By Jill A. Ellman*
An average person’s encounter with title insurance is likely as a contract guaranteeing clear title of real property in connection with a real estate transaction. A purchaser of real estate property today would not fathom completing the transaction unless the property in question has clear title. Yet, the purchase of art title insurance is a comparatively new notion in the art world where multi-million dollar sales are a common occurrence. Currently, ARIS is the leading seller of fine art title insurance. ARIS is the creation of attorney Lawrence M. Shindell and former insurance executive Judith L. Pearson. Both had a mutual client that needed a unique insurance policy to cover a specific World War II-related risk. The research process that ensued led to the inception of ARIS, which obtained New York State regulatory approval to sell insurance in 2006. In November 2010, the insurer Argo Group, which underwrites specialty insurance and reinsurance products, purchased the company, allowing for the expansion of ARIS’s insurance practice. Arguably, the ability to insure title to art is a better alternative to litigation over title disputes and authenticity. This article explores what ARIS covers, examines some of the issues ARIS faces underwriting art risk, and discusses solutions that may assist in minimizing such risk.
The ARIS Policy
ARIS insures museums, private collectors, banks accepting art as collateral, dealers, and galleries. Its Art Title Protection Insurance (“ATPI®”) policy (the “ARIS Policy”) is based off of the American Land Title Association (ALTA) real estate title insurance form and is designed to insure art owners against defective title risks. The ARIS Policy in and of itself covers defective title claims, from artwork with unverified provenance (in the case of theft or illegal import of objects) to liens or lack of authorization to sell artwork. Provenance, or an artwork’s ownership history, is most often an issue with respect to looted and/or stolen art, such as art looted during World War II. According to ARIS’s promotional material, art theft encompasses 25% of art title risk; whereas traditional liens and encumbrances account for 75%. Currently, ARIS’s most common claims include those surrounding estates and a seller’s lack of authority to sell an artwork. For example, familial or divorce-related claims may arise in the event a part-owner of an artwork is kept out of a sales transaction.
Many insurance policies provide coverage for loss under a certain policy period, whether it is occurrence or claims-made coverage. However, coverage under the ARIS Policy may continue as long as the policyholder retains an insurable interest in the fine art or is liable to a third-party claimant under certain instances. Typically, a policyholder will purchase the ARIS Policy at the time of a transfer of title, including in the case of consignment or purchase from an auction. There is a one-time premium paid by the purchaser, whose artwork is covered for the face value of the ARIS Policy plus costs to defend a claim. Coverage may be excluded for intellectual property rights related to the artwork, claims related to authenticity, issues arising out of bankruptcy, and government seizure of art. And of course, there is no coverage for any misstatements or omissions by the insured in the application process.
With respect to individual investors of art, ARIS represents that the ARIS Policy affords greater protection than other types of insurance. Homeowner’s insurance policies with art riders, for instance, do not include coverage for title-related claims. An ARIS Policy may protect the art object in the event of consignment and is transferable to a policyholder’s heirs. Museums may also benefit from holding art title insurance as D&O insurance policies will only protect a museum’s management from claims brought against them for their conduct in the course of business; standard D&O policies do not apply to art title claims and may specifically exclude such claims.
Nonetheless, art title insurance is not a panacea for eliminating all risks associated with an art object. Whereas ARIS provides coverage for defects in title occurring in the past, buyers will still need to purchase insurance that will safeguard them against future loss and theft, which are covered in fine art property insurance policies. Further, ARIS is not an expert in authenticating art; nor does it insure authenticity.
Underwriting Art Risk
Dealers and auction houses have caught on to the trend of encouraging buyers to purchase art title insurance for the assurance that their artwork has clear title. As artwork sometimes contains incomplete provenance, especially art possibly looted during World War II, a buyer is held to a higher duty to investigate before purchasing and may not exclusively rely on the due diligence of dealers or auction houses. In certain circumstances, sellers will purchase title insurance to provide the buyer or dealer assurances of clear title, such as when a dealer sells a consigned artwork. Sometimes auction houses will encourage sellers to purchase art title insurance, as in the case where Christie’s sold artwork from the Salander-O’Reilly Galleries in June 2010. See Title Insurance Concept Spreads Into Art Sales. One explanation for art title insurance gaining traction is the simple reason that art, like real estate, has increasingly become another way to diversify a financial portfolio, particularly for high net worth individuals. In fact, ARIS has seen a shift in its representative insureds, from those purchasing art title insurance because of doubts concerning the provenance of their artwork, to those seeking to protect their investment. Such a need for art title insurance is consistent with the trend of art becoming a new asset class. According to Deloitte Luxembourg’s 2014 Art & Finance Report, buyers seeking to purchase art as an investment rose from 53% in 2012 to 76% in 2014. See Deloitte Luxembourg & ArtTactic, Art & Finance Report 2014 Whitepaper.
As part of the underwriting process, ARIS reviews the authenticity of fine art. For objects with an ownership history, research methods and art experts may assist in affirming an artwork’s unverified provenance. When underwriting contemporary artwork, however, ARIS must develop a view on that artwork’s authenticity. One need to look no further than the recent Knoedler Gallery scandal, in which fake paintings were sold to an unassuming public, to understand the potential risk of insuring a piece of art, later found to be a fake. As insurance is a moral hazard, ARIS recognizes that due diligence and research cannot completely absolve risk and claims do arise.
In order to confront and preempt future title issues, ARIS invested in a center at the State University of New York at Albany that will use technology to mark art objects. This initiative aims to devise an authenticity standard on which property insurers, museums, foundations and artists rely. ARIS anticipates that placing a mark on a fine art object will mitigate risk for insurers, thereby potentially lowering premium costs for insureds. Using modern methods from DNA markings to nano-technology, a team of scientists, art historians and legal experts will work collaboratively to develop a standard of authenticity for fine art, which will bear markings, in the form of a synthetic DNA liquid, identifying their unique characteristics. ARIS will not own the mark, as third-party entrepreneurs will create and sell them, but it is advocating for establishing an authentication standard because it recognizes the benefit of clarifying an artist’s legacy. The anticipated launch date for this initiative is pending.
The idea of applying science to mitigate art disputes is not a new concept. For instance, radiocarbon dating assists archaeologists with the chronology of material objects. Art historians also use scientific methods as a means to identify and pinpoint art belonging to an artist’s particular time period. Pigment analysis, thermoluminescence dating, ultraviolet light and X-rays are just a few of the many methods used as a means of authenticating artwork. See Forensic Science for Antiques. The marking initiative is particularly useful for art in the primary art market, or art that has never been challenged or contested; for example, art that is sold directly from an artist’s studio, contemporary estates , or foundations. However, art already in the secondary art market, or art that has a sale history, will be more of a challenge to authenticate. Art on the secondary market that is contested, such as a disputed Jackson Pollack work, requires more attention.
If the marking technology gains traction among collectors and dealers, appraisers and art historians need not fear for their job security as insurers will still need to rely on their expertise along with other scholarly evidence found in art databases and catalogue raisonnés. This especially holds true for art in the secondary market. Ideally this new technology will ease the burden for appraisers, some of whom are faced with liability for rendering their opinion, to the extent that they are retained to endorse artwork for valuation purposes (for more discussion of the Bill before the New York State Assembly to amend New York’s Art and Cultural Affairs Law and the challenges that art authenticators face See The Shifting Sands of Art Authentication). The new scientific methodology may work in tandem with appraiser’s expertise as a means of providing a more reliable evaluation of fine art and perhaps reduce the frequency of costly art authentication legal disputes.
On its own, this new standard may still not be enough to achieve complete assurance of authenticity. Reliability may also be an issue as any technology, especially new technology, may still be prone to error until it is perfected over time. And forgers, who are already skilled in replicating materials, may also find ways of duplicating an object’s unique DNA code or mark. This type of technology, arguably, is initially ideally suited for contemporary art that directly emanates from a known source, such as an artist’s studio. Given the difficulty of authenticating art removed from an artist’s studio or foundation, the technology is likely to be more effective as a supplement, and not a replacement, to the expertise of scholars and appraisers.
One thing seems to be clear, the demand for art title insurance continues to increase. As the first mover in the industry, ARIS is well positioned to service this market niche.
*The author would like to thank Sherri North Cohen of ARIS for her assistance in providing information for this article.
- ARIS Website, http://www.aristitle.com/;
- ATPI® Owner’s Policy;
- ARIS Risk Management Individual Collectors and Museums Brochures;
- Deloitte Luxembourg & ArtTactic, Art & Finance Report 2014 Whitepaper, http://www.deloitte.com/view/en_LU/lu/industries/art-and-finance/57db4038a8438410VgnVCM1000003256f70aRCRD.htm;
- Stephen D. Brodie, The Case for Title Insurance, Art & Advocacy, Spring/Summer 2013, Vol. 15;
- Katya Kazakina, Billionaires at Basel Bet Art Is Better Investment Than Cash, Bloomberg (June 20, 2014), http://www.bloomberg.com/news/print/2014-06-20/billionaires-at-basel-bet-art-better-investment-than-cash.html;
- Dina Modianot-Fox, Forensic Science for Antiques, Smithsonian.com (May 14, 2008), http://www.smithsonianmag.com/arts-culture/forensic-science-for-antiques-49339284/;
- Kate Taylor, Insurance for Art Collectors Covers Ownership Disputes, The New York Sun (July 10, 2008),http://www.nysun.com/arts/insurance-for-art-collectors-covers-ownership/81553/;
- Kate Taylor, Title Insurance Concept Spreads Into Art Sales, The New York Times, November 10, 2010;
- ARIS Title Insurance Corporation Launches Initiative to Establish International Legal-Scientific Standards for Emerging Authenticity Technologies in Global Art Market, Business Wire (November 18, 2013), http://www.businesswire.com/news/home/20131118006441/en/ARIS-Title-Insurance-Corporation-Launches-Initiative-Establish#.VB3dQ_ldWSo; and
- State University of New York at Albany to Serve as International Center of Innovation for Art and Collectibles Industry, The Wall Street Journal (March 6, 2014), http://online.wsj.com/article/PR-CO-20140306-912673.html.
About the Author: Jill A. Ellman is an attorney at Tressler LLP. She is interested in the intersection between business and art law.