ELITE ADVISOR BEST PRACTICES
Insurance considerations for clients who collect art, cars, wine and more
By David Hubbard
- Insurance can help your clients preserve the long-term value of their collectibles, but a homeowners’ policy likely isn’t an adequate solution.
- There are proactive steps all collectors can take to lessen the chances of avoidable damage or loss.
- The best way for your clients to access industry-leading coverage is to work through an independent insurance agent who focuses on affluent clientele and offers a choice of carriers.
With success comes the freedom to pursue a broad range of interests, many of which lead to the acquisition of tangible assets. If your clients invest time and money while following their passions, it is critical to alert them to issues that can impact their financial health. However, this can prove challenging when the objects of their affection are unfamiliar territory for you.
To illuminate the insurance and risk management concerns pertaining to collectibles such as fine art, collector cars, wine, jewelry, memorabilia, antiques and other collectibles, I sat down with Katja Zigerlig, vice president of art, wine and jewelry insurance for the Private Client Group at AIG. Following is a recap of our discussion.
DH: How do you define “investment-grade” collectibles?
KZ: They are the highest-quality items within a collecting genre—fine art, furniture, jewelry, wine, etc.—and typically will maintain their value in an international marketplace. I say that with a caveat, because there are a lot of localized markets. California Impressionism, for example, is popular mostly with collectors in the West. Even though that is a specific region, the best paintings of that genre would be considered investment-grade works.
A lot of items are collectible, but that doesn’t mean they are investment grade. Most passionate collectors focus on what they love, whether it is investment grade or not. Yet all collectors put time, money and extensive thought into pursuing their collecting passion, so it should be protected regardless.
DH: What kinds of loss trends do you see?
KZ: Art theft is what we read about most often in the newspaper, but the most common cause of loss for private collectors is accidental breakage and damage. Every collector is vulnerable to accidents. Here’s a recent example: A client was changing a light bulb in his foyer. He lost his balance on the ladder and used the wall to steady himself. Although he avoided a nasty spill, he also put his hand through a very valuable painting.
DH: What are the insurance options available to collectors?
KZ: Proper insurance, updated appraisals and risk management make the foundation of a thorough art/asset protection plan. Regardless of the overall insurance limit, homeowners’ policies generally cap “contents” coverage. The value of covered items also may be subject to depreciation. Insuring high-value collections through a private collections insurance policy instead can provide more suitable protection.
Independent insurance agents or brokers can point your clients to best-in-class providers. Good carriers will offer:
- Worldwide protection, including coverage for items in transit
- Immediate coverage for new acquisitions, with 60 to 90 days to notify the carrier of a purchase
- Care, custody and control coverage, which protects items taken home on loan before the client commits to the purchase
- Coverage for catastrophic events such as windstorms, floods, fires and earthquakes
- Coverage for collectibles used as collateral
DH: If a collector resides in an area prone to natural catastrophes, will insurance be prohibitively expensive?
KZ: Not necessarily. To control costs, we recommend disclosing as much information as possible about the care of the collection. Proactive measures to minimize risk, such as connecting artwork to the security system, may result in premium credits. A reputable independent insurance agent can help collectors navigate that process and obtain the best possible pricing. Also, the insurance carrier may have suggestions on preventative measures that can lead to savings.
A related recommendation: Creating an emergency plan can minimize the likelihood of damage in the face of a natural disaster or other emergency. Many preparations can be executed well in advance, such as purchasing a backup generator to manage humidity or obtaining custom-sized crates to move art to a safe storage area.
DH: Some collectors are reluctant to insure art because of tax implications. Can you comment on the merits of that strategy?
KZ: Insurance protects the value of the estate for heirs and beneficiaries, and collections should be considered part of that. Of course, the constant fluctuation of the exemption limit requires careful attention.
For most collectors, the collection will outlive them. It is prudent to decide how to distribute art assets, whether during their lifetime or at death. The options—including bestowing or bequeathing their collections to relatives, charities or museums—have implications on insurance coverage. Some collectors erroneously assume insurance isn’t important if they are dispersing their art assets. However, inadequate or absent insurance increases risk for the collector. An appropriate insurance policy provides protection for the duration of ownership, from the time of purchase to the time it is sold, donated or transferred. The bottom line: insurance is an aid, not a barrier, to the fiscal and physical protection of collections.
DH: How often should someone have their collection appraised?
KZ: The art market rebounded in 2010 with strong sales across the board—from African tribal sculpture to Chinese antiquities to first-edition books. To keep up with these types of changes, obtain new appraisals every three years. Many modern and contemporary art values have gone up significantly within the past year alone. Collectors can research auction results for their artists through online compilations of records. If similar works are selling for more or less than the current insured value, it is time for an updated appraisal. Professional assistance is available from associations such as the American Association of Appraisers or American Society of Appraisers.
DH: How can an insurance company help collectors protect their investment?
KZ: Every insurer promises to pay a covered loss—that is the reason to buy a policy in the first place. Yet some companies go beyond the promise of a check by providing services to help prevent damage or loss to what in many instances is an irreplaceable item. These services may include complimentary referrals to trusted packers, shippers, art lawyers, conservators and appraisers.