By: Renee Montgomery
Scenario: Your museum is securing a loan critical to its upcoming exhibition. The lender returns the loan contract. His declared insurance value is high, but the loan is vital to the exhibition and it’s ticklish to question this lender. The contract is countersigned with everyone hoping the loan will simply come and go without incident so the value never becomes an issue in an insurance claim.
The question of inflated loan values is a delicate area of exhibition production –both from your side and your insurer’s. Once your institution has approved a value, under the conditions of most collection policies, your underwriters must honor this amount in the event of a total loss claim. In the case of a partial loss (or damage) claim, the value becomes the basis for adjustment , meaning, a damage to an object valued at $1 million rendering the artwork to lose half its value, let’s say, will result in a $500,000 claim, but if the work had been valued at $500,000, the claim would settle at $250,000. As a result, underwriters depend on museums to carefully vet loan values. A massive settlement with one institution’s lender, can translate into higher premiums for you upon insurance renewal. In some cases your museum might be purchasing special coverage specifically for your exhibition or paying the lender’s premium, so a higher lender value can signify direct costs.
My intention with this blog is to provide museums with some tactics helpful in resolving the issue of inconsistent insurance values assigned by lenders.
As with most controversies, an open dialogue is usually the best solution. The museum can explain to the lender “We’ve been seeing all the values come in from lenders for this exhibition and notice yours is high compared to similar objects. Can we ask what you based the value on?” In my experience, mis-stated values normally stem from unsophisticated lenders who were simply guessing at approximate values, and are usually responsive to questioning. Of course, museums are careful not to furnish an appraisal during any of these conversations, but to forward the lender to an appraiser(s), auction house, and/or artist’s dealer for clarification.
Museums may also ask the lender to supply a copy of an appraisal – implying this is needed for bureaucratic reasons if necessary. For instance, at my museum, the curator handily blames me: “Gee, I’m sorry; our risk manager requires an appraisal.” Or your museum can explain your insurance company requires substantiation. In my experience, when lenders have been asked for documentation, I’ve been happily surprised. Many collectors closely follow the market. The lender may even respond with a bill-of-sale if he’s acquired the object lately.
Sometimes we hear lenders claim, “This work is priceless, it’s impossible to set a value!” Museums must tactfully push through that sort of description. The claim of pricelessness can be true in limited instances but almost every type of art or artifact is bought and sold on the open market nowadays and has a value, (e.g., George Washington’s personal copy of the Constitution/Bill of Rights recently sold at auction).
Another strategy is to agree to insure for the “fair market value at time of loss” rather than for a declared value, so the issue is put off to experts later if needed. Further ideas are conferring with other museums who’ve hosted exhibitions of similar material. Colleagues can’t disclose their lenders’ values of course but may furnish revealing information, e.g., “Yes, we dealt with that lender. He has a curator advising him. ” Or perhaps your own insurance agency knows the lender – through positive or negative loss history. Again, in my experience, most feedback from the insurance agencies regarding particular lenders has been favorable. Your brokerage may happen to serve the collector too and be aware of an appraisal you could request from the collector.
Another possible solution is to ask the lender to continue his own insurance, so any claim settlement impacts his record, not yours. Bear in mind that many lenders (or their agents) may wish to invoice a premium however. Naturally in these cases, you’re obtaining an insurance certificate naming all the borrowers (including tour venues) as additionally assured or waiving subrogation rights.
If dealing with other institutions, look for a quid pro quo situation before negotiating, for instance, “we are looking forward to lending to your upcoming exhibition and value our partnership with your museum, but must resolve this value issue.” Most colleagues and private collectors are sensitive to the realities of budget limitations so if you mention the [inflated] insurance value could impact your costs, they may be see the value less as an abstract approximate number, and be willing to pinpoint it better along market rates.
If the matter simply can’t be resolved, an internal risk management discussion should occur (e.g., with your supervisor, curator, conservator), taking into consideration: the value, length of loan, lender, the relative fragility, and risks to which the object will be exposed or not, e.g. a complicated travel itinerary. Discuss any special mitigation measures you can employ: obtaining outgoing condition reports and photos preferably signed off by the lender and your staff (or your agent) at the lender’s door, special advance inspection by a conservator, a possible courier, and/or special security safeguards, e.g., display under a vitrine. In some cases, the prudent approach may be to simply delete the loan from your exhibition.
If you must proceed, try to reduce your risks, for instance, by agreeing to insure on your premises only and not during transits, where damage is statistically more likely to transpire. Or, similarly try to limit your insurance responsibility to the less-likely risks of loss, theft or mysterious disappearance, thereby avoiding the whole issue of depreciation in the event of damage.
Of course, issuing loan contracts early allows more time to negotiate values. A loan form returned the day before the pickup date gives little time to sort out difficulties. Finally, developing internal procedures in advance, outlining how inconsistent loan insurance values will be addressed, will speed up the process and help you manage expectations. Procedures should be accompanied by staff training or sensitization.
Renee Montgomery is Assistant Director, Risk Management, for the Los Angeles County Museum of Art, California.