The insurance market for museums and historic homes remains competitive yet stable, with favorable loss experience, intelligent and loyal buyers, as well as a certain degree of prestige attached to it, marketers of this specialty coverage say.

The niche, while somewhat insulated from the volatility of the broader insurance market, has not been immune to the impact of the troubled economy and soft pricing trends afflicting the property and casualty industry in general, National Underwriter learned.

James M. Henry, underwriting manager for Markel Insurance, for example, said pricing for properties such as historic homes and museums has been soft–for museums in particular. “We see some fluctuation in price, with a downward trend over the past several years,” he said. “But coverage has been readily available at a competitive price for some time now for the better risks, and underwriting results have been good.”

David Price, executive vice president and chief underwriting officer of wholesale brokerage Burns & Wilcox, said there has also been an economic impact, to some extent. For museums insuring their contents, he noted, cost-cutting measures could include increased retention of risk during this economic downturn.

“To me, that's one way you could save some money, if you have good protection on the risk itself,” he said.

But he also said carriers are aware of the financial condition of museums, and work with their insureds to improve costs.

As for the risks themselves, Joseph C. Dunn, president and chief executive officer of Huntington T. Block (HTB) Insurance, a specialty fine art brokerage and an affiliate of Aon, noted the difference between insuring a historic structure and additional coverages for the contents contained therein–such as historic pieces contained in a museum.

For the actual structures, such as historic homes, the challenge, professionals said, is finding ways to replicate forms of construction no longer in use today.

Scott R. Spencer, senior vice president, worldwide appraisal and loss prevention manager for Chubb Personal Insurance, said materials, for example, may no longer be readily available. Modern homes, he noted, do not have hard pine floors, wrought iron hinges, plaster walls or slate roofs, so restoring the structure becomes more expensive than simply the sum of its parts.

As Mr. Henry observed, “a client with a historic building does not want the building repaired with 'colonial-style vinyl siding' from the local building material dealer's discount lot, so make sure historic property valuation coverage is available.”

He said Markel relies on the insured to establish the correct historic replacement cost by means of an appraisal.

These appraisals and valuations are the key to insuring structures, Mr. Price said. He added that all parties–the insurer, insured, and “to some extent, those doing the work”–need to reach an agreed valuation so it is understood what will be paid for and what will not.

“It's a fascinating subject to bring an object back after a loss as best as it can be recreated,” he said, adding that it often involves “very large sums of money.”

He said it is difficult–and sometimes not possible–to replace a 250-year-old building with the same quality. Those parts that can be replaced, Mr. Price added, may require some serious searching.

Historic structures, he said, “present all kinds of challenges for underwriters who want to write this class of business.”

For Chubb, Mr. Spencer said the company appraises every home it insures–historic or otherwise. But because of the unique construction, he said it could cost, for example, $2 million to rebuild a home purchased for $1 million.

To properly appraise an historic home, Chubb has specialists around the country visit the house, said Mr. Spencer. He noted that these specialists study historic homes and are familiar with the costs and materials.

Chubb also works with the insured to learn about the home and teach the insured as well, Mr. Spencer said. He explained that in most cases, the insured is moving into an historic home for a reason–because they like the uniqueness, or are interested in history.

“Infrequently do you find a customer who accidentally ends up in an historic home,” he added.

But once in a while, Mr. Spencer said a customer will say they do not want to rebuild the home to its historic specifications. He said this occurs more frequently at policy inception, when an insured will voice intent to replace walls after a loss with drywall rather than plaster.

An actual loss, though, can change the customer's opinion, Mr. Spencer noted. If there is only partial damage, for example, would an insured choose to replace just the damaged part with drywall while leaving the plaster on the undamaged parts?

“What one thinks at the time of appraisal can be different than at the time of loss,” according to Mr. Spencer. “We try to work with the customer to identify…the price.”

Mr. Spencer said an insured who has been in a classic home for awhile will usually try to maintain the historic specifications after a loss.

When a loss does occur, Mr. Spencer said the key is to find contractors that focus on the restoration and reconstruction of historic homes. “We engage them at the outset of a claim,” he noted.

These contractors can obtain the proper materials from a variety of sources, Mr. Spencer said, including salvaging them from partially destroyed homes and using reproduction materials that can match those in historic homes.

The restoration could even involve such details as layers of paint, he said, noting that in 1840, there may have been 25 layers of paint on the molding, so the look is different with just one layer.

As far as how frequently losses occur with these structures, Mr. Spencer said historic homes stand up quite well compared to modern houses. He said hundreds of thousands have perished over time, so the ones that remain almost fall into a “survival of the fittest” category.

Loss experience, he said, is actually better than on homes built in the 1970s.

Regarding coverage for valuable collections, such as those on display in museums, Mr. Henry said that “along with the basic coverage for building, business personal property and general liability coverage, museums and historic homes have unique needs in covering their collections of artifacts, fine arts, furniture, prints and paintings.”

He said such exposures are “best covered by an inland marine floater, which can broaden the covered perils and will also address exposures such as property on loan to the museum, in transit and on display at another center.”

Once again, there is an important emphasis put on valuations and appraisals.

“The value assigned to collections is always a concern,” pointed out Mr. Henry. “Ideally, higher valued items will be scheduled in the policy. We rely on the insured to set the value and require recent appraisals for high valued items.”

The benefit of extra work on the front end helps to ensure smoother work on the back end, according to Mr. Henry “The extra effort that goes into establishing values before a loss occurs is more than made up for with an easier settlement should a loss occur,” he said.

Mr. Dunn said HTB clients looking to value collections are referred to professional appraisers. As a broker, he said, HTB does not recommend one specific appraiser to avoid conflicts of interest and errors and omissions issues. But he said the broker would recommend the collector to the array of national appraisers' societies for references and advice.

The insurance broker's role, he said, is not to get involved in the appraising process but rather to help point the collector in the right direction.

For smaller museums, they can usually transfer their entire risk away by purchasing full coverage on their permanent collections, Mr. Dunn said. For larger museums, however, the values of the collection can run into billions of dollars.

“In these instances, we'll work with the buyers and quote an array of options for them,” he said, noting that the institutions can select an option that fits their risk appetite and budget.

Most fine art policies for museums, Mr. Dunn said, also address incoming and outgoing loans via “any other location and transit” sublimits. This coverage helps provide protection when a museum, for example, borrows a piece from a collector.

In many cases, according to Mr. Dunn, the lender will require the museum to agree to extend its fine art policy and provide coverage for the piece from the time it leaves the collector's wall until it is back.

The coverage is important, Mr. Dunn said, as 80 percent of claims are caused by transit losses or from mistakes made during the packing process. He said museums need to use professional shippers and handlers to mitigate risks.

On insuring museums in general, Mr. Price said the risk is relatively low cost for insurers because most of the properties are “highly protected in many ways.” He said security is usually very good, and the buildings are equipped with sprinklers, alarms and “all things you'd expect good risks to have.”

Both Mr. Dunn and Mr. Henry noted the quality of the purchasers.

Mr. Dunn said coverage will generally be obtained by museum registrars, who are essentially logistic officers for museums. “It's a profession unto its own,” he said, adding that these registrars are “sophisticated buyers.”

Mr. Henry observed that “museum professionals are nice to deal with, are very loyal customers, and depend heavily on their agent for guidance in selecting a carrier and coverage.”

Insurers and agents are also lured to this market because of its prestige. Mr. Price suggested there is “a sort of cachet to say, 'I insure the Guggenheim Museum.'”

He added that insurers are inclined to be supporters of museums and recognize their cultural importance.

Agents, too, appreciate the broader significance of local museums in their areas.

“Based on a combination of prestige and service to the community, many agents will target the local museum as a desirable account to write, which adds to the competition [in the marketplace],” said Mr. Henry.

For buyers and sellers of coverage, though, the prestige comes with the responsibility of being truly knowledgeable in the field.

“It's not a thing to be taken lightly,” according to Mr. Price. “It's not a commercial risk. It's art; it's history; it's heritage.”

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