Collection Risk Management for Insurance Purposes

Risk management and insurance are two different but interrelated functions when discussing adequate collection care and protection. Protection in the context of this article will mean indemnification not physical security although care can and should, include physical security considerations.  This article is not meant to be all inclusive and should be viewed as a starting point for further discussion and observation.

 

In the insurance industry, risk is defined as the uncertainty concerning the occurrence of a loss.  Risk management includes the concepts of avoiding, preventing, and minimizing loss. You must realize insurance does not look to do anything about risk; they consider the above concepts in order to rate the risk for actuary to price out.  [To clarify, an actuary is a person who compiles and analyzes statistics and uses them to calculate insurance premiums.]  One reason insurance companies have risk departments is to assist their client’s or prospective client’s in reducing their premiums by pointing out problematic risks in the property that the client desires to insure.

 

The purpose of collection risk management is to identify those areas which, if not addressed, will leave the collector or his insurer exposed to a financial loss. The collector has a fundamental responsibility to provide safe and secure conditions and environment for all collections to be insured. This includes lighting, relative humidity, temperature, pollutants, contaminants, and other elements and factors that may affect the status and condition of any part of the collection. The care and welfare of the collection is a primary consideration in determining if and under what conditions an insurer will provide coverage.

 

The risk management process consists of 3 basic steps:

1. Identifying the risks

2. Developing risk protocols: Risk protocols are the guidelines, procedures, tools and methodologies that have been adopted for use.

3. The implementation and ongoing evaluation of protocols

    

RISKS to collections, whether the collection is fine art, wine, dolls, glass or ceramics, can overlap with the same risks the structure is subject to.  To state the obvious, exposure to water and fire are serious risks.  However, there are numerous other risks that can affect the wellbeing and insurability of your collection.  Heat will turn paper items brown and dry them out to the point of crumbling to the touch. Are you hanging your works on paper over or near a heat register or fireplace? Heat will also cause your wine collection to prematurely age and quite likely dry out the cork, leak and subsequently oxidize! Freezing will cause certain materials or supports to shrink and get brittle.  Light, particularly Sunlight will fade or discolor certain mediums used on paper as well as the dies used in the paper itself. Children and pets come with their own inherent risks, primarily breakage. However, pets also have the tendency to scratch and pee on things as well as rub up against stuff. Natural oils in the fur or hair will transfer to the items being rubbed. Remember – your pieces that are in storage must not be ignored. Roisin O’Regan, from the FTAdvisor website | Published Aug 28, 2012, wrote an interesting short article on this. 

 

Protocols must be written to address the identified risks.  Protocols should outline specific actions that need to be taken to correct any deficiencies such as;

•   Artwork hung in direct sunlight

•   Items stored near or over the furnace

•   The displaying of sculpture, glass or ceramic in an entryway

•   Artwork hung over “working” fireplaces

•   Inadequate hanging systems

•   Lack of sufficient fire and theft protection

   

These protocols need implemented and re-evaluated to ensure the risks are mitigated. Without follow-through nothing changes, your collection will still be at risk. Environments will change, structures will age, periodic re-visiting of the risks and protocols must occur to address these changes.  Your insurer may have different reasons (significant financial impact) than you for the protection of your collection, although the end result should be the protection, preservation and continued enjoyment of the collection that you spent significant time and money to assemble.

 

Collection management is an important part of accumulating an exclusive collection. Emerald Art Services, LLC works with you and your insurer to identify the risks to your collection and develop protocols to mitigate these risks to keep your possessions beautiful for years to come.

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Fine Art, Wine & Collectible Appraisals

Emerald Art Services

 

Emerald Art Services provides ISA and USPAP compliant personal property appraisals for Estate Planning, Obtaining Insurance, Charitable Donations, Probate, Diminished Value, Liquidation or Divorce.

 Specialties include Paintings, Prints, Ceramics, Orientalia, Collectibles, Sacred Artifacts and Wine.

Cris Drugan is an accredited appraiser with the International Society of Appraisers and has been providing appraisal services for 15 years.                                                                       

 

             

Contact Cris at 330-630-5645 or see our web site at www.emeraldartservices.com  OR Cris@emeraldartservices.com

 

 

Wine Collection Appraisals

Do you have an extensive wine collection?

 

 

 

Have you considered what you would do in the event of a catastrophic loss or other unexpected even

               

 Bottles will break…labels will float off or burn…foils will melt. How will these wines be identified? Your last chance…the cork may have limited information. Don’t count on your insurer to understand your collection the way you do. Some will…Most won’t. Your collection is a living, breathing investment. Inventory is an ongoing process…drink some…buy more… drink some more! As your inventory is a rollercoaster, so is the value. Not only quantity, but also the varietals, origin, age and market tends will effect the value.

Emerald Art Services can provide a detailed inventory, condition report and current market value of your wine collection. This can serve as the documentation of your loss when your insurer requests it. An appraisal also documents your assets should you experience any other sudden occurrence. I am an ISA accredited appraiser with over 20 years of wine retail and collecting experience. Please feel free to contact me to discuss your concerns.

Art Loss – Fraud, Theft or Damage

It’s more exciting and newsworthy to talk about theft. The FBI’s art theft program Web site states: “Art and cultural property crime – which includes theft, fraud, looting, and trafficking across state and international lines – is a looming criminal enterprise with estimated losses running as high as $6 billion annually.” It is difficult to calculate a total dollar value because a substantial number of art crimes are not reported. When it comes to actual art thefts, the reality is far less romantic than Hollywood’s version. Thefts more closely resemble shoplifting than a scene from “The Thomas Crown Affair”. “They’re usually inside jobs by staff,” said Donald Soss, vice president for personal insurance on the West Coast at Fireman’s Fund. The employee is working with someone and gives them the alarm codes. It’s not that interesting to discuss a forklift going through a painting or a tracker-trailer overturn on a freeway. In general, more losses to artwork are due to damage rather than theft or fraud.

It is estimated that near $100 million in fine art was destroyed in the terrorist attacks on the World Trade Center on Sept. 11, 2001.  According to insurance industry art experts, a majority of the art was underinsured.  In addition, to this day, some of the smallest art galleries in New York have more money on their walls than banks do in their cash drawers, yet many still lack adequate security and insurance protection. 

When the economy began to decline in late 2007, early 2008, it was expected that insurance fraud would most likely increase. And, as the unemployment rate, the cost of gasoline and the foreclosure rates all increased, an increase in insurance fraud became a certainty. Industry studies estimate the annual cost of insurance fraud is between $85 and $120 billion, and is growing at a rate of 10% per year.  The Florida Dept. of Ins. reported an increase of 9.6% in homeowner fraud from 2008 to 2009, while South Carolina reported a 12% increase.  While this represents all homeowner fraud, theft and damage to scheduled property can make up a significant portion of the losses.    

Take for example sports memorabilia fraud. The problem may account for upwards of $500,000,000 in losses annually. The forgers used fake third-party authenticators in most cases, but in a few situations they sought out inexperienced authenticators who unknowingly approved fraudulent Certificates of authenticity (COA’s). Pricing is also fostering the forgery of what are claimed to be original items. With recent sales of;

• a 1948 Carlo Mollino (1905-1973) trestle table auctioned by Christie’s sold  for US$3.8 million
• items by Jean Prouvé (1901-1984) – a Kangaroo chair sold for US$136,800, a reading table for the Maison de l’Etudiant sold for US$556,800 and a pair of perforated metal doors for the Maison Tropicale reached US$680,000
• a Marc Newson Lockheed lounge sold for $200,000
• an Eileen Gray (1878-1976) 1923 lacquered console table sold for US$534,000 while a lacquered screen sold for US$374,000
• a 1847 Mauritius Blue stamp sold for US$3.8 million in 1993
• a $176,000 was realized for a 1905 Steiff teddy bear and $231,000 for an 1875 US tin toy

vendors can falsely assert an item’s authenticity and on occasion provide a phony provenance document or even another signed document. There is a price threshold beneath which there is little concern for provenance or forensic analysis to prove authenticity. For many buyers and insurers the cost of consultation with experts or detailed forensic examinations will often be more than the price of an item. While on the other hand, if the authenticity and accurate value are not verified, collectors and insurer’s can experience huge financial losses. 

*One reason for fraud is simply the limits of supply. Demand continues to grow but antiques are a nonrenewable resource. Supposedly around 80% of “ancient” terracotta’s smuggled from Mali since the 1980s have been fakes and some estimates suggest that around 60% of antiquities from China are of contemporary manufacture.

Mechanisms for forgery include –

• fake signatures – adding a recognized artist’s signature (often considered to be a valuable indicator of originality) to an unsigned work not executed by that artist or by deleting an existing signature in favor of one from a more recognized artist
• completing unfinished works – ‘restoring’ an incomplete work from an earlier period (with the requisite signs of age), particularly in a way that ‘improves’ it
• misrepresentation – deliberately selling a retouched work by a master’s protégé (or merely from the corresponding period) as that of the particular master
• reproduction – reproducing an original and selling that copy as the original
• pastiche – copying details from different work by a particular artist for amalgamation as an unrecorded unique work by that artist
• drafts – simulating drafts of a major work, such as an oil painting or sculpture, by concocting sketches of figures.

*the last section on fakes and mechanisms for forgery are from…

June 2008
© Bruce Arnold
caslon.com.au | caslon analytics

Significant problems found with current appraisals

An appraisal is a record of an item to prove its existence, establish its identity and communicate a value through an established methodology.

 In reviewing a number of artwork and collectible appraisals for various insurance companies across the country, the vast majority (85%) lacked the information needed to identify the work should there be a loss. Identification is, at least as important, if not more important than the value. Without proper and complete identification, value conclusions can be skewed. I’m not just talking about identifying the artist and  “title” of a piece; I’m talking about the physical description and content of the piece. Can you recreate an image of what the piece is or more often, was, from the description? Size, support, medium, genre, content and colour are all significant in correct identification and valuation.

 The insurance company exposure on improperly insured artwork, collectibles and jewelry is significant. Thousands to hundreds of thousands of dollars can be lost on one claim. Insurance companies need to know what they are insuring in order for actuary to properly price their product. This starts with underwriting understanding the need for proper identification of this type of property. Underwriting guidelines usually indicate only when an appraisal is required (if an item is valued over $5,000). When dealing with artwork and collectibles to jewelry, specific requirements as to appraisal content should also be included in the guidelines. By doing this, it would also assist the claims staff in their investigation, settlement and possible recovery of missing or stolen items.

 Emerald Art Services provides consulting and appraisal services to insurance companies and private clients across the country. Visit WWW.EMERALDARTSERVICES.COM for additional details.

Is It Fine Art, A Collectible Or An Antique?

Although any item could be placed into one or more of the following groups, there are some general guidelines for placing an item into a category…

 

 Fine Art – “a visual art considered to have been created primarily for aesthetic purposes

                         and judged for its beauty and meaningfulness, specifically, painting, sculpture,

                        drawing, watercolor, graphics, and architecture.” The word “fine” does not so

                        much denote the quality of the artwork in question, but the purity of the

                        discipline.[1]

 Collectible – A collectible is typically a manufactured item designed for people to collect.

                               In addition, a collectible can be an item made without the intention of

                              special interest but due to rarity or uniqueness, production fault, human

                              error, nostaliga, or other events, becomes sought after due to its rarity in

                              these circumstances.  A collectible does not necessarily have to be valuable

                              or antique.

 Antique – The word antique comes from the Latin word antiquus, meaning old.

                         Although there are many opinions as to how old an item must be to be

                         considered on antique, there have been a couple formal attempts in defining

                         the term. One such attempt was the Smoot-Hawley Tariff of 1930 which

                         defined an antique as “works of art, collections in illustration of the progress,

                         of the arts, works in bronze, marble, terra cotta, parian, pottery or porcelain

                         artistic antiquities and objects of ornamental character or educational value

                        which shall have been produced prior to the year 1830.” Another attempt is

                        made by U.S.Customs and Border Protection defining an antique as “an article

                        over 100 years of age at the time of importation.” These definitions are arguably

                       only for taxation purposes. In a commercial situation I would suggest that an

                       antique is “a decorative object, piece of furniture, or other work of art created

                       in an earlier period” . There are many things that are old, but simply being old

                       does not imply that the item is an antique or even valuable. 

 

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[1] Dictionary.com – Unabridged

Art Damage & Diminished Value

An Observation on Diminished Value

Conservators and restoration specialists Code of Ethics prohibits them from entering into the realm of appraisals as a clear conflict of interest. However, the reality is that the “success” of a conservation treatment of a damaged work of art does have a very real impact on the value of the piece after treatment.

 Just as an art appraiser working within the insurance industry is NOT a representative of the insurance industry, neither is the conservator. Many conservators have apprehensions about the insurance industry and have legitimate issues and concerns regarding their direct or indirect involvement in fine art insurance claims or their own insurance coverage.

 The question “What is Art?” lingers within the insurance industry. A vast majority of the people working within the domestic insurance market acknowledges their limited knowledge and appreciation of art. Art appears intimidating and foreign to insurance agents, brokers, underwriters, and claims adjusters. However, there do exist a minority of people within the insurance industry who are atypical and specialize in fine art insurance.

 The U.S. insurance industry has a diminishing and narrow understanding of the art object as well as the role of the fine art conservator. When an object of art is damaged, the insurance company typically assigns the claim to an adjuster. The adjuster assigned to the claim can either be a company adjuster or an “independent adjuster”, by definition, not on the payroll of any specific insurance company.

 Consultants are utilized when a claim requires a specific expertise. A hail damaged roof, for example, would require the technical evaluation of a structural engineer to properly assess the damages. I play a similar role within the art community. Within the appraisal industry, I am one of the only fine art experts with over 18 years as a Property &Casualty adjuster. My role as an adjuster was to investigate the insurance claim by meeting with all interested parties and making a physical inspection of the work or works of art to assess damages. Adjusters are guided by the insurance policy, which can have slight variations from company to company. Many claims for fine art involve damage in transit. An underwriter’s greatest exposure is not always fire or theft but sub-standard packing and handling.

 When a work of art is damaged, you should secure the services of a trained conservator or restoration specialist as well as an accredited or certified art & antiques appraiser to assist with the insurance claim.  Conservators or restoration specialists can provide you with opinions regarding restoration, while the appraiser can provide value opinions both before and after restoration.  Valuation subsequent to restoration is often referred to as “Diminished Value”, although not all restoration will diminish the value of a work of art. Diminished Value calculations can be very difficult for conservators, insurance adjusters and collectors to fully comprehend; yet it is a constantly recurring problem within the insurance industry. This subjective process is about the position of the artwork within the art market and not about the success or failure of the conservation. The quality of the conservation is an important factor in determining diminished value although the monetary compensation for damage is never a reflection upon the quality of the conservation. Conservation can be 100% successful, yet the value of the artwork can be negatively affected. Conversely, even a partial restoration of certain works would affect their value to the positive. In addition, the auction market, history of private sales and the state of the art market at the time of loss, should also be considered in determining loss of value. Many appraisers utilize a scenario, which incorporates a mathematical formula of subjective values pre and post damage where the difference between the two numbers equals the loss of value.

 Loss of value compensation is a negotiated compromise that should be discussed by the adjuster and the owner of the artwork. A conservator should never be placed in a position to render a public opinion regarding loss of value, as this would be in violation of their “code of ethics”. Many untrained adjusters pressure the conservator for a success percentage attributed to the anticipated condition of the artwork after treatment. A conservator may innocently write within a Treatment Proposal or Condition Report stating that “conservation may be 90% successful”, thinking they are circumventing the question of loss of value. The adjuster will simply interpret this as meaning the value, post restoration, is 90% of the value prior to restoration. One way for the conservator to avoid such a misrepresentation is to clearly state that the success rate of the conservation is by no means a representation of a perceived loss of value.

 Please contact me with any questions that you may have.

Cris Drugan, ISA-AM, CIPM

 cris@emeraldartservices.com

www.emeraldartservices.com

www.linkedin.com/in/cdrugan

Int’l Mezzotint Society page on Facebook

Trout, mezzotint by: David Crown

The International Mezzotint Society

 

The International Mezzotint Society now has a presence on Facebook. 

[http://www.math.ufl.edu/~glover/mezzotint.html]

 

Check it out at…

http://www.facebook.com/pages/International-Mezzotint-Society/292301830839?ref=ts

 

 

Pigment vs. Binder ~ What is the Difference?

Pigments

 The pigment determines the color of the paint as well as the permanence of that color.

 PIGMENTS DETERMINE:
1) Chroma; Relative brightness
2) Opacity; transparent, translucent or opaque
3) Tinting strength or Color strength
4) Light fastness; How long before color shifts or fades

                                             

  Binders

 The binder (acrylic polymer emulsion) determines paint handling characteristics, clarity, flexibility, UV resistance (non-yellowing), drying and curing times. While both are necessary for high quality paint, it can be argued that it is the binder that is most important, since it is the binder that the artist physically feels while working, and it is the binder that will hold the pigment for future years.

BINDERS DETERMINE:
1) Clarity; Clear binders make true “color” paint films
2) Drying time; How fast paint will dry
3) Handling; Physical qualities – thick, fluid, sticky, smooth, brush drag
4) Archival; Non-yellowing binder won’t “yellow” colors over time
5) Environment Effects of the atmosphere on the paint film durability
6) Blocking Affinity of dry painted surfaces to bond (paintings stacked face to face)
7) Film hardness; Harder film is more durable over time
8] Flexibility of film; Flexible film is more durable over time
9) Adhesion; The types of substrates that paint adheres to, over what time period adhere it

Development of Hairline Cracks in Oil Paintings

Why do oil paintings develop hairline cracks and acrylic paintings do not?

This is directly related to the binders used in oil and acrylic paint. Oil paint binder (linseed oil) dries to an inflexible weak film. As temperature and humidity conditions change and the substrate expands and contracts, this inflexible film can crack. In addition, linseed oil dries very slowly. If the lower paint layers contain more linseed oil than paint applied on top, the top layers will tend to dry sooner. This may cause cracks to develop.

Acrylic paint remains flexible, which prevents the paint film from cracking. Acrylic paint binder (acrylic polymer emulsion) dries to a flexible paint film because the molecules interlock. They “move” with the substrate (canvas) during expansion and contraction due to heat or cold and humidity.

                                                                                                            © 2010 – EAS