430.3

FINE ARTS INSURANCE

(April, 2009)

Fine Arts insurance provides protection against sources of tangible loss or damage, except for the sources of loss that are specifically excluded. Items that are eligible for coverage include the following:

antique furniture	etchings	art glass windows
pictures	tapestries	marbles
ornamental rugs	statuary	rare books
paintings	bronzes	antique silver
manuscripts	porcelains	rare glass

There is also room for coverage for miscellaneous items that are rare, have historical value, or artistic merit.

Ineligible Property - This insurance is designed for private collections. Therefore, it is not meant to protect property belonging to or in the custody of:

•         dealers,

•         auction rooms,

•         museums,

•         art galleries, or

•         art institutions (exceptions: schools, colleges, universities).

Commercial coverage would be more appropriate for certain items. Fine arts coverage is typically written for personal risks under a Personal Articles Floater form, under a Scheduled Property endorsement attached to a Homeowners policy (HO 04 61), or by means of a Fine Arts policy that, typically, contains the provisions of a Personal Articles Floater relating to fine arts. The three coverage options involve the same basic insuring provisions and underwriting considerations. For more information, please refer to PF&M Section 430.1, Personal Articles Floater.

Analysis of Policy

Coverage

Fine Arts insurance may be written on a special form basis and is designed to cover articles in private ownership including collections. Private collections include property owned by individuals, firms, corporations, and associations that are not dealers, auction rooms, museums, art galleries, or art institutions ordinarily open to the public. Universities, colleges, schools, and hotels are considered to be private collection risks.

Insurance covers the property insured under the policy within the limits of the Continental United States, Hawaii, and Canada and the off-premises coverage extends to property that is on exhibition (excluding the premises of fair grounds or of any national or international exposition unless included by endorsement). Insured property located in Puerto Rico is subject to the same coverage conditions as those in the Continental United States and Hawaii.

Regardless whether such property is covered by an endorsement or a separate policy, the form usually includes a schedule containing, minimally, the following information:

•         property class,

•         detailed property description,

•         insurance limit,

•         list of property locations, and

•         appraised value.

Exclusions And Limitations

Like any other type of insurance, there are many instances that just do not qualify for protection. Specifically, Fine Arts insurance does not cover:

1. Wear and tear, gradual deterioration, insects, vermin, or inherent vice (inherent vice refers to the characteristics of physical property that are expected to cause deterioration to that property without outside help. A simple example is untreated rubber that hardens and cracks),

2. Damage caused by exposure to harmful levels of light, humidity or temperatures. An exception typically exists when the extremes are caused by fire, or storms.

3. Damage caused by any repairing, restoration, or retouching process,

Example: Vera has a schedule attached to her homeowners that covers several paintings and some statuary. One day she takes a valuable portrait to "Olaf's Art Barn" for an appraisal. An Olaf employee states that the painting, though already valuable, would have its value increased if it were restored. The insured leaves the portrait at the Art Barn. A restoration apprentice begins work on the portrait and, because he mixed a cleaning formula incorrectly, he mars and smears the portrait. This damage would not be covered by the insured's floater schedule.

4. Damage caused by an electronic or mechanical fault or breakdown.

Example: Ned has an extensive collection of statuary created by artists who specialize in working with delicate crystal. He keeps much of the art in a display room with a heavy metal grating that lowers from the ceiling. One day, while lowering the grating, Ned's home suffers a power surge and the grating slams onto the floor. The violent impact knocks over several statues and they shatter. This loss would not be covered by the fine arts policy.

5. Breakage of art glass windows, glassware, statuary, marble, bric-a-brac, porcelains, and similar fragile articles. However, loss by breakage is covered if caused by fire, lightning, aircraft, windstorm, malicious damage, theft, explosion, earthquake, flood or collision, derailment, or overturn of conveyance.

Example: Thieves break into an insured's home and steal several high-valued items, including an HDTV, DVD players, computers, and silverware. The thieves leave the house in shambles, including a crystal objet d'art, broken on the floor. Too heavy to lift, it is likely that the thieves tipped it off its pedestal. The shattered piece would be covered.

Protection against breakage may be added, for additional premium. Loss to property while on exhibition at fairgrounds or premises of national or international expositions is typically excluded. However, coverage is available for property on temporary exhibition at a modest location that does not have the exposure of access to larger crowds.

Examples:

•         A jade statuary collection lent to a local library branch - covered

•         A jade collection lent to a travelling exhibit of Native American Culture – not covered

6. loss or damage to property while it is either in or on an unattended vehicle (see below, "Important Provisions").

Important Provisions

Because of the nature of fine art and the special exposure to loss they represent, there are a number of conditions that apply to their coverage. The conditions are meant to minimize the likelihood of an insurer having to respond to a loss. Typically conditions include:

Competent Packers - The insured agreeing that the covered property, whenever moved, will be packed and unpacked by competent packers. Naturally it is important that people with expertise in handling and moving valuable property be used rather than permit novice handlers and increase the chance that such property is damaged.

No Bailee Coverage - A statement that the insurance will not operate to benefit any carrier or other bailee who has temporary control over the covered property. This condition is important for two reasons. First, coverage is priced according to the exposure faced by the property owner. The protection would be under-priced if coverage were extended to include entities such as movers, cleaners, storage facilities, etc. Second, other parties exercising control over insured property are responsible to arrange and pay for their own insurance.

Property Belonging to a Pair or Set - An insured must agree to special handling for articles that belong to a set. In the event of the total loss of any article or articles that are a part of a set, the company agrees to pay the insured the full amount of the value of the set as specified in the policy or endorsement schedule. Conversely, the insured agrees to surrender the remaining article or articles of the set to the company.

Newly Acquired Property

Objects of fine art that an insured acquires during the policy period may be covered according to their actual cash value. However, the insured is obligated to report any newly acquired items within 90 days of their acquisition. Naturally an insured would also have to pay the additional premium. The new items may not exceed 25 percent of the amount of insurance for scheduled fine arts. That is to say, the maximum amount of coverage that applies to a non-listed, new item is 25% of the total value of the fine art schedule.

Example: Jim Flair's homeowner policy includes an HO 61, Scheduled Property Endorsement and it and his policy have a January 10 effective date. On March 2, a short-circuit occurs in the wiring behind a kitchen wall and a fire erupts. Although it is quickly put out, a new painting is destroyed by heat and smoke. Jim bought the painting during a vacation to Majorca. It cost $5,900 and he had not yet reported it to his insurer. The insurer, after investigating the loss, includes $2,500 payment for the portrait in the settlement check for the fire loss. Jim calls the adjuster who tells him that the painting was a newly acquired piece and, due to that fact as well as the fact that his current schedule includes seven items covered for a total of $10,000, 25% of that amount ($2,500) is the most available for his loss of the painting.

Blanket Items

A schedule may include items covered on a blanket basis. However, such items must be described on the schedule and their total value must not exceed 10 percent of the total amount scheduled. However, if this limitation is impractical due to the nature of the items involved, a higher limit may be negotiated with the insurer. The intent of this limitation is to be fair to both the insured and the insurer. Special property coverage works best when an insurer is fully aware of its exposure and is able to collect an adequate premium. Blanket coverage is a way to defeat that goal. Most losses are partial ones and in such instances, a blanket limit can be shifted to protect a wide range of unscheduled property. The limitation minimizes an insured's ability to do this. However, an insurer also should be reasonable in enforcing limitations.

Example: Paul Kollecktur has a schedule of $30,000 with $25,000 spread over 12 specifically described and appraised items. However, the remaining $5,000 is a blanket amount for a collection of nearly 200 pewter figurines. Since all of the figurines have about equal value and because it would be onerous to describe and assign a value to each item, Paul's insurer made an exception, allowing their blanket status, even though the blanket amount well exceeds the 10% ($25,000) limit.

Note: The 10% blanket limitation is tied to the value of the specifically scheduled described and insured items; not the total value of the items covered by the entire schedule.

Definitions

Primary location - The permanent premises for the fine arts private collections to which, whenever removed, the scheduled property will be returned.

Additional or Secondary locations - The temporary premises for the fine arts private collections that were removed from a primary location.

Other locations - A separate premises for fine arts private collections not falling under the definitions of primary and additional or secondary locations.

Note: Depending upon the company providing the insurance, different terms may be defined. Since definitions affect how the coverage applies, special attention should be paid to any and all special terms.

In Event Of Loss

The insured must notify the company or its agent as soon as possible of every loss or damage that may become a claim under the policy. An insured is also required to file a sworn proof of loss within 90 days from the loss. Failure to follow this procedure will invalidate any claim.

The insured must submit to examinations under oath by company representatives related to any claim. The insured must also assist a company in getting all other persons (including other insurable interests, household members and employees) to cooperate with examination requests. He or she is also required to make all account, bills, invoices and other vouchers, or certified copies available to the insurer and to permit the insurer to make extracts and copies.

All adjusted claims are paid to the insured within 60 days after presentation and acceptance of satisfactory proof of interest and loss.

The insurance pro rates with other applicable insurance: The company is not liable for more than the amount set opposite the respective articles covered under the policy, which amounts are agreed to be the values of the articles for the purpose of the insurance.

The entire policy shall be void if the insured has concealed or misrepresented any material fact or circumstance concerning the insurance and in case of any fraud or false swearing by the insured touching upon any matter relating to the insurance, whether before or after a loss.

Appraisal - If the insured and the company fail to agree on the loss amount, either party can demand that the loss be submitted for appraisal. The request has to be in writing and it has to be made no later than 60 days after the company has received a valid proof of loss. The latter requirement assures that an insured fairly participates in the loss settlement process.

Once the appraisal option has been chosen, each party must::

•         select a competent appraiser

Note: The appraiser must be a disinterested party – in other words, an appraiser must not be in a position to personally benefit from the appraisal decision,

•         agree to a (reasonable) time and place for the appraisal, and

•         select a competent and disinterested umpire, (a local, authorized judge will make the selection if the two parties cannot agree on an umpire within 15 days).

After the appraisers evaluate the loss, they must attempt to agree upon a loss amount or, if they cannot agree, forward the decision to their umpire. Note that a decision reached by any two of the three parties establishes the loss amount, as long as the amount is provided in writing. In other words, a written amount established by either the two appraisers or the umpire and either appraiser is binding that amount becomes what the insurer must pay as well as the amount the insured must accept.

Example: Brenda Solver and Mutual Casualty, her insurer, disagree on the value of a loss to her painting. Brenda says that the piece, an impressionist scene of a French Optometrist's office painted by the Italian Abstract Master, Octavia Mundane, is worth more than $35,000. The insurer, regardless of the fact that it did agree to insure the piece for $41,000, offers to pay $12,700. Brenda makes a written request to resolve the matter through appraisal. Unfortunately, the appraisers also disagree. Mutual's appraiser values the loss at $13,200 and Brenda's sets the loss at $37,800. They submit their findings to their umpire who, to Mutual's disdain, agrees with the $37,800 figure.

The insured and the company each pay its appraiser and equally shares the other appraisal expenses including the cost of the umpire.

Subrogation – after an insurer pays a loss, the insurer receives all of the insured's rights of recovery against any person or organization. The insured must execute and deliver instruments and papers and do whatever is necessary to secure such rights for the company.

Example: Let us continue with the Brenda Solver/Mutual Casualty scenario. Mutual pays Brenda the appraisal amount, $37,800. The painting was destroyed during a party. Brenda had invited a large group of neighbors over for a summer gathering. One obnoxious neighbor kept chasing others around with a huge water gun. After chasing another guest into Brenda's home, the guest jumped out of the way of a powerful jet of water. The burst of water slammed into the painting, knocking it off the wall and onto a ceramic tile floor; destroying it. Mutual Casualty ended up suing the neighbor to recover its loss payment.

Eligibility

Fine Arts insurance on private collections is available for individuals, firms, corporations, or associations that are not dealers, auction rooms, museums, art galleries, or art institutions ordinarily open to the public. University, college, and school risks, however, are eligible for the insurance. So are hotels. But it may not be written for risks such as:

•         dealers, commercial risks, museums, art galleries or art institutions ordinarily open to the public,

•         property owned by and insured for the account of Federal, State, County or Municipal authorities, or

•         temporary exhibits of property not owned by the insured, when covered for a total period of not exceeding 90 days unless the company makes an extension.

For an illustration of a loss involving artwork, please refer to PF&M Section 469_C195, "Art Used For Business Raises Coverage Question" in Court Cases.

Due to the broad coverage, the frequently large values involved and the vulnerability to fraud, requests seeking substantial amounts of fine arts coverage should be carefully underwritten.

Fine Arts insurance presents far more opportunities for sales than is immediately apparent. Individual owners of valuable private collections are logical prospects. There are many insureds whose possessions may be limited to a few items of paintings, statuary, or rare books. Hobbies of many people with artistic appreciation run to fine books, pictures, and porcelains. While most circumstances typically involve relatively modest values, it is still in both an insured's and an insurer's best interests to schedule such property.

It is not the readily insurable perils such as fire or windstorm, which generate most Fine Arts losses. Perils such as water damage, carelessness, insects, pets, burglary, mysterious disappearance, and others typically cause losses since only the broader form, Fine Arts policy, covers them.

All articles to be insured must be individually described and have a respective amount of insurance assigned. However, some insurers may agree to issue coverage for a group unscheduled property under a single, blanket amount.

Valuation

Fine Arts insurance is, in essence, valued coverage, so the matter of valuation is important. Bills of sale or appraisals should be obtained before coverage is issued. If it is necessary to provide a temporary binder, the binder should be made contingent upon obtaining supporting documents that justifies the listed amount of insurance. Some companies provide insurance on an actual cash value basis by use of a Valuation endorsement when lower values make an appraisal impractical. In general, however, appraisals should be obtained for valuable fine arts. The market for such property fluctuates sometimes wildly in either direction. Underinsurance can be avoided by securing periodic appraisals (perhaps every two years at the latest). Even with items of lesser value, the existence of bills of sale and appraisals will facilitate adjustments in the event of loss and reduce questions of valuation. When values are not substantiated to the company's satisfaction, the scheduled coverage might be declined (in the case of an application) or terminated (in the case of an existing policy).

Registration Of Art Objects

A procedure for identifying and registering works of art of exceptional value has been patented by the International Art Registry (U.K.) Ltd. Underwriters may consider rate credit for such registration. For information, contact The International Art Registry (U.K.) Ltd. Another helpful source is the International Art Loss Register, a databank that is sponsored by a consortium of art dealers, insurers, law enforcement agencies, museums, and others. It is a registry that publicizes the theft of artwork and facilitates its recovery. Since it is a convenient way for persons to check on the source of artwork offered for sale, it also acts as a deterrent, making it more difficult to sell stolen goods. For more information, please refer to PF&M Section 430.3-1, Art Identification and Registration. We suggest that you make use of a reputable published or online directory service to secure contact information for the sources mentioned above.

Rate And Premium

The premium for Fine Arts insurance is determined from the Manual governing the company's writing of Inland Marine insurance. The computed rate applies per $100 of insurance.

Breakage Coverage

The policy may be endorsed with a Breakage Coverage endorsement which, typically, covers breakage of the following types of property:

•         art glass windows (i.e., stained glass),

•         glassware,

•         statuary marble,

•         bric-a-brac, and

•         porcelains and similar fragile articles.

Special Risks

Museums, art galleries, or art institutions ordinarily open to the public are often large and newly constructed buildings where large collections of value are concentrated. Some of these museums or art galleries are very desirable and underwriters at times accept large commitments on such locations. The Company should be consulted in advance when such risks are entertained and before commitments are made. Property owned by an insured for the account of Federal, State, County, or Municipal authorities likewise require special treatment.

Dealers and commercial risks may be covered under a special Fine Arts Dealers form when the insurer upon acceptance of a completed application develops rates. The following risks are generally considered to be high risk:

•         risks in unprotected areas,

•         risks located at the shore,

•         risks located at vacation resorts,

•         exposures located along highways, and

•         antique dealers specializing in furniture and fine china.

Art As Investment

Valuable paintings and other objects of art are often acquired and kept for pure aesthetic reasons. However, art collection is also a popular method of investment for individuals and homeowners. Many investors actively follow the art market to supplement their activities in the stock market. Such persons may acquire art purely in the hope that its value significantly increases. It is important that agents and insurers ask about the existence of fine art and other collectibles during Homeowner policy renewals or personal insurance program reviews.

Coverage Options

Agents and brokers have options for their insureds to consider when the subject of insurance for art objects is discussed. They may recommend scheduling each item and applying a specific amount of insurance to the objects in a Homeowners policy endorsement. The amount of Unscheduled Personal Property coverage under the Homeowners policy may be increased by endorsement to accommodate the higher values represented by newly purchased art.

The same process could be suggested for writing a separate Personal Articles Floater policy. Producers may, in any event, perform a helpful service for the insured by explaining the manner in which existing insurance covers art objects "automatically." Paintings, for example, are included in the general property to which Unscheduled Personal Property coverage of a Homeowners policy applies. There are no special limits of coverage on such types of property as there are on money, jewelry, furs, and boats. Paintings are insured against the perils named in a Broad Form Homeowners policy in the same manner as furniture or clothing.

The problem arises from the possibility of the limit of insurance under the homeowners coverage not being sufficient for all property, including art objects, lost in a serious fire. Furthermore, paintings and other objects of art are subject to risks of a special nature, which may not be covered either named peril or special form HO policies.

Need For Speciality Insurance

Fine Arts insurance is the answer for art objects of significant value. It provides protection against direct physical loss on the widest available coverage basis for owners of paintings, etchings, pictures, tapestries, art glass windows, and other bona fide works of art (such as valuable rugs, statuary, marbles, bronzes, antique furniture, rare books, antique silver, manuscripts, porcelains, rare glass, and bric-a-brac), of rarity, historical value, or artistic merit. Items are scheduled using detailed descriptions. Their accompanying limits of insurance are, ideally, based upon bills of sale or recent, expert appraisals. Rates are typically based upon a per hundred or per thousand dollars of coverage basis.

If the value of an insured's paintings is modest, he may afford to be comfortable with the perils insured against under a Homeowners policy. However, such insureds generally think that their property is only threatened by common perils such as fire, vandalism, or theft. This mindset needs to be changed because it is not broad enough to mirror reality.

Example: While midway through a vigorous spring-cleaning, Mrs. Jones gently places an old painting, a family heirloom, on the carpeted floor so she could dust the wall. She asks her teenaged daughter to vacuum the living room. Missy, in a rush to get back to a chatroom session, hurries the job, ramming the vacuum cleaner into the heirloom. The entire center of the picture is ripped out of its frame and sucked into oblivion. Unfortunately, there's no coverage under the homeowner's policy for the accidental vacuuming.

Inventory Recommended

One way to help an insured evaluate his fine art exposure is to recommend that a full inventory be created, either just for the special property or for all of his personal property. Such a suggestion would be particularly opportune shortly after an insured has just made an art purchase (or acquired art as a gift or inheritance). The process of an inventory may easily prompt an insured to more thoroughly determine his need for coverage. The inventory may quickly point out that an insured owns more special property than he or she realized. Or, the act of listing values for such property may cause an insured to realize that he has no idea of their current value. Even if the insured has sales receipts or appraisals, questions may arise over their relevance, especially if they are not recent (less than two years old) or, in the case of appraisals, do not come from a qualified source. It is important that an inventory contains enough detail to properly identify (distinguish) each piece mentioned.