Title Insurance for the Arts:

Pros and Cons of Purchasing

Introduction

Steven Spielberg, the movie producer and art collector, decided that he needed a Norman Rockwell painting. He called the gallery he usually purchased art from and was told that a Rockwell was available. He went to the gallery, saw the work and was smitten. He purchased it for $700,000, took it home and hung it with his other works. Sometime later Spielberg was sued by the previous owner who claimed that the gallery was not at liberty to sell the work because it lacked the proper documentation. In point, Spielberg had defective title to the work, and as such, he did not legally own the Rockwell.

Defective Title

Like a piece of real estate undergoing the process of being sold, regulations and laws exist requiring that the piece of art for sale has no issues regarding proper ownership by the seller. In order to protect buyer, seller and banks providing the mortgage, title insurance companies provide insurance against titles which later prove to have issues. Titles for properties, which do have issues, are identified as "defective." Quite simply, "defective title" pertains to the fact that the property sold did not have documentation establishing that the person selling it unequivocally owned it. The hunt for proper title in today’s fine art market is exemplified by Nazi era thefts of fine art in countries it occupied during World War II between 1939 and 1945. The looting of the Iraqi Art Museum during the current US war in Iraq is another example.

Spielberg's relationship with his art dealer allowed him to walk away with a substitution for the Rockwell painting he had bought but did not cover the $50,000 in court costs which he spent fighting the defective title. Without this relationship a typical buyer would not only spend a fortune on court costs but would also lose the purchase price.

ARIS: The New Kid on the Block

Up until 2006, there was no title insurance to protect purchasers of fine art. In 2006, a company named ARIS introduced fine art title insurance to art collectors. The introduction of fine art title insurance represents a major step in consumer protection. In the absence of it, art purchases run the gamut of challenges and attacks from past owners, false provenance, and hefty losses resulting from attorney fees and court costs. The current title insurance product and process protects from defective title and defends against legal costs. There are however, some questions, issues, and problems with the current product.

The Current Offering

ARIS is a New York State licensed title insurer. The company has written 300 policies ranging from $20,000 to $4 million. The policies are written for the present value of the art, and cost about $1.75 - $6.75 per thousand dollars of value. So title insurance for a $100,000 work of art would cost approximately $1,750 - $6,750, with no renewal costs. The policy covers the present owners and their heirs. It protects owners from defective title in that if title is challenged the policy covers legal costs and the loss of the work if in fact the insured does not have legal title to it. In the case of Steven Spielberg and the challenge to his ownership of the Norman Rockwell painting, fine art title insurance would have taken care of court costs and the value of the work purchased.

The Process of Insuring Fine Art from Defective Title

According to the present fine art title insurer, the process of insuring a work of art begins with a written statement provided by the individual who wishes to purchase insurance, outlining the facts about the art. The statement will identify where the purchase was made, who owned it previously, its cost and any information pertinent to the work. From that point it takes about three weeks using various art professionals to corroborate the provenance of the given work. If no problems are found, the insurance is issued. A reinsurance company situated in London and associated with Lloyds of London is working with the present title insurance company to provide greater protection.

Costs vs. Benefits

The insurer notes that there is tremendous risk associated with title ownership given the fact that there is an international movement to take back art which was removed, from rightful ownership. Whether museums or individuals hold works of questionable title, genuine owners are using both legal and diplomatic powers to secure art which was removed without proper title or just plain stolen. The Indiana Jones days of taking art by force or chicanery has been replaced by various watchdogs such as The Commission on Looted Art in Europe and a host of various worldwide agencies and courts requiring that proper title be provided by those holding works. As recently as February 2009 a German Court ruled that the rightful owner of propaganda posters stolen in 1938 by the Nazis belonged to Peter Sachs and not the German Historical Museum. The costs associated with establishing title once it has been questioned or deemed defective may easily ruin a collector financially and psychologically. According to the insurer, the benefits of fine art title insurance well outweigh the cost. For about 3-7% of the value of a work, on a one-time cost basis, a collector would be insured for defending against defective title and the value of the work. In point, for a maximum of 7% of the value of the fine art, the insured is protected against the loss and legal costs associated with establishing correct ownership. Spielberg would have paid about $49,000 to insure that he would not lose $750,000. The insurer notes that in one auction the fact that a piece sold for substantially more than its estimated price was largely due to the fact that title insurance backed the sale.

Issues of Fine Art Title Insurance

Fine Art Title Insurance and Its Implausibility

Fine art title insurance is a new product, untested and without a history of success. The fact that the major insurance carriers have not in the past and do not currently provide such a product leaves a heavy question to be answered. Why? Although the insurer claims that research supports that the untested product works, the fact that the old timers did not provide fine art title insurance says that there may be a problem with the research. It would seem that a few successful challenges to title on the grounds of defectiveness borne from a faulty pool of provenance data or information would quickly sink the fine art title insurance ship. According to recent comparative study of pre-sale authenticity identifiers such as style, signature, provenance documentation and so on provided by galleries, auction houses, and private sellers undertaken by the investigator, provenance data came in last as substantiating authenticity of given paintings more than five years old. It is recognized that the insurer is not focused on authenticity but the fact is that provenance or documents supporting fine art title were only minimally supplied in the above investigation. In point, the quantity of information supplied to document who had owned a given work offered for sale - a significant criterion for authentication - was minimal compared to other criteria. How then is the insurer going to provide title if very little provenance or documentation is supplied by sellers of fine art?

Questionable Provenance Sources: GIGO

According to the company, research has proved the fine art title insurance to be a workable product. Because they have not been willing to share the data or process supporting their statement, one can only make the assumption that what the stats or data demonstrate is that given the present state of the art market, there is an extremely low probability that the insurer will have to pay out in claims greater than the insurer's profit. For example, the premiums paid by the 300 clients on board presently will exceed the cost of claims paid out, with a resulting profit for the insurer. Given that the level of provenance may or may not support defective title - there are problems getting, securing, and ascertaining reliable title data - the insurer enters the realm of extreme risk based on questionable data, and low levels of data. Over the last year it has become all too clear that the insurance companies' billions of dollars of losses have been attributed to an inability to secure sound data and information enabling the companies to accurately assess risks and therefore make a profit. The bottom line is that by the assumption of questionable data there emerge questionable conclusions. GIGO, garbage in creates garbage out. The lack of adoption of fine art title insurance and the dubiousness of existing research sources weigh against the likelihood of its long-term success. Given that fine art title insurance is a welcome first attempt, some sort of plausible explanation must be provided as to how the new kid will work after the old timers left the game.

Processing Difficulties

Securing provenance for a given work is a long tedious process. For the most part genuine documentation is not available. Sellers don't have it, are unwilling to part with it if they do, and most amounts to garbage in garbage out. The question emerging is how will the insurer, in two to three weeks, gather data and information about a given work when no existing database is available supporting such a short research time. Title searches in real estate take a few weeks only because such research has a base going back more than 125 years.

The People Exhuming Provenance Documents

The insurer notes that it has attorneys, insurance experts and art historians carrying out the research. The insurer does not list the expertise or professional background of the provenance experts. Merely because someone has a law degree, insurance background or graduated with an art history degree does not mean that they know how to secure, examine, and develop conclusions about the documents supporting ownership. Documents are easily forged, especially in our digital age, and given that works go back hundreds of years, no note was made about how the insurer's experts would be able to unequivocally identify real documents from fake ones.

Insurance Requirements and Exclusions

In normal real estate title insurance processing the owner or purchaser is never asked to supply any information about the property undergoing title search. In the new fine art title insurance the owner is expected to provide information about the piece being insured. Further, the exact nature of the information is not really identified except to note that if defective title claim arises and the information supplied was weak the insurer may walk away from the claim. This exclusion among many is not unusual since insurers use exclusions as protections against risk. It also allows them to avoid paying claims. The more general and the more excessive the exclusions, the better the chance an insurer will fail to pay the insured. Auto insurance companies protect against damage to a car parked on an owner’s property by excluding it from claims if a tree falls on it. If collision insurance existed it would be covered. They also protect via time windows for claims, and by requiring the insured to supply much information within the time frame allowed. In effect, exclusions limit liabilities for an insurance company.

Another exclusion is that during the course of a claim the insurer may want to settle for less than the value insured for. This leaves the insured with potentially less than the value of the work paid for even though the insurance cost was based on the original value. Here the insured loses part of the value of the work, and also some of the premium paid. To the extent that many exclusions exist - I count about ten - the present form of fine art title insurance serves more to protect the insurer. The insured must evaluate risk of premium paid and settling for less than the value paid versus whether the insurer will pay the costs associated with title issues.

Pros

In today's economy of egregious consumer losses developed as a result of Peter Principal corporate leaders pushed beyond their level of incompetence, any activity or insurance to protect the consumer is beneficial. Of further benefit is not to have to search out for a firm to address defective title issues. It is not always clear what firms are the most expert in challenges of defective title, and ARIS has the staff, which seems to satisfy a defective title company. The psychological benefit of not having to become involved in the defense of the challenge is an additional benefit. The cost of such protection may be high for some, but it is a one shot deal. The insured is not paying every year.

Cons

The product is new without any success stories, and it seems to fly in the face of what experienced insurers would be involved with. Its requirements of having the insured provide information about the property to be insured has no basis in normal title insurance process, and its exclusions seem to place the insured at greater risk than the insurer. The art market is uncontrolled and unregulated, with the capacity for fraud and forgery rampant. It is questionable that the new kid on the block will be able to navigate through such a snake pit. A more important question is whether it is really necessary that title insurance be purchased. We are led to believe that based on the quantity of title related issues one would be best served to secure the insurance. One asks however "What is the probability of running into a defective title issue?" Here no data is provided. One would assert that very few title problems arise in regards to the general public purchasing art. The examples provided by the insurer probably equal to $30m out of $50 billion, which amounts to maybe 1%.

The Risk of Purchase

The purchase of fine art title insurance has to be made via a cost/benefit analysis. The purchaser must evaluate the overall costs versus the overall benefits. This requires that one examine all parts of the purchase. The problem here is that we really do not know what the costs and benefits are since the product is new and untested. Lacking a set of data or information about cost/benefit, it is necessary to analyze the risk of purchase: how risky is the product in terms of the costs? How much will the policy cost, and what are the risks associated with the purchase? What will the purchase price provide to the buyer? Without a past history it is not clear what the buyer will secure. Yes, the insurer says it will insure title. However, as pointed out there are some issues and problems, which may prevent the insurer providing what it says it will provide or excuse it from doing so. One may reasonably assert that at this point there might be more risk to purchase than being potentially provided with a claim settlement, which may never take place.

Smoothing Out the Road

Although there are some bumps in the road to offering insurance protection for fine art title, the potential for making the offering to the buyer more palatable is available.

Authenticity

The insurer seems to have no interest in whether the work being provided clear title is authentic. If it is found to be inauthentic will the insurer pay the claim knowing full well that if it is bogus it is probably not worth the value of the policy? Will the insurer reject the claim on the grounds that the insured did not provide due diligence. The insurer should make it clear what consequences will follow if a work is clear title but inauthentic.

Costs

The current pricing structure is excessive for a new start up with an unidentified success history. The current premiums should be aligned with real estate prices. Unless the insurer provides evidence that the costing structure is different, why should the buyer pay more for insurance of an asset of the same value, merely because one is a work of art and the other a piece of real estate?

Transparency

The process and actors involved should be identified and expertise and professional qualifications clearly established. What is involved in securing provenance? What documentation is sought, how long does it take, and what exactly establishes final provenance? Just because A is an attorney does not make him an expert in art provenance; just because B is an art history major does not make B an art expert.

Exclusions and Requirements

There are too many exits for payment of claims based on the responsibilities of the insured, and the ambiguity of some of the exemptions and conditions could easily create a paper war between the parties sliding rapidly downhill to litigation. This is a case of an uneven balance in the insurance equation favoring the insurer. The exemptions and conditions should be reduced and the language tightened up so that the balance is more equal. The requirement to provide data about the artwork being insured should be more clearly identified.

Success Stories

The insurer should begin to provide some claim settlement evidence indicating that its start-up nature is beginning to be morphed into that of an established insurer.

— by John Daab Ph.D.  |  April 22, 2009  |  Print Version - PDF

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