A recent federal court decision held that financial loss resulting from the consignment of paintings by their owner to an art dealer can constitute physical loss to property under the terms of an all-risk insurance policy.
The Jan. 16 decision (and March 14 order denying reconsideration) by Judge Robert W. Gettleman of the U.S. District Court for the Northern District of Illinois, Eastern Division, in the case of Henry F. and Anne Marie Frigon v. Pacific Indemnity Company, should be of great interest to inland marine insurers of art.
The ruling highlights yet another way in which the greatest threat to works of art is from insider theft.
The plaintiffs were art collectors who had bought and sold art for a number of years, assisted by a prominent Chicago art dealer–Richard H. Love, of R.H. Love Galleries. The plaintiffs purchased most of their collection of Early American Impressionist art from Mr. Love's gallery.
Between 1997 and 2002, the plaintiffs placed 11 paintings with the gallery for sale on consignment, pursuant to either a written consignment agreement or an oral agreement between the plaintiffs and the gallery.
The plaintiffs had paid over $1 million for the paintings–which included Childe Hassam's "Sunset, Little Hills"–and the paintings were consigned with an aggregate minimum sale price of $1.6 million.
The plaintiffs alleged that, unknown to them at the time of the consignments, the gallery had been insolvent for years and had been selling consigned art for less than the minimum agreed price and keeping the proceeds to keep the gallery operating.
Contrary to the consignment agreements, the gallery sold the plaintiffs' paintings through trades and sales for less than the minimum prices, then neither forwarded payments to the plaintiffs nor informed them of the transaction.
Ultimately, the plaintiffs became concerned and demanded the return of the paintings. Mr. Love admitted to the plaintiffs that the paintings had been sold and the gallery, having spent the proceeds, could not pay the minimum sales prices to plaintiffs.
The plaintiffs insured the 11 paintings with Pacific Indemnity under a policy covering "all risk of physical loss to valuable articles." After the plaintiffs made a claim to the insurer–denied on grounds that the plaintiffs could not establish a covered loss–the plaintiffs brought a complaint against their carrier, seeking a declaration that the paintings had been lost or converted, and were covered under the terms of the insurance policy.
The court granted plaintiffs' motion for summary judgment and denied defendant's cross-motion for summary judgment. The defendant insurer later moved for reconsideration of the order on the grounds that the court's opinion misunderstood certain facts and misapplied the law of conversion, and that motion was denied.
The plaintiffs had the initial burden of showing the existence of a covered loss, and the court found that the gallery sold the paintings without authority and then failed to remit the proceeds, constituting conversion under Illinois law.
Since the court found there was no doubt that the gallery's unauthorized sales deprived plaintiffs of their property, it concluded that plaintiffs met their burden of showing a covered loss.
There are lessons to be learned from this case by inland marine underwriters:
o If a policy's definition of loss may encompass conversion of consigned property, it would be wise to require the insured to notify the insurer prior to consigning a painting.
o An insurer may also wish to charge a higher premium when art is consigned, as a result of the accompanying risks.
Also of note in this decision is the court's finding that, even though all of the paintings had been improperly sold by the gallery before the inception of the defendant's policy, the act of conversion occurred when plaintiffs demanded the return of their property and the gallery refused.
The final element of the conversion was the gallery's refusal to return the property, which occurred during the defendant's policy period.
The implication for inland marine underwriters is that even if breaches of consignment agreements occur in one or more prior policy periods, the actual act of conversion may be deemed to have occurred in–and be entirely allocated to–a current policy period. Consequently, during the application process underwriters should inquire about all art that been consigned.
As a final note, apparently the plaintiffs' paintings were sold to bona fide purchasers. However, plaintiffs have made attempts to recover at least some of the paintings, and one of the paintings was the subject of litigation to clear title.
This case illustrates that in addition to more attention-grabbing instances of clouded provenance–such as sales under duress during the Nazi era–title issues may also arise in the context of consignment.
Underwriters may wish to offer, and purchasers of consigned art may wish to purchase, art title insurance to cover risks arising from challenges to ownership.
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