Robert Hiscox
ABSTRACT: Setting the cost of insuring works of art is a subjective process that attempts to balance the value of the object against the nature of the risks that the object is likely to encounter. The risks are not limited to when the object is
in transit but also those periods when the painting is hanging on the walls of its permanent installation. This paper ex- amines broad differences in catastrophic and particular risks. Risk assessment for objects in transit is discussed, includ- ing the transportation aspects such as the nature of the move, the level of care provided the object during the move, and possibility of incidents such as theft, fire, and accident. Premium costs are presented and explained in terms of the type of possible risk and the client.
CONTEXT
In the summer of 1990, the Chairman of Lloyd’s hosted a lunch for a group of cura- tors from museums throughout the United States, to which leading Lloyds underwriters of fine art insurance were invited. The under-
writers came away from that lunch with a clear message: the cost of insurance was such a large item in the budget for an exhibition
that this factor alone could determine the vi- ability of staging exhibitions in the future.
One curator even suggested that insurance represented up to one-third of the total cost.
He had been staging exhibitions for a num- ber of years, and clearly did not think he was getting value for money. If we, the insurers, did not cut premiums, then there would be no exhibitions to insure. Not only would we suffer a fall in business, but the public at large would be depri_ved of the opportunity to see our cultural heritage.
Insurance is, of course, a necessary ingre- dient of all exhibitions. Some loans from na- tional museums will be covered by government indemnities, but to make any ex- hibition comprehensive, the hosting institu- tion will wish to draw upon works of art from private collections and museums, which will not be prepared to lend unless they are protected against financial loss. We must, then, find ways in which the risks of
loss and insurance premiums can be reduced to a minimum.
COSTS AND RISKS OF EXHIBITION INSURANCE
It is useful to begin by analyzing the way in which insurance premiums are set. Insurance premiums vary greatly according to the risk to which a work of art is exposed. At one ex- treme is a ten-ton bronze sculpture perma- nently on display in a museum that is temperature controlled and patrolled regu- larly by guards; at the other extreme is a frag- ile item such as a glass goblet that a dealer carries in the back of the car from one trade fair to another. In assessing a risk, underwrit- ers look first at the nature of the work of art;
then at the degree of movement to which it is exposed; then at the level of care and protec- tion it is given; and finally, having weighed these factors, they assess the likelihood of varying perils, such as fire, theft or accidental damage.
Perils
It is worth just looking at the perils first.
These may be broadly divided as either cata-
strophic or particular. Catastrophic perils are those that will have a large-scale effect, and
include fire, lightning, aircraft collision, smoke, earthquake, and war. Fortunately, such perils occur rarely, but their effect can be devastating. Particular perils are those that tend to affect individual works, such as theft, vandalism, water damage, and break- age (also known as accidental damage).
These perils occur frequently, but the loss is limited.
Movement
It is clear that a painting hanging on a wall is far less exposed to risk than a glass goblet traveling around the country. But what pre- cisely are the increased risks in transit?
Mostly they are accidental damage and theft.
To a small degree, there is an increased war risk (the article may be in an airplane that is bombed) and an increased chance of water damage. But, conversely, a painting on dis- play is more vulnerable to a deranged person who might slash it with a knife than when it is in transit and out of the public gaze.
Medium
In examining the potential perils to which a work of art may be exposed, we must also consider the medium in which it is created.
Our glass goblet is unaffected by water damage, and may survive a minor fire; but it can easily be broken. A book suffers con- versely; fire and water damage is devastat- ing, but it can be mishandled without great risk. These are obvious examples, but where insurers fail to distinguish sufficiently is within the broad categories themselves. Con- sider, for example, an Old Master by Titian, thick with paint and probably restored a number of times, and contrast it with an acrylic by Rauschenberg with its large sur- faces of monochrome. Both can suffer water damage. The Titian is easily restored, with little loss of artistic value and, consequently, financial depreciation. But the Rauschenberg is destroyed, the pigments cannot be matched, and even the most expert restorer is unable to cover the damage without it being
visible to the naked eye.
So here we have added a fifth and signifi- cant element in the insurer’s calculations--fi- nancial depreciation. It is not a risk in itself, but can and usually does have a significant
impact on the size of a claim, and must be considered when setting the premium.
Setting Insurance Premiums
Now let us quantify these various elements in setting premiums for exhibitions and works of art in transit as a whole.
In the table below, I have illustrated a pos- sible breakdown of premium between vari- ous exposures on a valuable Old Master.
There are four categories: thirty days on dis- play (1) in a museum and (2) in an art gallery;
and a transatlantic transit of up to thirty days under (3) museum, and (4) commercial con- ditions. For simplidty, the risks are assumed to be of only four types: catastrophic (fire, earthquake, etc.), vandalism, theft, and acci- dental damage.
o/oo DISPLAY IN T RANSIT
Mu,~um Gallery Museum Commen:ial
Catastrophic .03 .075 .0S .075
Vandalism .02 .005 .00 .00
Theft .04 .10 .25 .525
Accidental
damage .01 .02 .10 .60
Total .10 .20 .40 1.2
Figures are expressed per thousand (one- tenth of percent) and are, of course, illustra- tive-don’t rush off to your broker and demand these terms. They are, however,
somewhere near reality.
What can we deduce from these figures?
First, for museum risk, the premium for one transatlantic crossing that may only last
twenty-four hours is approximately equal to four months on display on a museum wall.
The reduced risk of vandalism is massively outweighed by the risk of theft.
Notice, though, that the risk of accidental
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damage while in transit is not disproportion- ate to the risk while on display. As insurers, we recognize that packing techniques are now extremely sophisticated, and the in- creased risk of accidental damage while in transit originates almost exclusively from taking the work of art in and out of its con- tainer.
Second, the risk of accidental damage in a commercial transit is significant especially when compared with museum transits. It is a
sad fact that shippers vary widely in their ex- pertise and handling. To a large extent, mu- seums are shielded from the worst disasters, as they exercise rigorous controls over ship- ping techniques and, to their credit, use those shippers, who by their record, demonstrate expertise. Unfortunately, insurers are not al- ways so discerning.
It is our experience that the greatest risks for works in transit are those of theft and ac- cidental damage. In discussing these two as- pects let us explore ways in which premiums might be reduced.
PRINCIPLES OF INSURANCE
What are the basic assumptions underlying all forms of insurance?
Insurance operates by protecting the indi- vidual against financial loss that in the nor- mal course of events results from an unforeseen event. The underlying assump- tion is one of due care. It is not possible to in- sure our glass goblet in transit if it is sent unwrapped in a brown envelope through the regular mail service. However, even where due care is exercised there are differing de- grees of care, and the more a work of art is protected, the lower the premium will be.
Suppose a magazine-size painting is to be transported across the Atlantic. By accompa- nying the painting personally, and buying it a seat on the airplane, a curator will give that painting more protection than if it was sent by air freight, and the transit will enjoy a lower premium. Conversely, a shipper who subcontracts packing, delivery, or customs clearance increases the risks of theft and acci- dental damage, and so the transit should merit a higher premium. It is not unusual for
transits to be subcontracted to many different companies.
Our syndicate recently experienced a loss following a transit from a New York dealer to a London dealer that was routed as follows:
shipper "A" packed and delivered a marble table to Kennedy airport; it was flown to Ma- drid; deposited overnight with freight for- warder ’q~’; flown to London Heathrow where it was cleared by customs agents "C";
and delivered by subcontractor "D"; not sur- prisingly, it was shattered by the time it was unpacked. The problem for insurers is that shippers are generally protected from the consequences of their actions by trading agreements such as the British International Freight Association rules, which limits the shipper’s liability to 75,000 SDRs, equivalent to about £10,000 per transaction. Without the risk of financial penalties, there is consider- ably less inducement for shippers to exercise maximum control over the work of art while it is in their care, and to reduce the risks of damage and theft to a minimum. In this envi- ronment, it is harder for insurers to reward the diligent and penalize the negligent, and the trend is for premiums to stabilize at a level that accommodates the careless, rather
than falling in line with the improving tech- niques and expertise of the responsible ship- INSURING INDIVIDUAL LOANS
Let us explore how this general hypothesis affects works in transit in a museum environ- ment.
In the table discussed earlier--the one that allotted premiums to various risks while in transit--we observed that the risk of acci- dental damage in transit was significantly greater in the commercial environment than it was in the museum environment. One ex- planation was that museums exercised rigor- ous control over shipping standards.
To encourage museums to exercise these controls, it is now common practice for insur- ers to reward museums by returning a por- tion of the premium at the end of the year in the event of a good claims record. The Tare Gallery benefits from such a system, which is
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not dissimilar from the No Claims Bonus that exists in motor insurance. However, this is an unsatisfactory way of alleviating a basic in- justice that only works when there are no
claims. If losses do arise, then in the long term a museum will be labeled with a bad re- cord when the responsibility more often than not lies more properly with the shipper, whose own daims record will be untainted.
Using the analogy of car insurance, it is like penalizing the careful driver who has done no wrong, but has had the misfortune to be driven into by a reckless teenager, and the in- surer turning around and saying the careful driver must suffer the penalty while letting the teenager get off scot free. We all expect the insurer to recover damages from the teen- ager. Why, then, should the art insurer be prevented from recovering from the shipper when the shipper is in the wrong?
To add insult to injury, we must not forget that the museum is a funded body with lim- ited resources, whereas the shipper is paid for its services; paid and yet not responsible for its actions.
Shippers must be more willing to accept the responsibility that is theirs. Then the good shippers would benefit from receiving more business, the bad would wither and, as day follows night, premiums would fall.
INSURING LARGE EXHIBITIONS
Contrast the situation where a museum is making a series of individual loans through- out the year to the "blockbuster" exhibition such as the recent Van Gogh or the forthcom- ing Rembrandt shows. For the series of loans, the museum will use two or three different shippers from a list; and the transits will be a small part of the shipper’s annual turnover, each one being of minor importance on its own. Large exhibitions, on the other hand, generally have one organizer and one ship- per per venue.
This is an ideal situation from an insurer’s perspective. The shipper will have full con- trol over all exhibits, and its reputation will be on the line.
This ideal situation is reflected in the pre- miums, which are heavily discounted: the
risks of theft and accidental damage are re- duced, because the shipper will exercise ut- most care to ensure its continued good reputation and record. In many cases part of the premium is only payable in the event that losses are above a given level. All parties benefit from this arrangement. The insurers can quote lower premiums with confidence and therefore encourage further exhibitions;
the shipper enhances its reputation by good management and so increases its opportuni- ties for further orders; and the museum has both the convenience of one shipper and the benefit of lower insurance costs. When the spotlight is on them, we can expect the ship- pers to exercise the maximum possible care to protect the property in their care.
RISK MANAGEMENT
We have seen that insurance premiums are set by drawing on experience of past exhibi- tions, and by the insurer’s perception of dif- ferent risks for each exhibition as it arises.
Considerable attention is given to the secu- rity of exhibition sites and the measures taken to protect works of art from thieves and vandals at such venues. Much less care is taken to investigate the circumstances of transits between venues, and this is precisely where insurers fear the worst, as can be seen from the breakdown of premiums.
To a large extent, the different perception of the risks at exhibition sites and in transit is a result of ignorance. A greater knowledge of
transit methods could do much to reduce premiums, where the greatest risks are per- ceived as accidental damage and theft. Insur- ers recognize that packing techniques in a museum environment are first class, al- though few insurers could describe those in detail; whereas in a commercial environment packing is frequently inadequate, unsuitable, or just plain careless. Even so, we, as insur- ers, could still learn more. For example, which mediums are the most liable to dam- age? Or, what is the optimum way in which to pack a terra cotta horse? When it comes to the handling of works of art, insurers’ knowl- edge is even more sketchy. Who are the best shippers, that is, the shippers used most fre-
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quently by museums and approved by na- tional security advisers? Which shippers use which counterparts abroad, and which for- warding agents and customs agents at ports and airports? To what extent are transits ac- companied, be it throughout the journey, to the point of loading onto an aircraft, or just to the next subagent? How are works of art cleared through customs? How soon will works of art be collected after they are taken off an aircraft, and when will they be depos- ited in bonded warehouses to await collec- tion? Which shippers have their own high-security facilities which they use as col- lection points? In essence, which shippers are professional throughout from the highest manager to the humblest handler?
CONCLUSION
Greater awareness of the hazards of transit and of the measures taken to reduce such risks can do much to reduce premiums for works of art in transit. Lower premiums mean lower costs, more exhibitions will be
staged, and more art can be displayed to an increasingly hungry public. This conference, I hope, will do much to disseminate knowl- edge of techniques, and increase the expertise
of shippers and insurers alike.
To museum curators I say this: Share your knowledge of good techniques, educate your insurance brokers, and throw open the doors to your back rooms where the packing is done; tell your brokers which shippers you use, why you use them, and let us hear your horror stories.
To shippers I say: Don’t hide behind trad- ing agreements and shipping conventions;
take financial responsibility for your actions;
stand up proud of your service, proud of your expertise, and shout your record from the rooftops. If you are truly professional, you will command admiration from muse- ums and insurers alike, you will attract lower insurance premiums, and you will prosper while your less careful competitors flounder.
And to insurers, the message is this: Listen and learn; learn about techniques, learn who the true professionals are; and once you have learned, discriminate and price your premi- ums accordingly; encourage the good and promote truly competitive pricing levels.
If insurance costs can be cut, then exhibi- tion costs will be reduced significantly. All of those involved in planning exhibitions will gain as more and more exhibitions are staged, and the works of art entrusted to our care will be seen by a wider public through- out the world. []