Filed Under:Agent Broker, Coverage & Policy Issues

Insurance Advice for the Increasing Popular Trend of Art Collecting

By Heather Struck

NEW YORK, April 12 (Reuters) - Visitors who have tried to visit New York's vaunted Armory Show of contemporary and modern art last month may have spent more time pushing through crowds than examining the exhibitions.

More than 60,000 visitors - the most ever - crowded into two dockside spaces overlooking New York City's Hudson River for the three day event, where they sipped champagne, murmured over works by masters like Andy Warhol and Cindy Sherman, and threw down big money to snap up a piece of the new art scene.

Art collecting and visiting is becoming increasingly popular, as evidenced by more and better-attended shows and robust auctions. It hasn't hurt that the growth in art prices have been outstripping stock markets worldwide and in the U.S, according to the Mei Moses Fine Art Index. In the first quarter of 2012, prices of postwar and contemporary art sold at auction were up 29.6 percent from the same period the year before, for example.

At the same time, art buying is becoming more democratic. Buyers no longer need a dealer to purchase a work, according to Dena Crosson, an private appraiser with Crosson Fine Art in Bethesda, Maryland. "A lot more people are showing up themselves to bid on art."

Those people, increasingly, are so-called mass affluent, who are joining traditionally wealthy art collectors in the search for an appreciating asset they can hang on the wall and enjoy. Financial advisory firms like Citi Private Bank and HSBC Private Bank are using art advisers to help clients who want to invest in art, build collections, or borrow against the pieces they own.

Nouveau collectors may be able to gain access to contemporary artwork, which can range in value from a few thousand dollars to multiple millions of dollars for a single piece. But their work and expense does not end when the check is written. Collectors have to figure out how to protect their investments and avoid common pitfalls. Here are some of them, and what to do about them.

ACCIDENTS HAPPEN

A few months ago, a professional art moving team was carrying a valuable painting into the residence of a Los Angeles art collector, when one of the movers slipped and scratched the painting with a hammer, putting a small hole in the canvas.

Panic ensued, but the painting, which had been appraised at more than $2 million, was covered by an insurance policy. One of the first things that the insurance broker did was contact independent art advisor Megan Fox Kelly in New York to evaluate the extent of the damage. She determined that the incidental slip of the hand had shaved just a few thousand dollars - not a huge amount - off the value of the painting.

Though they may be rare, art accidents do happen, and sometimes they are a lot costlier than that. Las Vegas hotel owner Steve Wynn caused art dealers around the world to gasp in 20 0 6, when he accidentally put his elbow through a Picasso he had just sold, forcing him to cancel the sale.

Most art insurance policies will cover physical damage from accidents like fire, flood, paintings falling off their hooks and even misguided and totally-against-the-rules football tosses. These risks are common enough, and insurance should be a mandatory step in buying art, says Kelly. "I can't encourage people enough to insure their art investments," she says.

Insurers that specialize in art, like the market leader Chubb Corp. and AXA, can offer plans that may cover some or all of an art collection. A collector, can, for example, buy $1 million of coverage for $1.5 million in art on the theory that every piece won't get lost or completely destroyed at the same time.

Art coverage can be added to a homeowners policy, for as little as $1 or $2 a year per $1,000 of art. But the caps in those policy may be too low and a separate art policy might be better, says John Buxton, a Dallas, Texas, appraiser.

Insurance policies will usually cover the work while it is in transit, but dealers and auction houses may also insure the work against shipping damage. Most consultants recommend hiring a professional art handler when moving or reinstalling art, which is a highly technical and skilled job.

Michelle Impey, a senior fine art specialist for Chubb, suggests that collectors make an art inventory list with photographs and store it in a separate location. Burglar alarms are good, but many people fail to actually use them, she says. Collectors can consider arming individual paintings or sculptures with motion-sensor alarm systems, so that they will be active even when doorways and windows are unarmed.

Traditional insurance policies do not cover the gradual deterioration of art as it ages. Art owners can minimize damage by carefully surveying the environment where it will be displayed.

"The collector's first instinct is to think about the art work as the focus point in the room," says Impey. They may, however, also pay attention to points where water can leak inside walls, such as underneath bathrooms, where doors may swing and even where children may be passing frequently, like staircases.

In situations where the environment is made very risky for art works, such as heavy construction or even weather (think hurricane season in Florida), a fine art storage facility like Fortress or Christie's Fine Art Storage may be a good space to wait out the conditions. But it can cost hundreds or thousands of dollars per month for a room to store entire collections.

ROLLERCOASTER VALUES

Having an art work appraised is part of every art buyer's experience when they want to sell, but, because values of contemporary art can go up and down from one auction to the next, owners could save a significant amount in insurance premiums by keeping appraisals up to date.

There are many reasons why an art work's value can fall, the most common being the capricious values of the contemporary art market.

"The standard rule of thumb is to reevaluate your art every five years," says Crosson.

"Tell the appraiser what the valuation is for, and be very clear about why you need an appraisal," says Dorit Straus, fine arts manager for Chubb Personal Insurance. Owners may have their artwork appraised so it can be used as the basis for a loan or to settle an estate.

Art forgeries are not common in the contemporary world - Kelly says she has never dealt with an authenticity issue in her work - but the stories of art sales that turn out to be forged paintings are exciting enough to grab art buyers' attention.

The best way for collectors to protect themselves from buying forged works, or works that are deemed authentic and overturned years later by art foundations, is to take a good look into the art's provenance - or the chain of owners that a work has passed to and from.

Another way to approach this is simply to always buy from a trustworthy dealer. "A dealer should always be happy to help look into the work's background," says Straus. "If a dealer has problems with this, that is already a red flag."

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