork. Collectors and museums are finding themselves reevaluating their works on a regular basis – usually every three to five years – to ensure adequate coverage.

Policies usually have two ways of dealing with the value of a collection. Insureds can purchase an agreed value policy, which determines the itmes value at the inception of the policy. Alternatively, they can opt for a current market value policy, which would assess the value at the time of a loss. Either way, underwriters will request evidence of an artwork’s value, including a recent bill of sale or appraisal.

Henri Matisse wrote: “Time extracts various values from a painter’s work. When these values are exhausted the pictures are forgotten, and the more a picture has to give, the greater it is.”

When seeking to protect a master’s work, a family heirloom or an emerging artists collection, today’s fine art coverages, delivered by underwriters who have honed their own specialized talents, are offering more affordable protection and thus are able to provide assurance that the value of a cherished collection is long preserved.