How art-title insurance can protect you from unexpected lawsuits.
By Alan Katz, Esq.
You may have bought a work of art, but are you sure you own it? How do you know whether the IRS or creditors of any prior owner have filed claims on your artwork?
Art-title insurance entered the art-market scene in 2006. Only one company, ARIS Title Insurance Company, offers art-title protection insurance (ATPI). The ATPI policy insures that the policyholder has legal ownership of the insured artwork. The insurance policy addresses the following principal risks:
- the insured artwork’s record of ownership, or provenance;
- whether liens or claims exist against the artwork; and
- whether the owner has authority to sell the artwork.
An art buyer usually orders art-title insurance before purchasing the work from a dealer or a gallery. The insurance becomes effective once the seller transfers the title to the buyer. Buyers can also obtain the insurance months or years after the purchase. However, any defects in the art’s title history and other claims that the insurance company discovers during its investigation would then appear as exceptions to the title and would not be insured.
HOW IT WORKS
The ATPI policy breaks the risks into two categories: “art-provenance and chain-of-title risks” address theft and illegal import or export before the date the policy was issued. “Classic title risks” include creditor claims and the owner’s authority to sell.
Unlike the transfer of real-estate deeds, no public system exists in the U.S. for the recording of art transfers. ARIS conducts a search on the artwork’s history through documentary evidence about the art that previous owners, galleries and museums provide. This evidence includes ownership affidavits, bills of sale, gallery catalogs or citations in a catalogue raisonné, a comprehensive, annotated listing of all the known artworks by an artist either in a particular medium or all media. ARIS searches the few public records that do exist, which are limited to lost- or stolen-art reports, as opposed to actual title transfers. These sources include the Art Loss Registry; Interpol; the National Stolen Art File, which the Federal Bureau of Information maintains; and the International Foundation for Art Research. ARIS ascertains classic title risks by searching public records in the states and counties in which the owner and previous owners resided or conducted business.
The ATPI policy does not cover the art’s authenticity but merely the artwork’s ownership. The ARIS title insurance policy excludes two general categories from coverage. The first is affirmative misrepresentations, such as forged documents or false or misleading statements made by the seller of the artwork to ARIS. The second is defects, liens, encumbrances, adverse claims or other matters created, assumed or agreed to by the insured or known to the insured and not disclosed in writing to the insurance company—for example, if the buyer of the artwork knows of a lien or claim of ownership by a third party and does not disclose this fact to ARIS.
The policy holder pays a one-time premium ranging from 1 to 3 percent of the purchase price for most artwork. However, the premium can be substantially higher for works of art with gaps in ownership that occurred around World War II, when many works were seized from collectors, stolen or sold under duress. The art owner pays the premium when the policy is issued, and it covers the insured for the period of ownership. The coverage also automatically extends to the insured’s heirs.
IS IT WORTH IT?
Many art owners obtain art-title insurance, regardless of the piece’s dollar value. According to Judith Pearson, the president of ARIS, policyholders purchase a substantial amount of art-title insurance for art having a value of less than $100,000.
Historically, collectors and museums have expected reputable dealers to know the artwork’s record of ownership and either explicitly or implicitly warrant the art. Likewise, major auction houses obtain a warranty of title from their consignors and often conduct their own searches of the art’s history.
Auction houses and others can also use art-title insurance as a marketing tool. When Christie’s held a sale of art from the bankrupt Salander-O’Reilly Galleries in 2011, it recommended that the buyer purchase title insurance from ARIS. Although the bankruptcy court had approved the sale and the work was legally free of any claims or encumbrances, Christie’s thought that a buyer would feel more comfortable with title insurance.
A buyer who purchases art-title insurance transfers the financial risk of a potential claim to the insurance company, which has likely conducted a more extensive investigation of the art’s history and, presumably, has deeper pockets.
As with other types of insurance, the collector is buying protection against a specific risk. Perhaps more important, collectors are buying peace of mind that the work of art proudly displayed on the living room wall actually belongs to them.