“Unless you buy direct from the artist, there is always going to be unknowable information about an object,” says Judith Pearson, president, of ARIS. “Therefore one are can not eliminate every ownership risk for an artwork.”
The role of Pearson’s company is to insure ownership risks so that art owners can close art transactions. ARIS Title Insurance Corporation’s Art Title Protection Insurance (ATPI) programme provides title insurance for art buyers. Owners pay a one-time fee, typically between 1.5% and 3% of the value of the art works, for protection as long as they or their descendants own the art work.
“Ownership is the keystone for art to move from a passion purchase to an asset class.”
Pearson says that the importance of ownership – of title – should never be overlooked. “Ownership is the keystone for art to move from a passion purchase to an asset class. If you can’t anchor ownership you can’t sell an artwork; you can’t donate it; you can’t use it as collateral for a loan. You can’t even give it away. Valuation can also be tricky under evolving appraisal standards. ”
High value cases involving theft, forgery or Nazi looting get the most press coverage but Pearson says that these issues account for less than a quarter of all claims. “Most cases involve claims against the artwork based on more traditional liens and encumbrances such as loans where the art has been used as collateral or disputes involving divorces, estate, family infighting or taxes,” says Pearson. These liens – or ownership claims – are often much harder to discover through traditional research. This is especially true when art has been moved around the world.
With more art being stored in traditional storage facilities and Freeports; Pearson says that they are seeing an increase in liens where owners have not paid bills for storage. She jokes that this is how assets become available for Storage Wars, the US television series. ARIS will also evaluate issues like contractual restrictions from galleries that are designed to stop buyers flipping art.
“We can never eliminate all risks, but one thing we can do insure over gaps in the chain of title.”
Writing title insurance is a bespoke business, and ARIS researches and evaluates each risk it insures. “We can never eliminate all risks, but one thing we can do insure over gaps in the chain of title,” says Pearson. The company has a specialist team of art historians and lawyers to underwrite the policies.
As nearly every home in the US is bought with title insurance, Americans are far more familiar with the concept of the insurance than Europeans but Pearson says they see a lot of demand in Europe. “Gallerists and dealers in the US trade more consigned rather than owned objects,” says Pearson. “Dealers and collectors in Europe often owned the works for a longer period of time consequently the objects may lack documentation making title insurance more necessary. Pearson gives the example of a European family that had owned a piece of work for several generations, after buying direct from the artist’s dealer in the early 1900s. The family moved it between several houses in different countries. When the family decided to sell work Questions arose about undocumented movement between countries, which meant there could be liability for import and export taxes – which could make resale difficult. “We looked at the various applicable laws and accepted the risk” says Pearson.
Most of the art submitted to ARIS for insurance is generally worth between $250,000 and $10 million, but it has written both more valuable and less valuable risks. ARIS writes policies for both buyers and sellers but says that the mix varies depending on demand for art. In softer markets they typically act more for sellers. ARIS has received several claims. Pearson says that most have worked out as anticipated.
ARIS launched in 2000 and started underwriting policies in 2006. It is still the only provider of art title insurance in the market. “Upon launch of art title insurance we anticipated competition, however, eight years later we are still the only title insurer for art,” says Pearson.
“When you buy art, one is acquiring an asset. It makes sense to protect your investment.”
To receive regulatory approval in the US there are a number of barriers to entry. It is a big undertaking for a niche market (property title companies underwrite millions of properties every month). ARIS was acquired by Argo Group, a large insurance company, in 2010.
Even if a competitor launches, Pearson is confident that demand for title insurance will rise as more people look to art as an investment.
“When you buy art, one is acquiring an asset,” says Pearson, “so no matter what one’s long term plans include; it makes sense to protect your investment.”
How Art Title Insurance Works
Art Title Insurance protects you from someone disputing the ownership of an art work or from someone claiming they have a lien against that particular artwork.
There are many ways in which a piece of art can attract a lien. It could happen where the work has been used to back an art loan which has not been fully repaid; where a tax authority thinks tax is due from inheritance, a sale or a piece being imported or exported; where storage fees have not been fully paid; or where a gallery asked for a commitment that the buyer would not sell without giving them first refusal. Liens can also relate to any previous owner so checking them all is often impossible.
Both sellers and buyers can protect themselves with insurance.
You typically pay between 1.5% and 3% of the artwork’s value (although this can rise as to above 5% and beyond in exceptional cases). This is a one-time fee (you do not need to make annual payments) and you are then protected for as long as you or a descendant owns the work.
If someone challenges ownership to an insured art work ARIS pays for the legal fees to defend the case and manages the dispute. If you lose and must return the work, ARIS will then refund the value at the time of purchase or the insured can apply to increase the indemnity limit in the event the insured objects appreciates in value.
It typically takes 30 days to arrange art title insurance but it has been done faster. “We do suggest that applicants call us as soon as they decide to buy – and definitely before transfer of any payment– to protect the transaction participants. We have written policies with very tight deadlines,” says Pearson.
ARIS is happy to work with auction bidders and can prepare an indication of cost for title insurance before they bid. “If we have underwritten title insurance before the auction and bidders are successful we do expect the buyer to purchase the policy,” says Pearson.
It is important to remember that title insurance is not an opinion or guarantee. It is insurance. If an artwork has title insurance it does not mean that it is free of risks, just that the insurer has calculated a premium to cover these risks. Unless a work is inherited title insurance cover ends when a work is transferred. Buyers will want to take out their own policy.