Businesses with corporate art collections and other collectors should consider insurance a critical element of any art transaction. Insurance obligations are not automatically provided for by law and should be addressed explicitly in art agreements, including for consignment or loan.
Who Is Providing Coverage?
Parties to an art transaction should not make assumptions as to who is legally responsible to insure the artwork. Typically, no one has this obligation by default. If a collector agrees to consign artwork to a gallery, who will insure it while it is in transit and on display? When art is loaned to a museum for an exhibition, will the borrower or the lender obtain insurance coverage? These questions should be addressed explicitly in the consignment or loan agreement. If the owner of the work is relying on coverage provided by another party, the owner should require that it be added as a loss payee and additional insured on the policy, and also that it be given a copy of the certificate of insurance and list of exclusions annually and notified immediately of any changes.
Scope of Coverage
Generic business or home insurance policies may not provide sufficient coverage limits for an art collection. They may not extend to times when the works are consigned, on loan or in transit, and may have exclusions that are not appropriate for art. The greatest protection comes from contractually requiring wall-to-wall, all-risk, fine arts insurance. “Wall-to-wall” coverage means that the work will be insured from the moment the gallery or other party touches the work to pick it up until the moment it is sold or returned to the consignor.
Valuing the Art
A collector relying on a gallery or other party to provide insurance should be sure to specify the work’s value in the relevant agreement. Galleries and museums often do not insure all the works in their custody for the full sale price, even though that may be precisely what the consignor expects to receive in case of a loss. In the absence of an explicit agreement otherwise, a court may find that a consignor is entitled only to the amount that it would have received in a sale (i.e., after the gallery’s commission), while others recognize that this does not account for the lost opportunity for reputational gains from having the work continue to exist and circulate in the market. Moreover, galleries often have blanket policies that cover all the works in their custody for a sum amount. In a consignment or loan agreement, the consignor or lender can specify the value they will receive for each item in case of a loss. The consignor or lender may want to contractually require that it receive this amount regardless of what insurance pays.
Collectors may also want to insist on a buy-back provision. This gives the owner the opportunity to buy the work back from the insurer if it is reported as lost and the claim is paid out, and later the work is recovered and returned to the insurer. The buy-back provision can provide that the collector can purchase it for the same amount that the collector received on the claim—regardless of the possibility that the fair market value of the work has increased since it was lost.
If there is a dispute with the insurer over the value of a claim, the insurance policy is likely to provide a means of dispute resolution – often, submission to a neutral umpire whose judgment as to valuation is final. This procedure can leave little room for challenge in court. This combination of uncertainty and lack of control is a major driver for settling valuation disputes through negotiations between the insurer and the insured.
Risk of Loss
When artwork is sold, Uniform Commercial Code § 2-509 applies as to when the risk of loss shifts from seller to buyer. It is important to understand the rule that applies to a particular sale so that the work is properly insured by the right party at the right time. The parties can also specify by contract when the risk of loss will transfer to the buyer.
Twists
Art law adds interesting twists to insurance issues. For example:
- Are paintings stored in the artist’s home and destroyed by a fire considered personal property because they are not currently exhibited for sale, or are they business property because they could conceivably be sold at any time? One court found that this question could not be resolved on summary judgment, so the question of whether the business or personal property limit applied was unresolved.[1]
- Does an “all-risk” policy cover losses to a consignor when an insolvent gallery secretly sells consigned works for less than the agreed-upon prices? Yes, according to one court, rejecting the insurer’s argument that the consignor was simply disappointed in its returns.[2]
- Does insurance cover the amount paid for a ransom to recover stolen art? Courts have said yes—even where the owner refused to testify about the identity of the ransom go-between out of fear for his family’s safety.[3]
As in many other types of transactions, in an art transaction, it is essential to consider insurance issues when negotiating the deal, writing the contract, and developing a strategy to minimize risk.
[1] Humphries v. Metropolitan Prop. & Cas. Ins. Co., 152521/2015, 2020 N.Y. Misc. LEXIS 2663 (N.Y. Sup. Ct. May 26, 2020).
[2] Frigon v. Pac. Indem. Co., No. 05 C 6214, slip op. (N.D. Ill. Jan. 16, 2007), reconsideration denied, 2007 U.S. Dist. LEXIS 17813 (N.D. Ill. Mar. 14, 2007).
[3] Gowans v. Northwestern Pacific Indem. Co., 260 Ore. 618 (1971); Kraut v. Morgan & Bro. Manhattan Stor. Co., 38 NY2d 445, 447 (1976).
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