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Fine Art Risk: A Tale of Two Markets

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The ownership of fine art is one of life’s great pleasures. A magnificent painting, sculpture or more rarefied forms of artistic expression bring delight to the viewer, make us ponder the work’s meaning and imagine the artist’s own musings.

Then there’s the other pleasurable part of art ownership—the possibility of significant appreciation in financial value. Among those who can afford to collect pricy artworks, fine art has always been part passion and part investment. When the recession railed, many wealthy people were buffered by rising values in their art portfolios. Stocks, bonds, Treasuries and other investments may have faltered, but their paintings, sculpture, rare jewelry, vintage automobiles and other valuable collections rallied.

Not all fine art followed this trend, however, according to my colleague, Mary Sheridan, who is assistant fine arts manager at Chubb and a former risk manager at auction house Christie’s. She explained that the high end of the art market—Picasso, Warhol and Lichtenstein, to cite a few artists—reap record prices these days. Artwork worth ‘only’ tens of thousands of dollars, on the other hand, fare less favorably. As Mary put it, “Fine art is a tale of two markets.”

While Edvard Munch’s The Scream fetched a record $119.9 million at auction and Andy Warhol’s Double Elvis brought in $37 million, many other excellent works of art tend to be worth what they cost at purchase, essentially holding their value for the time being. Not that the owners are bothered by the difference. “People buy art because it appeals to their aesthetic tastes, investment potential or simply keeping up with the Joneses,” Mary said.

“They’ll overpay for a Picasso and not care—they just want it on the wall,” she explained. “Others buy art purely for investment reasons, and stick it in storage until the market for that particular type of art rises. Ownership of art has always been driven by different factors.”

Risky Business

Money is one of these factors. Extremely wealthy individuals can buy fine art, fine wine and other fine items at the highest prices, while those who are well off but not billionaires are limited to less expensive works that still pack investment potential.

Apparently, this distinction also sometimes extends to how fine art is protected from damage and loss, as well as insured to full value, according to Nikki Brown, global fine art practice leader at insurance broker Aon. “People who generally are new to collecting art and other valuables often don’t have the same level of risk mitigation or appropriate insurance coverage that more seasoned art collectors have,” Nikki said. “They just haven’t been educated about how to properly care for and protect valuable works.”

She blames this lack of knowledge on the collectors’ insurance agents or brokers. “I’ve met collectors with paintings worth tens of thousands of dollars insured under ‘home contents’ in their homeowners insurance policy,” Nikki said. “The policy, meanwhile, is underwritten by a standard insurance company, and not a specialized insurer. The coverages and financial limits are inferior. It’s a problem.”

Mary Sheridan also noted that when she was at Christie’s, she’d occasionally come across a collector who was blithely unaware of the risks confronting their valuables. “Art in transit is where the highest percentage of insurance claims come in, yet I’ve met collectors who relocate from one city to another and they use the cheapest moving company to transport a painting worth a couple hundred thousand dollars,” she said. “Veteran collectors with art portfolios worth $100 million would never do such a thing.”

She recommends that artworks only be transported by professional fine art shippers in air-cushioned, temperature-controlled, fully-secured and alarmed trucks. When art is crated for shipment, secure the services of specialized art handlers to pack up the works. When art is stored, ensure it is placed above the first floor of a temperature-controlled warehouse.

An insurance agent or broker should be able to advise customers how to protect their fine art, but here are a few simple tips: Never hang paintings above a fireplace, below a bathroom or on walls subject to the sun’s ultraviolet rays; install waterless fire protection systems; and with regard to sculpture gardens, have landscapers contain works in a perimeter of mulch to keep the sculptures clear of lawnmowers.

It is also crucial from an insured value standpoint to appraise art every three to five years, given fluctuating values. Recruit the services of an art conservation consultancy to periodically examine the work for damage, like chips or fading, which can often be corrected. Always photograph each piece and preserve all related documentation, including provenance and title, in a secure place, preferably a safe deposit box. You’ll need this information for insurance purposes if the art is lost, stolen or damaged.

When it comes to insurance, art collectors should only deal with specialized brokers and insurers. Just like you wouldn’t hire a generic moving company to transport a valuable sculpture, you shouldn’t hire a generic insurance company to insure it. And any work of art worth a few thousand dollars or more should not be listed under ‘home contents,’ Nikki advises. “Schedule each piece in the homeowners insurance policy, or insure them in a separate ‘blanket’ insurance policy,” she said.

It also makes sense to purchase insurance on an agreed-value basis, in which the owner and insurer consent to the value of a work of art or other collectible in the event of loss, theft or damage. Nikki adds: “The most important consideration is to discuss the insurance treatment with a broker that specializes in art risks and insure the collection with a specialized insurer.”

She’s right on both counts. Not only can collectors rest easy that their passionate investments are financially protected, they will often be given access to an insurer’s value-added risk management services, such as infrared home scans to determine potential hot spots or cold spots, which could indicate potential electrical problems that could cause a fire or water leaks.

One final piece of advice: “Even if a painting is worth $20,000, act like it’s worth $20 million,” says Mary. “The savvy collectors I encountered at Christie’s always do the right things. Newer collectors can learn from their example.”


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