- Abigail Price
Method of risk management by which the owner or custodian of an object (the insured) transfers the risk of potential financial loss to an insurance company (the insurer) in return for the payment of a premium. By forming a contract of insurance, the insurer promises to indemnify the insured up to a specified amount of loss or damage occurring during a fixed period of insurance and caused by or resulting from events beyond the control of the insured.
The principle of insurance is that uncertainty of risk can be shared, and the basic economic theory is that the premiums paid by multiple insureds will cover the losses suffered by the few (i.e. when pooled, total premiums will be greater than total claims paid). There are examples of comparable arrangements from ancient Babylonian culture and amongst Chinese merchants in the 2nd century BCE, as well as in the early Greco-Roman economies. Today’s international insurance industry may be traced directly back to the early modern period in Europe and the evolution of the theory of probability. The world’s most renowned and enduring insurance entity is Lloyd’s of London, which originated out of Edward Lloyd’s Coffee House (established in the 1680s). To the present day, Lloyd’s continues to be a specialist insurance marketplace for many classes of business and a forum for innovation in art insurance.
The earliest specialized art insurance policies were issued in the 18th century. One documented example from the early 1770s involves Catherine the Great. After having lost the Braamcamp collection she had acquired from the Netherlands in a shipwreck off the Baltic coast, the Empress charged her artistic advisor, François Tronchin in Geneva, to take out an art insurance policy for the transport of the Baron de Thiers collection. There are two prevailing methodologies for art insurance contracts. The first is known as “All Risks” coverage, where physical loss or damage from any cause is insured within certain terms and conditions, and usually excludes specific causes of loss, such as: wear and tear, gradual deterioration, inherent defect, nuclear or radioactive contamination, or war. The second type of contract is more restrictive and provides coverage for “Named Perils” only. In these cases, claims can only be filed for the defined causes of loss which are listed in the contract, such as: fire, flood, or theft.
In the event of damage to or loss of an object, traditional property insurance might offer a “like-for-like” substitute for a lost item. In contrast, specialized contracts for art insurance will approach indemnification from the perspective that an artwork is unique. In the event of partial loss, insurers cover the costs of restoration and any associated depreciation in value. If a single damaged work forms a component part of a set, insurers take into account the reduced value of the whole series after the loss, and not just the isolated piece. In the worst-case scenario, if an irreplaceable piece is destroyed, then insurance can enable the owner to acquire an equivalent asset.
Taking into account how the market drives fluctuating values of artworks, an essential clause in any contract of insurance prescribes the basis of valuation for indemnity in the event of a claim. An “Agreed Value” policy specifies the artworks covered and the value assigned to each work agreed by the contracting parties at inception of the period of insurance. Alternatively, a limit of liability can be set for an entire collection, with a basis of valuation stating that the worth of an artwork will be fair or current market value (being the amount which a willing buyer would pay to a willing seller in an unencumbered transaction on the date of the loss).
In addition to variable values, art insurers are affected by other trends within the international art world, such as the prevalence of temporary, commercial art fairs, blockbuster museum exhibitions, or the use of high-tech storage locations, such as Freeports. In the 21st century, artworks are frequently transported globally between locations and a significant volume of insurance claims occur when damage is suffered whilst in transit. Insurers also need to manage their aggregate exposure in areas where they may have an accumulation of art collections to ensure that they can absorb the potential for a catastrophic event, such as a fire, destroying everything at a given site.
Complementing a traditional approach to insuring physical loss or damage suffered to artworks, the insurance industry continually looks to develop more sophisticated products to meet the needs of an evolving art market. These areas include Defective Title insurance (in which there is a challenge to the insured’s rightful ownership of an artwork) and Fakes and Forgeries insurance (where the authenticity of an insured artwork is disputed).
- Tronchin, Henry. Le Conseiller François Tronchin et ses amis Voltaire, Diderot, Grimm, etc. d’après des documents inédits. Paris: Plon, 1895.
- Bernstein, Peter L. Against the Gods: The Remarkable Story of Risk. New York: John Wiley & Sons, 1996.
- Vara, Renée. “Insurability of Art.” In Fakebusters II: Scientific Detection of Fakery in Art and Philately, edited by Richard Jerome Weiss and Duane R. Chatier. Singapore: World Scientific, 2004.
- Merritt, Elizabeth E., ed. Covering Your Assets: Facilities and Risk Management in Museums. Washington, DC: American Association of Museums, 2005.
- Fischer, Christiane and Arnold, Jill. “Insurance and the Art Market.” In Fine Art and High Finance: Expert Advice on the Economics of Ownership, edited by Clare McAndrew. New York: John Wiley & Sons, 2010.