Some things to consider when thinking about insuring your collection

Posted on by Lydia Thompson

We often get inquiries from collectors about obtaining an insurance appraisal for their collection of fine art. Before hiring an appraiser, collectors need to evaluate their homeowners insurance policy and consider which works meet the threshold of value that necessitates a separate fine arts policy. Property Casualty 360 has recently posted some useful information to help collectors evaluate if a separate rider for the collection is needed. In particular, the author notes that typical homeowners policies require appraisals for collections worth over $5,000. Read on:

Large private collections generally have proper risk management in place including fine-art insurance that covers the full value of the items. But many smaller collections (those valued below $1 million) tend to be insured under a traditional homeowners policy or have no insurance at all. If these collectors face a devastating event resulting in damage, they may discover too late that their coverage is not sufficient to address their financial losses.

In simple terms, the process of insuring collections of fine art and collectibles under a traditional homeowners policy tends to be time-consuming and difficult while possibly yielding lower limits and less expansive coverage when compared to obtaining coverage with a fine art and collectible insurance policy. The comparisons below address specific differences between the two types of policies.

Appraisals – Homeowners policies generally require appraisals for collections over $5000 as part of the underwriting process. Many collectibles insurance policies do not require appraisals at the time of application.

Deductibles – Zero-dollar deductibles are the standard for collectibles insurance polices with some offering additional deductible options. Homeowners policies may offer zero-deductible policies, but it is not as common.

Limits – The limit on fine art and collectibles coverage generally ranges from $500 to $2000 for a homeowners policy without the addition of a floater or rider. Even with an added floater or rider, homeowners policies tend to limit the level of exposure. A collectibles policy may offer coverage up to $1 million or more.

Coverage – One of the most important coverage differences between a homeowners policy and collectibles policy is the valuation of covered items. Homeowners policies tend to insure for actual cash value while collectibles policies insure the full collectible value of items in the collection. This distinction alone can reflect a startling difference in potential claims payments in the event of a loss. Homeowners policies generally cover named perils only, exclude coverage for items during transit, limit coverage on items stored away from the home to as little as 10 to 15 percent, and extend coverage to newly acquired items for only 30 days. By contrast, collectibles policies typically include all risk coverage and provide coverage for items in transit, items stored away from the home (such as in an office or storage facility), and newly acquired items for up to 90 days. Some collectibles policies may offer additional coverage benefits such as discounts for monitored fire and burglar alarms or items kept in a UL-rated safe.

Claims – In today’s insurance market, filing a claim against a homeowners policy may leave an insured vulnerable to premium increases at renewal or the possibility of non-renewal. With a separate collectibles policy, claims do not affect homeowner premiums or loss history. In addition, companies that offer collectibles insurance may have claims adjusters with a high level of expertise in this area. Adjusters with this specialized knowledge are better able to determine the value of unique or rare items, which should expedite the claims process and lead to a better outcome for the insured.

A detailed comparison of the benefits and limitations of standard homeowners insurance versus collectibles insurance demonstrates that specialty coverage can be very advantageous for serious collectors.

The latest on exemptions for Director’s Order 210 of the regulation of the sale of ivory

Posted on by Lydia Thompson

The American Society of Appraisers (ASA) has provided its members clarification of the exemptions of the Fish and Wildlife Service (FWS) regulations on the sale of ivory. It is posted here in its entirety:

FWS Releases Proposed Ivory Regulations
Creates De Minimus Exemption; Clarifies Antique Exemption from Director’s Order 210

On July 29, the Fish and Wildlife Service (FWS) released proposed regulations affecting the sale, transfer, donation, or other disposition of African elephant ivory. The regulations, long-expected in the personal property community, prohibit the “sale or offer for sale of ivory in interstate or foreign commerce and delivery, receipt, carrying, transport, or shipment of ivory in interstate or foreign commerce in the course of a commercial activity”. There are, however, several notable exceptions proposed in the regulation.

De Minimus Exemption

FWS has proposed a de minimus exemption for those items which contain a limited amount of ivory that is not the primary driver of the item’s value. Property that meets the de minimus exemption must meet the following requirements:
• Items located in the United States, if the ivory was imported into the United States prior to January 18, 1990 (the date the African elephant was listed in CITES Appendix I) or was imported into the United States under a CITES pre-Convention certificate with no limitation on its commercial use;
• Items located outside the United States, the ivory is pre-Convention (removed from the wild prior to February 26, 1976 (the date the African elephant was first listed under CITES));
• The ivory is a fixed component or components of a larger manufactured item and is not, in its current form, the primary source of value of the item;
• The manufactured item is not made wholly or primarily of ivory;
• The total weight of the ivory component or components in the item is less than 200 grams;
• The ivory in the item is not raw; and
• The item was manufactured before the effective date of the final rule for this action.

FWS provides examples of items it expects to meet the de minimus exemption, such as “the ivory veneer on a piano with a full set of ivory keys”, “insulators on old tea pots, decorative trim on baskets, and knife handles, for example”. FWS also lists examples of items it does not expect to meet the de minimus exemption requirements, such as “chess sets with ivory pieces”, “an ivory carving on a wooden base”, “ivory earrings or a pendant with metal fittings”, or “figurines, netsukes, and jewelry”.

Antique Exemption

The proposed regulation retains an exemption for bona fide antiques, in line with Directors Order 210 as amended on May 15, 2014. This exemption allows for items that are more than 100 years old to be “sold or offered for sale in interstate or foreign commerce and delivered, received, carried, transported, or shipped in interstate or foreign commerce in the course of a commercial activity”. The proposed regulation clarifies, however, that items which were “imported prior to September 22, 1982, and items created in the United States and never imported” are not required to demonstrate that the antique was imported through an endangered species “antique port”. The enumerated requirements for claiming the antique exemption are as follows:
• It is 100 years or older;
• It is composed in whole or in part of an ESA-listed species;
• It has not been repaired or modified with any such species after December 27, 1973; and
• It is being or was imported through an endangered species ‘‘antique port.’’
NOTE: Under Director’s Order No. 210, as a matter of enforcement discretion, items imported prior to September 22, 1982, and items created in the United States and never imported must comply with elements A, B, and C above, but not element D.

As part of substantiating that an item is 100 years or older, those wishing to sell may use a “qualified appraisal”. However, it is unclear under the proposed regulation whether the use of this term ties back to its use for Internal Revenue Service (IRS) noncash charitable contributions. It is also unclear whether the “qualified appraisal” referenced here must be performed by a “qualified appraiser”, as the term is used at IRS, or if other qualifications would be used to determine an appraiser’s ability to perform a “qualified appraisal” for the purposes of this proposed regulation.

Musical Instruments

FWS enumerates four requirements for a musical instrument containing worked ivory to be exempted from prohibitions on import or export. It also reinforces that owners of these musical instruments must provide documentation to support that the ivory was obtained legally prior to February 26, 1976, though FWS clarifies that:
[T]here is sufficient information to show that the ivory was harvested (taken from the wild) prior to February 26, 1976, even though the instrument may not have been manufactured until after that date. It also means that there is sufficient information to show that the ivory was harvested in compliance with all applicable laws of the range country and that any subsequent import and export of the ivory and the instrument containing the ivory was legal under CITES and other applicable laws (understanding that the instrument may have changed hands many times before being acquired by the current owner).

The stated requirements for musical instruments are as follows:
• The ivory was legally acquired prior to February 26, 1976;
• The instrument containing worked ivory is accompanied by a valid CITES musical instrument certificate or equivalent CITES document;
• The instrument is securely marked or uniquely identified so that authorities can verify that the certificate corresponds to the musical instrument in question; and
• The instrument is not sold, traded, or otherwise disposed of while outside the certificate holder’s country of usual residence.

Inheritance/Household Move

In line with Directors Order 210, items containing ivory that are imported or exported as part of an inheritance or household move are exempt from the prohibition, provided that they are for personal use only and accompanied by a valid CITES pre-Convention certificate. However, the regulation clarifies that ivory imported or exported under this exemption “could not subsequently be sold or offered for sale in interstate or foreign commerce or delivered, received, carried, transported, or shipped in interstate or foreign commerce in the course of a commercial activity, even if it qualified under the de minimus exception.” [Emphasis added.] This does not appear to preclude donations of items which are availed under this exemption.

Donations of Items Containing Ivory

Finally, FWS makes clear in the proposed regulation that “[t]he donation of an item consisting of or containing ivory also would not be considered commercial activity, even if the donor qualified for a tax benefit where the tax benefit is not income.” This makes clear that donations of items containing ivory are permissible under the regulation, and can be done to secure a tax deduction for the donor.

ASA continues to review the proposed regulation, and plans to file comments with FWS. For those who wish to file comments, they are due no later than September 28, 2015.

Resources for San Diego Art Collectors

Posted on by Natasha Bonilla Eckholm

In addition to appraisal services, Thompson & Martinez consults with collectors regarding the acquisition, management and sale of fine art works. Last month, Natasha Bonilla Eckholm spoke to the East County Chapter of the San Diego Museum of Art on art collecting in “A Primer for Aspiring Art Collectors in San Diego: Strategies, Value, Collection Care and More,” presented at the Grossmont Hospital Healthcare Auditorium. The lecture covered collecting strategies and resources, as well as collections care, insurance and legacy planning. Resources for San Diego Collectors

Endangered Species Act updates affecting the sale of ivory in the US

Posted on by Lydia Thompson

We frequently get calls from people with ivory objects that they want to sell. Due to recent changes to laws at the state and federal level governing the sale of ivory, it has become increasingly difficult to sell anything made of ivory in the United States. There are exemptions to the ban on ivory sale including if you have an ivory object over 100 years old or if the object that you wish to sell includes less than 20% ivory of the surface area among other exemptions. However,  the burden of proof is on the seller, who must obtain a permit by submitting documentation supporting their assertion to the governing state or federal agency. At the federal level, the latest update is Director’s Order #210 which you can click on and read here do210. Due to the outcry of dealers, auction houses and museums claiming that these laws are overly restrictive and punitive to sellers and collectors, these regulations are in the process of being modified. Since 1970 California has had the most restrictive regulations on objects made of endangered species including ivory, mammoth and rhinoceros horn which I have written about in previous post. Now states like New York, (see ivoryfaqs by New York law firm, Pearlstein and McCullough) and New Jersey have enacted similar regulations. Other states are expected to follow their lead and enact more stringent laws.

Does Irreplaceable = Priceless?

Posted on by Lydia Thompson

The PropertyCasualty360.com, a website dedicated to reporting news on insurance issues, explains that just because a work may be “irreplaceable” it doesn’t mean it can’t be valued. Read on below.

“Ripped from the headlines – a wealthy art collector reports an original Picasso painting stolen. The FBI initiates a search for the criminals, the press speculates on who might have stolen such a high-valued work, and the insurance company has the difficult task of reimbursing their insured for lost value.

Fine art appraisers specializing in insurance claims are sometimes called upon to help establish value for those items that are often referred to as “priceless.” The logical question then becomes, “How do you value irreplaceable, ‘priceless’ works of art?”

The answer is simple in theory and difficult in practice; while most works of art are in fact irreplaceable, almost everything has a value. For appraisers, that value is most often determined by comparing like kind and quality items that are for sale or have recently sold in the market.

To elaborate, let’s take the example of the stolen Picasso discussed here. While these paintings are definitely irreplaceable, they are not necessarily “priceless.” Because Picasso’s paintings and paintings by other high-caliber artists are often traded in the auction market at Sotheby’s and Christie’s, prices for these paintings are established semi-frequently in the market and become a basis of value for these particular artists’ work.

To value the Picasso, we would compare the insured’s painting to other Picasso paintings which have sold at auction. To complete this task we would consider the year of creation, canvas size, subject matter, medium, style of painting, and other determining factors which would affect value. We would not directly compare a Picasso Cubist abstract to a Picasso Blue Period portrait for a value. Instead, we would compare like kind and quality works as well as how the market is currently responding to Picasso paintings in general. When Picasso’s Nude, Green Leaves, and Bust Cubist painting broke an auction record in 2010 for $106.5 million, it set the standard of value for other Picasso Cubist still life paintings.

This scenario holds true with other seemingly priceless paintings by masters such as Van Gogh, Monet, and the like. As long as there is an auction market for an artist’s work, a price can be established. It is often the case that private dealers and realized auction prices are very similar. This is particularly true of higher end art.

However, a work that has come up at auction over and over again and has been seen frequently by the public may be considered “stale” and not as valuable in the short-term as a work that has rarely been seen. For this reason, it is also important to have an awareness of the recent visibility of both the subject property piece and the works to which it is being compared.

Appraising high-end art is challenging, especially in the event of a loss and damage insurance claim. If the piece was damaged, an adjuster will often ask for help to secure restoration estimates and compare those to the replacement value. If the cost of restoration plus the cost of the estimated diminution of value is less than the replacement cost, an item will be recommended for restoration.

When collector Steve Wynn (the billionaire Las Vegas hotelier) accidently elbowed his Picasso, leaving a silver dollar-sized hole in the canvas before trying to sell it, his insurance company was notified immediately. Most likely, if the painting was scheduled on Wynn’s insurance policy, they footed the restoration bill, raising the question as to whether the damage and subsequent restoration affected the value of the painting. The answer is yes, there would be a diminution in value to the piece in comparison with other Picasso paintings that have not been restored.

Whether or not a piece has been restored in the past is something appraisers need to take into consideration; the condition of these paintings plays a major role in determining value.

Along with condition, provenance also plays a major role in the valuation. Provenance is the successive history of ownership of a work of art and it is one of the factors that helps establish the authenticity of a piece. If an important work of art does not have a paper trail it can be a red flag.

While appraisers are not authenticators, there are a number of things they look for to complete due diligence and help establish value. Most major artists have a catalog raisonné to reference. A catalogue raisonné (French meaning “reasoned catalog”) is a comprehensive list of artworks by an artist, describing the works so that they may be reliably identified by third parties.

Appraisers reference the artist’s catalogue raisonné in search of the painting being appraised to make certain it is listed. Also, the owners of the painting, if authentic, would most certainly have purchase documentation, auction house records, previous insurance appraisals, and/or insurance schedules to accompany their piece. In the event the authentication of the piece is questionable, there are experts to call on for assistance. The estate of the artist or the artist’s foundation can assist with recommending authenticators of their work.

For insureds who are art collectors, it is advisable to have them schedule their fine art separately on their insurance policy with an accompanying certified appraisal. This appraisal should be updated every two to four years, since many changes in the market can occur in this time period affecting the value of the artwork: the death of the artist, a record-breaking auction sale for the artist, and an increase in the art market in general are all factors that can increase value.

When dealing with irreplaceable, “priceless” works of art in an insurance claim, a certified appraiser qualified in the realm of fine art can provide invaluable counsel.”

Source: PropertyCasualty360.com