Close Close

Life Health > Health Insurance

Investing in Collectible Cars for Pleasure and Profit

Your article was successfully shared with the contacts you provided.

This year’s annual series of auctions of rare automobiles on the Monterey Peninsula in California features offerings for all tastes and collecting levels. At Gooding & Company, the official auction house of the Pebble Beach Concours d’Elegance, a 1966 Ferrari 365 P Berlinetta Speciale “Tre Posti” will cross the auction block. Farther down the peninsula at Quail Lodge, a 1963 Ferrari GTO will be offered. Both of these automobiles are projected to fetch millions of dollars. At those prices, collectible cars are rivaling fine art for value and prestige.

For those who can afford it, the decision to own a classic vehicle can be driven equally by investment goals and esthetic appreciation. While a Ferrari GTO’s skyrocketing value makes it a prudent investment diversification—as long as the current bull market in rare cars continues to roar—the car is also an object of pure beauty, its gentle curves evoking a masterful sculpture.

For the past four years, the collector car market has been on a steep upswing, with several cars reaping prices formerly confined to a Van Gogh or Picasso. When the hammer fell in July 2013 on the sale of a Mercedes-Benz W 196R for a record $33 million at auction, investors reached for the nearest handrail—the price was almost double the previous record set in 2011 ($16,390,000) for a 1957 Ferrari 250 Testa Rossa. Five weeks later, a Ferrari 275 GTB/4 NART Spider went for $27.5 million, proving that the new high-water mark was not a singularity. Recent private sales have commanded higher prices, with a 1963 Ferrari 250 GTO reportedly selling for $52 million in October.

It’s not just the high end of the market that is roaring—even rare cars priced in the six-figure range have obliterated previous auction records. So says David Gooding, president and co-founder of Gooding & Company. “Certainly, it has all the ingredients of being a record year, although you never know until you get through the last lot,” he said. “The value of the offering we have this year is greater than we’ve ever had before. Cars are now recognized the world over as an asset class, and they’ve been wonderful investments.”

Cherry Picking

Such investments underline the critical importance of managing the physical risks of collectible cars, which are subject to more unusual hazards than the typical threats like theft, fire and damage confronting other works of art. As Adam Wolfson, owner and president of Wolfson Insurance Brokerage, Inc. in New York, said, “Their owners frequently like to drive them—fast.”

Adam’s insurance agency serves the insurance needs of high-net-wealth families. Interestingly, he and David were roommates at Skidmore College and remain close friends today. “We graduated in the Class of ’89,” Adam said. “David’s dad was a collector and curator of rare cars and it rubbed off on him. David and his wife, Dawn, completely built their business literally in the laundry room of their home.”

Both men are repositories of automotive knowledge—David with an encyclopedic memory of historic automobiles, and Adam with his keen insight into the cars’ singular risks. Each expert can wincingly recall a major vehicle loss. “A few years ago, the owner of a beautiful Italian sports car worth north of $1 million experienced a total loss when the car went up in flames,” David said. “The vehicle was being driven by a mechanic who failed to carry along a fire extinguisher.”

Adam cited a client who collected mid-century Mercedes-Benz automobiles who had been claim-free for 10 years when disaster suddenly struck. “He backed one of his Mercedes out of his garage in Southampton (New York) into another one of his Mercedes,” he said. “He called me up and was very apologetic. The combined damage was more than $150,000.”

Preserving the physical integrity of rare automobiles insists upon dealing with an insurance agent who knows the difference between a Hyundai and a Maserati from an insurance and risk management standpoint. Adam is that kind of agent.

“There are steps one must take with regard to preserving and insuring rare cars that don’t necessarily apply with one’s drive-around vehicle,” he said. “For instance, if you’re having the car worked on, you need to use a repair shop that specializes in that particular automobile model, understands its value and has access to suppliers of vintage parts.”

He provided a telling example in this regard. “We had a claim once from the owner of a rare car in a body shop that was damaged further when the shop left it outside,” he said. “It incurred an additional $25,000 in damage from a hailstorm.” The car’s insurer subrogated the claim to the repair facility’s insurer, which fortunately had adequate coverage limits.

Due diligence is also required with respect to selecting the trucking companies to transport a valuable car to automobile shows, racetracks and other venues. “You don’t want to stick it on a flatbed truck,” Adam said.

Other smart ways to care for prized vehicles is to store them in temperature- and humidity-controlled environments and not just a regular garage. When idle for an extensive period of time, the car’s battery should be removed and the gasoline siphoned off to reduce the possibility of fire. Fuel systems should be cleaned on a regular basis to prevent clogging. And the cars should be driven on a regular basis. “Regular exercise is good for the cars,” said David. “It keeps the seals and fluids in good stead.”

Insurance Considerations

Special cars also need special insurance, but Adam noted that many people mistakenly believe that any car insurance policy will suffice.

“Rare cars must be treated differently from an insurance perspective than the `daily driver,’” he explained. “This isn’t always the case. Many wealthy individuals I meet for the first time have properly covered their diamond jewelry with the best homeowners or valuable articles insurance, but they’ll have a run-of-the-mill car insurance policy on a car worth six figures and more—not the agreed-upon-value car insurance we strongly urge.”

Such insurance policies establish the value of a car before the insurance policy is bound. Both parties, based on market assessments and other factors, reach a decision on the value of the car and stick to this figure—even if the car market enters bear territory. Owners can receive service from the priciest automobile restoration shops in the case of damage—so long as the costs stay within the agreed-upon value limits. The insurance typically carries no deductible or mileage limits and has very few restrictions, other than excluding coverage for racing the car at a racetrack.

Despite the broad coverages and robust financial limits of protection offered in these policies, the premiums are relatively inexpensive, particularly when compared to other valuable possessions. As Adam noted, “A $1 million diamond bracelet might cost between $12,000 to $18,000 a year to insure, whereas a $1 million collector car could cost between $4,000 and $8,000 annually, which is amazing given that you’re unlikely to ever drive a diamond bracelet at 75 mph on the highway.”

Why such a wide disparity in pricing? “Owners tend to treat their rare cars better than they treat their earrings and watches,” Adam replied. “They literally fall in love with these cars and their collections. They’re very passionate about them.”

Here’s hoping they also have the same passion when it came to choosing the right insurance agent and the best insurance coverage.