Assessing Liquid Assets

Wine collecting is one of the fastest growing pastimes in America. United States wine sales totaled $23.2 billion in 2004, and fine and rare auctions in the U.S. netted over $166 million in 2005, according to numbers just released by the major companies–a sharp increase of 31 percent over 2004. To house their burgeoning collections, wine connoisseurs are adding wine cellars to their homes in droves.

Today, wine cellars rival other luxury items such as granite countertops and mahogany floors as must-have amenities in high-end homes. However, from an insurance perspective, the stakes are much higher for wine than for many household items. Not only can wine be extremely valuable, but it is also fragile, perishable, and much more prone to loss. As more and more collectors seek wine collection policies, the insurance industry must be prepared to assess the unique risks associated with wine and provide knowledgeable claims adjusters.

Avoiding Claims

Wine, like all areas of insurance, carries its own unique set of risks, and proper storage can be the key to avoiding loss. Regardless of the cellar size, bottles must be securely stored. Racking should be solid, with bins secured to the walls, not freestanding. In areas with seismic activity, racks should be angled back to prevent bottles from “walking” out of their bins, and display racks must have a sufficient lip to prevent bottles from rolling off. Bottles should not be piled against each other in huge bins without dividers. A good rule of thumb is a maximum of 12 to 18 bottles per bin. This limits weight and movement, which can cause label damage and decrease resale value. Full case storage is important as well. Overhead storage is more precarious to reach, thus increasing the possibility for loss.

The wines' surroundings are also critical to preventing and assessing loss. Wine likes cool, humid air and an absence of vibration and UV light, and it is important to assess risks associated with these conditions. Identify any possible sources of vibration near the cellar. HVAC compressors, pumps, elevator motors, other machinery, and even staircases can cause vibrations which may damage wine.

Additional Risks

Ideally, cellars are below grade where temperatures can be easily controlled. However, flooding then becomes a risk. Identify any below-grade exterior doors through which water may enter, and check for both primary and back-up sump pumps. A single vapor barrier should be installed external to any framing or insulation and closest to the surrounding walls. Double layers of vapor barriers are dangerous, as they can trap and condense moisture between studs, leading to mold and rot issues.

Temperature control is also important. Ventilation in a cellar should be uniform, and there should be no excessively warm or excessively cool regions of the cellar. If substantial window exposures exist, window treatments and/or UV-blocking film should be installed. Doors and windows must also be sealed and properly insulated. If a cellar is properly insulated, it should hold its temperature during a short power interruption. Rapid temperature increase when power is shut off is a sign of inadequate insulation and/or air leaks.

Claims Sources

Perturbation of the ideal wine environment will typically involve loss and lead to a claim. The most common claims are those due to breakage, flooding leading to label damage, cooling failure, and inadequate humidity which causes dry corks, leaking, and oxidation. Structural failures of racking, where many bottles are broken at once, are also a major concern.

In the event of loss, claim adjusters must consider the age, rarity, provenance (purchase and storage history) of the collection, and the degree of damage. A wine exposed to heat above 80 degrees is likely to be irreversibly damaged, while a damaged label due to short-term water exposure does not affect the inherent quality of a bottle's contents but does decrease resale value. A claim adjuster must be able to identify conditions that cause total destruction versus superficial damage, even when the bottle itself is not broken. Enlisting the services of an expert sommelier may be very beneficial in identifying damage.

After damage is identified, determining the value of the claim becomes important. A detailed knowledge of the current resale and auction markets is essential for proper claim adjusting in this area. Each lost wine must be assessed for where it is in its maturity at the time of loss. A formerly valuable wine, well beyond peak drinking, is worth considerably less than a young collectible wine lost before its prime. Data on current values is constantly changing and must consider factors such as bottle size, source and storage conditions prior to the loss. Again, an expert sommelier may be a good resource to assist with valuation to ensure that both the insurer and the insured get a fair loss assessment based on the maturity and current market valuation.

America's passion for wine collecting shows no signs of slowing down. With hundreds of millions of dollars at stake, protecting valuable wine collections is an increasingly hot topic in the insurance industry. As a result, more and more adjusters are learning the intricacies of assessing liquid assets. And we'll toast to that.

Marc Lazar is owner of Cellar Advisors, LLC