Insurance for cultural assets. An insurance broker's perspective

The artworks sector has been in the throes of a boom in recent years, driven by growing numbers of new collectors. Interest by governments in mounting temporary and permanent exhibitions as tourist attraction magnets has a clear economic impact that kindles the interest of multiple economic operators. The insurance industry has concomitantly been tailoring its products to the increasingly sophisticated needs of the owners of works of art and collections. It can thus be instructive to take a look at some of the main features of the instruments used to provide coverage in the marketplace. 

This paper considers the most interesting aspects of insurance for works of art, understood to be, in the broadest sense of the term, "any object possessed of cultural, artistic, and/or historical interest". This broad concept spans the most varied range of objects and collections, including visual artworks (paintings, prints, photographs, etc.), sculptures, antique furniture, coins, rare manuscripts, incunables, stamps, and other objects of particular value such as jewellery and watches. In contrast, it is also meaningful to describe objects that are commonly excluded from this category, such as counterfeit works and copies, unappraised works, cash and banknotes, securities, share certificates, works that do not have a certificate of authenticity, etc.

In terms of risk, the two main groups of insurance products are material damage to the works and third-party liability damage (as a result of exploitation and even professional use) caused to the works. Though not easiest to obtain, loss of profit covers are also available. Think of, for instance, insuring the contingency of expected profit when negotiations to sell an artwork are unsuccessful. The main problem in this case is determining the value of the expected profit (and the valuation criteria to use).

Artworks are exposed to quite a range of different perils. A work can be stolen, damaged and/or destroyed by fire or water, both in storage and in transport or when being handled during packing, unpacking, or installation. Works can also be damaged by the public, as recently shown by the attacks on artworks in defence of the environment by "Just Stop Oil" activists.

The risk increases appreciably when what is being insured is an exhibition of works from different places and owners (private or public), possibly also including an international component. Moving and transporting works and loaning, ceding, and consigning them multiply the risk and the need for insurance, either by the owner or by the management of the institutions to which the works are temporarily loaned. The process of insuring exhibits is more complicated, in that it requires proactive measures related to organising and preparing the venues, dates, security to safeguard the physical safety of the works, transport, installation, etc.

One of the most relevant aspects when transferring risk is the difficulty in determining the insurable monetary (not sentimental) value to be able to avoid the contingencies arising from inappropriate valuations, especially in the case of one-of-a-kind works. 

Artworks also need to be described in detail in the insurance policy. Factors like age, authenticity, the media employed, whether or not the work is part of a collection, the author of the work, etc. all condition a work's monetary value. 

It is in all cases advisable to have appraisers who are experts in a given field perform the valuation and also determine the work's authenticity. When assessing risk, it is very important to authenticate the work. This is not always a straightforward task and requires hiring professional experts to perform analyses, studies, contextualisation, and comparison, taking cultural, artistic, and historical features into account. 

Valuation being so important (for other reasons, for insurance purposes, for tax purposes, or to appraise the value for a future sale), it is in all cases advisable to make sure that the appraiser has third-party liability insurance that covers possible errors, omissions, or negligence. 

The value of the insured interest does not stay the same over time, and insurance policies need to include clauses that make provision for adjusting the sum insured and the corresponding premium. 

Damage assessments have to be based on the value immediately prior to occurrence of the loss and the value, if any, after the loss (indemnity principle). The parties commonly set the value of the insured interest in the policy pursuant to the principle of free will as provided in section 28 of the Spanish Insurance Act [Ley de Contrato de Seguro] to avoid disputes over the value of the insured object. The parties are thus both bound by the agreed value, which is helpful should an indemnity have to be paid. Otherwise, the insured's own valuation will be taken as the maximum sum the owner of the insured interest is entitled to receive in case of a loss. 

In any event, the "estimated" value will be limited by any manifest error in the estimated value with respect to the actual value of the insured object {section 28(3) Insurance Act} to avoid possible unjust enrichment by the insured (section 26 Insurance Act). 

Every effort should be made to avoid discrepancies between the value of the insured interest and the sum insured, especially underinsurance, unless the parties have agreed to waive the underinsurance principle. 

Valuations of artworks for museums are a special case. Museums do not usually exhibit all the works in their collections, and this decreases the likelihood of a total loss. The practice in these cases is often to insure the works for the hypothetical value of restoring the works. That cost is generally made subject to a maximum sublimit.

The scope of coverage most commonly includes covers for perils of all kinds. It should be noted that there is no such thing as "pure all risk", limits are usually set in the terms of coverage.

When insurance is limited to transport insurance, the most usual covers are the ICC A covers (1). For exhibitions, wall-to-wall policies are most common, covering transport from the usual location to the exhibition venue, the period when the works are on display, and return transport to the place of origin. In any case, these policies cover handling (packing, unpacking, and installation) wherever damage is caused (exhibition venues, Customs, consignment, etc.).

The insurance questionnaire and the policyholder's duty to answer the questions play a vital role as a prior obligation preceding the risk declaration with a view to enabling the insurer to assess and put a value on the actual risk being transferred. The future policyholder is bound to provide true, objective details on all aspects (objective, subjective, quantitative, temporal, and territorial) included on the questionnaire that bear on the risk assessment. Along with a valuation of the object, information must be furnished on the service providers (in particular, the specialised shippers, the type of transport, and safety measures), the beneficiaries, listings of the artworks concerned, and values. It is always a good idea to follow any recommendations made by the specialised insurer concerning preventive measures to be taken having in mind the nature of the artwork and the exhibition venue. 

Third-party liability coverage is a different question altogether. These policies can indemnify the owner of the work not as the insured (the owner of the insured interest) but as the party that suffers the consequences of a loss. In the case of consignment (e.g., galleries), the insured interest is the consignee's business as an art professional. If a work in the consignee's custody is damaged, the work's owner can be indemnified as the injured party, not as the insured, since the owner is not the proprietor of the insured interest.

Notwithstanding the sizeable amounts that can accrue, terrorism cover can be purchased, especially for the duration of exhibitions and while on display at museums. Terrorism covers are usually taken out for transport but not while works are on display (an optional cover).

The most common exclusions relate to improper packing, improper exhibition conditions, and inherent vices. Damage resulting from fraud, abuse of trust, war, rebellion, ordinary wear and tear, ageing, gradual deterioration, mould, corrosion, damage from leaks or pollution, and damage from exposure to light, heat, moisture, and the like are the usual exclusions.

Fine art insurance usually also includes the following special inherent clauses: 

• Partial damage to sets or collections clause. This clause covers monetary losses to the hypothetical value attaching to all the pieces in a set or collection as a whole. This refers to the value to the set or collection overall depending on the significance of a damaged item.
   
• Depreciation or artistic devaluation clause. Coverage can include the insured risk of depreciation or artistic devaluation to an artwork caused by partial damage to the work. This is a value and damage supplemental to the cost of repair. At any rate, the sum of the devaluation plus repair may not exceed the sum insured.
   
• Photographic works clause. This clause covers the cost of making a copy from the original negative using the same technique. For historical photographs, the indemnity covers the cost of making a new copy plus depreciation of the value of the copy. If there is no negative, compensation is based on the fair market value.
   
• Museum clause. Where an insured museum is paid full compensation for a work, ownership is not transferred to the insurer but remains with the institution. The repurchase clause applies in the event of theft or loss. This protects the interests of the museum as policyholder. 
   
• Repurchase option clause. If an artwork is recovered after compensation has been paid out, the insured is given the option to repurchase it from the insurer.
   
• Subrogation clause. The insurer agrees to waive its right to take action against the organisers of the exhibition, packers, carriers, or any other individual or entity involved in handling, transport, or installation of the insured objects barring gross negligence or wilful misconduct.
   
• Hand carry clause, which pays a sublimited sum where the insured objects are able to be transported by museum staff or persons subcontracted by the museum for that purpose.
   
• Installation and contemporary performance art clause.
   
• Breakage of protective glass clause. Damage to the glass is excluded. A special clause with that cover (glass clause) may be purchased.
   
• Frame damage clause. This clause covers damage to the frames of the insured works.
   
• No excess clause. 
   
• Foreign exchange fluctuation clause, an instrument to safeguard the valuation. 

Anecdotally, it can be mentioned that some museums only take out insurance on transporting works to exhibitions or for temporary loans. The insurance and reinsurance market has only limited capacity to cover the extremely high value of museum collections. Coverage by the Government, directly or in combination with private insurers, is an option in these cases.

Risks connected with transferring ownership of works can also arise, for instance, special sales at auction. In most cases scholarly legal opinion holds risk to be transferred to the buyer when the work is actually handed over or has been placed at the buyer's disposal. Up to that point the risks are borne by the auction house or the broker involved in the sale. To minimise risks relating to coverage, most policies include clauses providing that new works can be added up to a stipulated percentage of works and the sums (ordinarily 25%) each year. 

To conclude, whether a collector buys art as an investment or purely out of love of the artwork, art has value that needs to be protected, and that means bringing risk management and loss prevention strategies to bear and promoting awareness of ambient conditions and how they affect artworks. It also means promoting the highly advisable use of insurance to transfer risk and providing the resources needed to rebuild or restore a collection after a loss. 

Lastly, it is important to stress that it is advisable to get independent, personalised advice from a specialised insurance broker who has access to both the local and international markets and who will look out for the client's interests and go that extra mile instead of just resorting to standard risk management and insurance products.