Editor's Note: Stephen Halbeisen, chair of Cozen O'Connor'sSubrogation & Recovery Department's South Central region,contributed the article below.

Fine art losses come in many shapes and sizes. Often, fine art is a relatively minor component of a homeowner's orcommercial property claim. Occasionally, however, damaged artrepresents the vast majority of a claim.

You may have heard of the story in 2006 about casino mogul SteveWynn, who accidentally poked a hole in his own Picasso painting,“Le Rêve,” which he had previously agreed to sell to anothercollector for $139 million. Given the impact of the damage on thepainting's value, Wynn decided to keep the painting afterconservation.

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 causation and responsibilityfor the loss. For the inexperienced claims or subrogationprofessional, however, proving damages can be an afterthought. In order to maximize your potential subrogationrecovery on a claim that involves works of fine art, understandingthe recoverable measure of damages and hiring the right damagesexperts 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 the artwork after a loss can significantlymitigate the extent of damage. Stabilizing the art after a loss iscritical, so transfer of the art to atemperature-and-humidity-controlled environment is essential.There, the art can be held for inspection and storage, pendingdetermination of a conservation plan. When you are dealing with amultimillion-dollar painting or sculpture, improper handling and/ortransportation 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 istransferred to a stable environment, a determination must be madeas to whether conservation efforts can help mitigate or remediatethe damage. The American Institute for Conservation of Historic andArtistic Works (AIC), with more than 3,500 members, encompassesgroups and individuals that specialize in specific formats andtopics, such as paper, electronic media, objects, painting,photographs, textiles, wood, and so on.

Mitigating the Damage

Hiring the right conservator can greatly mitigate the damage.The more valuable the work of art, the more critical the selectionof a conservator. If the work of art is not totally destroyed andcan be treated by a conservator, then a treatment plan should beestablished before any conservation work is undertaken. In thebest-case scenario, the art can be completely restored to itspre-loss condition and the loss in 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 permanentlydamaged.

When a work of fine art is damaged or destroyed, what is therecoverable measure of damage in a subrogation claim, and howdo you 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 the property is notsubject to market valuation, other methods may be used, such asreplacement value, actual or intrinsic value, and sometimessentimental value.

Pre-Loss Market Values

To prove damages on a fine art loss, the pre-loss market valueof the art must be established. Relevant information should begathered, such as a description of the work of art, purchase price,photographs, condition reports, provenance (history of ownership),appraisals, and so on. It is especially important to know theactual condition of the subject work of art, as the market value ofworks by a single artist can vary significantly depending on actualcondition. If the art had been loaned to museums for exhibitions,then it would be very helpful to obtain condition reports preparedby the museum. Recent auction sales of an artist's work may beavailable through 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 sales history and comparable sales are sometimesavailable, art valuation can be a subjective undertaking. Hiringthe right appraisal expert is critical. Not all art appraisers arealike. Some are claims adjusters who have little or no experiencein marketing or selling the work of a particular artist. Others areprivate art dealers or work at auction houses like Christie's orSotheby's with significant expertise in a specific artist's work.Claims and subrogation 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 to establishing the pre-damage market value of theart, it is also necessary to determine the post-loss market value.This is easy when the art is completely destroyed or consumed in afire; however, in cases where conservation efforts are undertakento remediate 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.