Damage Control

According to Art+Auction’s editors, our Brothers In Law column generates tons of fan mail. Unfortunately, almost all of it is from our mother. We also get the occasional serious question (or threat) from readers who are curious about art insurance for works consigned to a gallery — an issue that has been much in the news since the 2007 bankruptcy of the Salander-O’Reilly Galleries in New York.

Here are excerpts from some recent letters we received on this and related topics.

When I lend art to a gallery, must the gallery insure it?

No. But we always advise lenders to sign a consignment agreement that specifically provides for insurance at the gallery’s expense.

Am I protected if I sign a consignment agreement stating that the dealer will cover my work with “standard, wall-to-wall, all-risk” fine-art insurance?

Not necessarily, since there are no generally accepted standard exclusions, and since all-risk is still subject to any exclusions listed in the policy. We recommend carefully examining the exclusions in the underlying insurance policy, and not just the certificate of insurance (which only briefly summarizes the main points in the policy). To avoid disputes in the event of a loss, your consignment agreement should specify all the risks that are excluded, or at least state that your art is covered under the terms of the fine-arts policy.

If I consign a painting to a gallery that suddenly goes bankrupt, will all-risk insurance protect me if the painting has been sold and I haven’t been paid?

This question is being considered now in dueling lawsuits between the Philadelphia Museum of Art (PMA) and its insurer, AXA Art Insurance Corp. In 2006 the PMA consigned paintings by Maurice Prendergast and Arthur B. Davies to Salander-O’Reilly, which sold the Prendergast to another gallery and later declared bankruptcy without ever paying the museum. The PMA now claims AXA should reimburse it $1.5 million for the painting because Salander-O’Reilly effectively stole it (the present location of the Davies is unknown). AXA counters that this kind of loss is not covered since the policy was intended to compensate the museum in the event of physical loss or damage to the works, not financial fraud. Whatever the case’s outcome, we assume that most insurers will start writing policies with exclusions for “conversion,” meaning unlawful appropriation or use of another person’s property.

What other types of exclusions do you think will soon be added to art-insurance policies?

We anticipate that at least one new exclusion will result from the Transportation Safety Administration (TSA) mandate that goes into effect August 1, 2010, requiring all passenger-plane cargo that has not been certified by the TSA to be screened. Specifically, we expect insurers to start excluding losses incurred when an uncertified packer or shipper transports art and the airline opens the package (possibly even on the tarmac) and damages it. Our advice: Work with a TSA-certified screening facility or fine-art shipper to decrease the risk of a package’s being opened and damaged at the airport or while in transit.

My gallery’s insurance policy has an exclusion for employee theft. Is it possible to buy coverage for this?

Yes, there is a crime policy that covers losses from embezzlement, but the limits tend to be relatively low.

Are galleries legally required to provide terrorism insurance?

No. Personal insurance must provide this coverage, but not a gallery or other commercial venture. Galleries can, however, easily purchase it.

If my all-risk insurance policy won’t protect me, what other steps should I take when consigning work to a gallery?

We always recommend filing a Uniform Commercial Code financing statement with the Secretary of State of the state where the gallery is located. This filing puts the world on notice that you have an ownership interest in the work. Assuming the filing is done correctly, if the gallery goes under, you have a first-priority security interest in the art, and this interest should come before the rights of most other creditors.

My painting was stored in a gallery’s basement, where it became moldy. Does my policy’s exclusion for mold mean that I am not covered?

Not necessarily. Insurance broker Mary Pontillo, of the New York brokerage DeWitt Stern, tells of a client in a similar situation who consulted a conservator and determined that the mold (not covered under the policy) was actually due to water damage, which was covered. Knowing how to report your claim accurately is vital if you want to get paid.

My sculpture was damaged in a Chelsea gallery when water poured in during a storm. Does the policy exclusion for flooding mean I’m not covered?

It depends how “flooding” is defined in the insurance policy. Some policies define it as the rising of a body of water, such as the overflowing of the Hudson River, while others include surface water, as in a heavy rain.

Acts of God, such as wind, lightning, and fire, are normally excluded from policies, right?

On the contrary, they are usually covered; they are exactly what insurance is for. Since many perils are regional, consider where your art is going when and what is prone to happen in that area during that season — for example, California brush fires and earthquakes, Florida hurricanes, Chelsea rainstorms (see above), and so on.

Do policies typically exclude damage due to restoration?

Yes, and that’s why properly drafted consignment agreements usually state that the gallery may not clean your art without your consent. LeConte Moore, also a broker at DeWitt Stern, advises modifying this exclusion by saying that the insurer will nevertheless cover damage that is “not specifically caused by the repair or restoration” — for example, if oily rags in the restorer’s studio catch fire and your painting is damaged in the conflagration.

A gallery that wants to send my photographs on tour to various less-developed countries has offered me “worldwide” insurance coverage. Is this enough?

Yes, so long as none of the nations on the tour are excluded in the policy. If they are, you can try to get the exclusion removed, which might involve buying specific reinsurance for those locations. We wouldn’t count on having Afghanistan included.

When artworks consigned to galleries are damaged, are insurers normally good about paying claims?

In our experience, yes, in part because they receive so few claims that not paying is simply bad marketing.

Do exclusions in art insurance vary greatly?

Yes, so when buying insurance, shop around for more than just the lowest premiums.

How can you both be so smart and so good-looking?

Thanks, Mom.

Charles and Thomas Danziger are the lead partners in the New York firm Danziger, Danziger & Muro, specializing in art law.

“Damage Control” originally appeared in the July/August 2010 issue of Art+Auction.