Is art an alternative asset? This has become an increasingly popular question. Collectors proclaim they are motivated solely by passion yet smile when their pieces resell for a profit at auction. The financial community wants the magic formula for picking art with high returns, and “art as an asset” seminars are more prevalent than ever.
Beauty and profit are not mutually exclusive. Whether collecting for love or money, there is a common burden: if an item is damaged, it loses its aesthetic appeal and monetary value.
Rethinking insurance
Distinct insurance coverage is available for fine art, jewelry, wine, antiques and other collectibles, yet many include these items in a homeowners’ policy and unknowingly diminish their protection. Regardless of the overall insurance limit, homeowners’ policies generally cap limits on “contents” coverage. The value of covered items also may be subject to depreciation. Insuring high-value collections appropriately can provide broader, more flexible protection.
Other collectors who focus on their legacy may erroneously self-insure, because they assume an art insurance policy will tip off the IRS and subject them to more taxes. This is incorrect. Lack of planning can cause higher estate taxes. As a trusted advisor, you can help your clients effectively manage the transfer of the collection. Numerous options are available, including donations to non-profit organizations; tax-free gifts up to a certain amount and the creation of a foundation. Insurance protects the value of the estate for heirs and beneficiaries.
Tips for your clients
Sound insurance protection is a large part of the equation, but other steps can be taken to preserve the long-term value of fine art. Share the following considerations with your affluent clientele:
Follow the numbers
The art market rebounded in 2010 with strong sales across the market—from African tribal sculpture to Chinese antiquities and first-edition books. To keep up with the upswing, obtain new appraisals for items purchased more than three years ago. Many modern and contemporary art values have gone up significantly within the past year alone. Collectors can research auction results for their artists through numerous online compilations of records. If similar works are selling for more or less that the current insured value, it is time for an updated appraisal. Professional assistance is available from associations such as the American Association of Appraisers or American Society of Appraisers.
Get it in writing
For a long time, art deals were transacted on a handshake. In an increasingly litigious world, your clients can protect their interests by having all transactions documented in writing. This includes loan and consignment agreements; value of the art object; an identified party responsible for insurance; and explicit terms of when the title transfers if the art is for sale. In addition, advise your clients to check with the Art Loss Register prior to new purchases, to make certain there are no outstanding theft claims on the work they wish to acquire.
Avoid damage during transit
Your clients may buy artwork at auction or on vacation, as well as move pieces back and forth from seasonal residences. Anytime art is moved, it is at risk. The best remedy is to use a specialist art packer and shipper; the popular shipping companies we all entrust for everyday packages were not designed to transport fragile works. Prior to packing, a condition report should be prepared that includes photographs and descriptions of any existing damage for each item. If items are in perfect condition, this should be noted as well.
Fly with confidence
If your clients are traveling with art, there is more to consider. As of August 2010, the Transportation Security Administration (TSA) has the right to inspect all cargo sent on passenger airlines. Certain fine art specialty shipping companies are designated as “certified cargo screening facilities.” This means they are TSA-approved; using this resource minimizes the possibility of the crate being opened by inspectors.
Be properly “hooked” up
Analysis of fine art claims within the Private Client Group at Chartis showed that breakage and accidental damage are the leading causes of loss.* Standard hooks from hardware stores are not always the best solution for hanging high-value items. Advise your clients to consult professional art handlers and conservators for their installation needs.
Take advantage of technology
Many collectors take a laissez-faire approach to the receipts for their artwork, which makes it harder to protect their overall investment. Numerous art management software options are available, enabling collectors to not only record the price, but also keep track of provenance, appraisal history and exhibition details. Collection management also facilitates organization, so appropriate decisions can be made about insurance, appraisals, and tax and estate planning.
Illuminate discretely
Heat and direct light from the sun or lighting fixtures cause gradual deterioration to art. Your clients should keep works out of direct contact with sunlight. This may mean moving items on the wall throughout the year as the sun changes its course in the sky. Soft light bulbs should be used year-round as well.
Plan ahead and play it safe
Some of your clients reside in locations that are subject to catastrophes such as earthquakes, hurricanes and wildfires. Other areas are vulnerable to flooding or power outages due to storms, or excessive heat or cold. Creating an emergency plan for art and other valued collectibles can minimize the likelihood of damage in the face of a natural disaster or other emergency. Many preparations can be executed well in advance, such as purchasing a back-up generator or obtaining custom-sized crates to move art to a safe storage area.
Education is key
Talking to your clients about their art investments will help ensure that monetary and sentimental values are preserved for many years to come. By better understanding their assets—and their vulnerabilities—you can connect them to best-in-class solutions and deepen your overall relationship.
Katja Zigerlig is Assistant Vice President of Art, Wine and Jewelry Insurance for the Private Client Group division of Chartis.
*Based on Private Client Group’s claim activity in the U.S. and Canada between 2000-2009.
Coverage provided by a member company of Chartis Inc. The descriptions contained herein are summaries only. Please see actual policy for full terms, conditions and exclusions. All submissions are subject to underwriting guidelines. Coverage may not be available in all jurisdictions.
