Editor's Note: Stephen Halbeisen, chair of CozenO'Connor's Subrogation & Recovery Department's South Centralregion, contributed the article below.

Fine art losses come in many shapes and sizes. Often, fineart is a relatively minor component of a homeowner's or commercialproperty claim. Occasionally, however, damaged art represents thevast majority of a claim. You may have heard of the story in 2006about casino mogul Steve Wynn, who accidentally poked a hole in hisown Picasso painting, “Le Rêve,” which he had previously agreed tosell to another collector for $139 million. Given the impact of thedamage on the painting's value, Wynn decided to keep the paintingafter conservation.

In the context of subrogation, when a property loss results indamage to real property, personal property, and works of fine art,it is all too easy to focus the investigation solely on causationand responsibility for the loss. For the inexperienced claims orsubrogation professional, however, proving damages can be anafterthought. In order to maximize your potentialsubrogation recovery on a claim that involves works of fine art,understanding the recoverable measure of damages and hiring theright damages experts are as important as proving the cause of theloss.

When a loss involves damage to a work of fine art, the natureand extent of the damage must be evaluated quickly. Was the artcompletely consumed in a fire or was it damaged by smoke, humidity,water, or physical impact? The nature and extent of the damage willdictate the response by claims and subrogation professionals. Forexample, water damage to a Mark Rothko oil painting requires adifferent response than smoke damage to a rare Ansel Adamsphotograph.

Handle With Care
Proper handling of theartwork after a loss can significantly mitigate the extent ofdamage. Stabilizing the art after a loss is critical, so transferof the art to a temperature-and-humidity-controlled environment isessential. There, the art can be held for inspection and storage,pending determination of a conservation plan. When you are dealingwith a multimillion-dollar painting or sculpture, improper handlingand/or transportation after a loss can significantly exacerbate thedamages. Art handlers experienced in removing, crating,transporting, and storing fine art should be considered dependingon the value of the art in question.

Once the art is transferred to a stable environment, adetermination must be made as to whether conservation efforts canhelp mitigate or remediate the damage. The American Institute forConservation of Historic and Artistic Works (AIC), with more than3,500 members, encompasses groups and individuals that specializein specific formats and topics, such as paper, electronic media,objects, painting, photographs, textiles, wood, and so on.

Mitigating the Damage
Hiring the rightconservator can greatly mitigate the damage. The more valuable thework of art, the more critical the selection of a conservator. Ifthe work of art is not totally destroyed and can be treated by aconservator, then a treatment plan should be established before anyconservation work is undertaken. In the best-case scenario, the artcan be completely restored to its pre-loss condition and the lossin market value can be minimized.

More often than not, however, the damage can be treated only tothe extent possible without risking or causing further harm to theartwork. In those cases, the artwork cannot be fully restored and,to a certain extent, will remain permanently damaged.

When a work of fine art is damaged or destroyed, what is therecoverable measure of damage in a subrogation claim, and how doyou prove your damages? Works of art are considered personalproperty, and the common-law rules applicable to personal propertydamage also apply to works of art. When art is destroyed and cannotbe repaired or conserved, the amount that can be recovered insubrogation is market value in most jurisdictions.

Generally, market value is defined as the price the item wouldbring if it were offered for sale by a willing but not obligatedseller and purchased by a willing but not obligated buyer. SeeExxon Corp. v. Middleton, 613 S.W.2d 240, 246 (Tex. 1981).When personal property is damaged, the measure of damage is thedifference in the market value of the item immediately before andafter the damage. See Thomas v. Oldham, 895 S.W.2d 352, 359(Tex. 1995). If market value cannot be determined, or theproperty is not subject to market valuation, other methods may beused, such as replacement value, actual or intrinsic value, andsometimes sentimental value.

Pre-Loss Market Values
To prove damages ona fine art loss, the pre-loss market value of the art must beestablished. Relevant information should be gathered, such as adescription of the work of art, purchase price, photographs,condition reports, provenance (history of ownership), appraisals,and so on. It is especially important to know the actual conditionof the subject work of art, as the market value of works by asingle artist can vary significantly depending on actual condition.If the art had been loaned to museums for exhibitions, then itwould be very helpful to obtain condition reports prepared by themuseum. Recent auction sales of an artist's work may be availablethrough online services such as www.artnet.com andwww.askart.com.

The market value of fine art can fluctuate significantly overrelatively short periods of time. For example, the fine art marketwas significantly impacted by the global economic crisis that beganin fall 2008. Interestingly, the demand for the work of certainartists, such as Gerhard Richter, rebounded quickly by spring 2009,and the market for his work has remained strong since. Therefore,it may be necessary to engage an appraiser with a strong workingknowledge of the market for a specific type of art or the work of aparticular artist in order to determine the market valueimmediately before the damage occurred.

Subjectivity in Appraisal
While saleshistory and comparable sales are sometimes available, art valuationcan be a subjective undertaking. Hiring the right appraisal expertis critical. Not all art appraisers are alike. Some are claimsadjusters who have little or no experience in marketing or sellingthe work of a particular artist. Others are private art dealers orwork at auction houses like Christie's or Sotheby's withsignificant expertise in a specific artist's work. Claims andsubrogation professionals should thoroughly evaluate thequalifications and potential bias of prospective appraisers.

In the end, the appraisal expert needs to be highly qualified,competent, credible, and someone who has done his or her homework.The last thing you want is an appraiser who simply tells you whathe or she thinks you want to hear.

Post-Loss Market Values
In addition toestablishing the pre-damage market value of the art, it is alsonecessary to determine the post-loss market value. This is easywhen the art is completely destroyed or consumed in a fire;however, in cases where conservation efforts are undertaken toremediate the damage, a determination must be made of thepost-conservation market value of the art. This can be particularlychallenging because the owner of the art before the loss oftentimesretains ownership after the loss and after conservation. In thosecases, the loss in market value can only be estimated.

Most art appraisers estimate the post-conservation loss ofmarket value in terms of percentages. For example, if the work ofart had a pre-loss market value of $1 million, and the appraiserestimates the post-conservation loss of market value at 25 percent,then the provable loss of market value would be $250,000. Given thesubjective nature of this exercise, the qualifications,methodology, and credibility of the expert that appraises thepost-conservation market value of the art are paramount. If the artis actually sold after conservation is completed, then the salesprice will probably be sufficient evidence of post-conservationmarket value.

Because of the subjective nature of art as well as the pricevolatility in the art market, paying attention to the details ofthe damages aspects of fine arts losses will pay dividends withrespect to your first-party exposure—and it will significantlyimprove your ability to maximize your subrogation recoveries.