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The art world has been unusually gripped by the insurance industry since the businessman collector Ronald Perelman sued a constellation of providers for not paying out on five paintings following a 2018 fire in his East Hamptons home. Perelman reportedly testified that the works, valued at $410mn, subsequently “lost their lustre . . . and a lot of their character” and that one work, a 1971 painting by Cy Twombly, had “lost its oomph”. The ongoing dispute raises questions about the limits of art insurance — not least whether “oomph” is quantifiable.
The “loss or damage” clause on which Perelman’s suit relies is, says Robert Read, head of fine art and private client at insurers Hiscox, part of the most common type of policy. While not speaking directly about the Perelman case, Read says the clause “is quite broad, but pays out for physical loss or damage. Emotional loss is not covered.”
Damage payouts generally cover the cost of an artwork’s restoration plus its calculated depreciation. But proving physical damage to art is not clear-cut. Perelman’s case includes analyses by an outside expert, which, his suit says, “demonstrate irreversible damage caused by the fire”. Read says that, in general, “it is amazing what scientific analysis can show, but you can get one expert to say one thing and be credible and another to say the opposite and also be credible”.
Valuations are a potential minefield in an already murky market. Insurance premiums are normally calculated as a percentage of an object’s or collection’s value. But as these fees are set relatively low (generally under 1 per cent), collectors who take out art insurance tend to assert the collection’s maximum possible value thus receiving the highest outcome in the event of a claim. This suits the interests of the insurer too, as they receive a higher premium, but it may not represent real value and could be vastly different from an appraisal made for, say, inheritance tax or a divorce settlement. “You can frequently find yourself in a battle between valuers,” says Amanda Gray, partner in art law at Mishcon de Reya.
Either way, she says, collectors should pay more attention to their contracts: “Multimillionaires might not be interested in poring over insurance documents, but someone has to do it.” She reminds that even once a contract is finalised, “it is not a dead document to be kept in a drawer.” Rather, collectors need to be mindful that “if, for example, you move your art, particularly to another jurisdiction, if it has gone up in value, if you buy new works, you will need to update your insurance — if you don’t want it to be tested,” she says. The Perelman case could come down to “a lack of certainty, such as what was actually meant by ‘fire damage’ in the first place”, she says.
Another issue, says David Scully, an insurance mediation expert who was a fine art underwriter for Axa XL for more than 25 years, is that prices for certain Modern and contemporary artists have skyrocketed in recent years. So, he says, the concentration of value in just a few objects, such as Perelman’s five paintings, makes art more capital-intensive for insurers: they must keep more money in reserve in case of claims, eating into their profits. “Art insurance used to be one of the most profitable lines of business, so insurers could afford to be very generous when a claim occurs. Today, it’s not such an attractive line,” he says.
Wider concerns are upping the risks. “Climate change, particularly in hurricane- and earthquake-prone areas, mean that rates have hardened a lot for catastrophe risk,” Scully says. Putting work into a freeport, a tax-advantageous storage facility, may not help as, again, the concentration of value ups the stakes. Hiscox’s Read flags other areas that now come into art-insurance calculations, such as possible activist attacks in museums and “the increasing amount of damage done by people taking selfies and walking backwards into things”.
Collectors can opt not to take out art insurance at all. “Our biggest competitor isn’t Axa but people who don’t insure,” Read says. Those outside of the US and Europe, of which there are many, “are sometimes happy to take on the risk themselves”, he says. Scully notes that this could overcome privacy concerns as “sometimes people don’t want the paper trail of insurance.”
The Perelman litigation is still a rarity in the art world, Gray says. But Scully warns that claims could arise from owners losing money on their businesses or investments in the current economy. He says (not referring to the Perelman case): “In every recession, art claims increase, and some of those will be specious. Most arise from need, not greed. There are people who are always honest and those who are outright dishonest but in the middle are a wide range who may be paragons of virtue until the day comes when there is a pressing debt that must be paid.”
