From Risk to Representation, All You Need to Know About Art Insurance

President of the ARIS company, Judith Pearson is an insurance industry veteran with particular expertise in intellectual property liability. She cofounded aris in 2000 as the only outfit to underwrite title insurance for fine art and other high-value collectibles. The company was acquired by Argo Group in 2010. Pearson spoke with Benjamin Genocchio about different kinds of title risks, and how buyers and sellers can be protected.

What is art title insurance and how does it work?

It insures the policyholder’s clear legal title to an artwork or collectible—just like real estate title insurance, obtained by anyone buying a home. The insurer defends the owner against a title claim and reimburses the full insured value of the work in the event that a claim must be paid. The insured incurs no defense cost, and there is no deductible.

What does a policy cost?

There is one up-front premium based on the purchase price or appraised value; it averages 2 to 3 percent, sometimes less. That payment covers the life of ownership, and the policy auto­matically continues at no additional cost when the work transfers to legal heirs.

What is the process to obtain a policy?

Submit an image of the work with identifying information such as its title, artist, and dimensions, as well as pur-chase records, appraisals, provenance research, and any connoisseurship information, such as exhibition history.

This will help determine what is actually known, not what has been assumed about the work. The insurer then conducts its own investigation and analysis, indicates the premium, and issues coverage, typically all within 10 business days.

How do you handle a seller of undisclosed identity?

The title insurer requires the seller be identified to the insurer to complete the underwriting process but keeps all identities confi­dential from each side. The mechanics in auction transactions differ slightly, depending on whether the consignor-seller or the purchaser buys the insurance. Either way, the title insurance transfers the risk to a third party and gives both parties permanency of the transaction.

What is the nature of title risk in the current art market?

The most talked-about risk is stolen artwork, though theft represents only 25 percent of the risk. Most ownership challenges involve liens, encumbrances, and questions of legal right to sell: The work might have been pledged as collateral, be subject to government claims for unpaid taxes, or be tied up in estate disputes or divorce or bankruptcy proceedings.

Isn’t a collector protected by buying only from reputable dealers?

It is always best to deal only with reputable intermediaries. Yet the market has seen many instances of rapidly declining reputations, such as the case of Knoedler & Company, which closed abruptly in 2011 amid allegations it sold fake works with unconfirmed ownership for decades. Due to the complexity of art market legal title risks, intermediaries are unable to investigate those risks in the same way and to the same degree as a title insurance company.

And auction houses?

Auction houses are more transparent organizations, but as intermediaries, do not assume legal title risks. They pass the seller’s contractual representation and warranty of clear title to the buyer. If a title problem arises, auction houses use a rescission clause to unwind the sale [return the art to the seller and the purchase price to the buyer]. When this occurs years after the fact, it can be problematic—even locating the seller may be impossible—and the prospect puts sellers and buyers in the precarious position of lacking permanency of the transaction.

Why is yours the only company offering title insurance?

Two reasons: One is a historical mismatch—fine art property insurers have knowledge of the art world and physical damage losses, but by regulation they cannot offer title insurance; real property title insurers can legally offer art title insurance but lack knowledge of art and its market. The second reason is that intermediaries—galleries, dealers, and auction houses—initially feared title insurance would highlight risk and impede sales, but they have come to embrace it, as have collectors and risk management advisers. Removing a risk or uncertainty in a market always increases that market’s activity and asset values.

That sounds like a win-win proposition.

We think it is. 

This article is published in the July 2013 issue of Art+Auction.