Insurance for Art Collectors Covers Ownership Disputes

By KATE TAYLOR | July 10, 2008-New York Sun


It's a collector's nightmare:


You buy a valuable painting from a reputable dealer and hang it on your
wall. Years later, you learn that the painting was once stolen, decades
before you bought it. The original owner sues you, and before you know
it you've both lost your investment and racked up tens of thousands of
dollars in legal fees. You can sue your dealer to try to recover your
loss, but that drags the legal mess out even longer.


Disputes over ownership of artworks are common, often protracted, and
costly. Well-publicized cases involving theft and Holocaust restitution
have drawn attention to the risks involved in not knowing every place
your art has been. But collectors can find themselves dragged into court
over less sensational issues, too. A dealer may have sold a work he
didn't have the right to sell, or he may have failed to pay a consignor.
Perhaps the seller of the artwork is an heir and, later, other heirs
come forward to challenge his right to sell the piece.


A new insurance product, art title insurance, is meant to protect both
buyers and sellers against these kinds of problems. At the moment, only
one company, called ARIS, offers it. Founded by a lawyer and a former
AON executive, ARIS has underwritten more than 300 policies since it
started selling insurance in June 2006, covering works of fine art
valued at between $20,000 and $4 million. (They do not offer insurance
on antiquities.)


Like a real estate title insurer, ARIS both commits to defending the
policy holder's title against any challenges and indemnifies the policy
holder against his loss if a challenge is successful.


The primary difference between this and real estate title insurance is
that there is no central registry of art transactions. So while a real
estate title insurer only has to search the public records to underwrite
a policy, ARIS has to comb the spotty (and sometimes intentionally
obfuscatory) records and recollections of dealers, auction houses, and
collectors. That partly explains why art title insurance is so much more
expensive than real estate title insurance. With both types of
insurance, a purchaser pays a onetime premium for a policy that lasts
for the life of ownership. The chief executive of ARIS, Lawrence
Shindell, said that so far, premiums have ranged from 1.75% to 6.75% of
an artwork's value, depending on the risk. (Mr. Shindell declined to
identify any particular works that ARIS has insured.) Real estate title
insurance premiums vary by state; in New York, title insurance on a $1
million house costs roughly $4,500, or 0.45%.


An art lawyer, Thomas Danziger, who has done business with ARIS on
behalf of a client, said he believes that art title insurance is a
"terrific" idea, while noting that "[w]hether any single company
survives and does well is hard to know." He and his partners in his law
firm, Danziger, Danziger & Muro, thought several years ago of trying to
offer title insurance, but they didn't have the time or resources to
devote to it. "They clearly saw the opportunity here," he said of ARIS.


One recent high-profile title dispute involves a Norman Rockwell
painting that the director Steven Spielberg purchased for $200,000 in
1989. In 1997, his assistant discovered that the FBI listed the work as
having been stolen in 1968. Mr. Spielberg notified the FBI, which
notified the owner of the painting at that time, who subsequently sued
both Mr. Spielberg and the dealer who sold it to him. Although the
dealer agreed to take the painting back, Mr. Spielberg is still trying
to recover almost $50,000 in legal expenses from the dealer and the
original owner, who themselves are still locked in a legal battle
concerning the painting's ownership.


Where outright theft is not involved, courts generally find in favor of
good-faith purchasers, but the legal defense can still be costly. In
2003, the collector Peter Brant was sued by a Swedish heiress, Kerstin
Lindholm, regarding a Warhol painting called "Red Elvis." Ms. Lindholm
claimed that the dealer who sold Mr. Brant the painting had
misappropriated it when he was supposed to be merely transporting it for
exhibition. Last year, a Connecticut court finally ruled that Mr. Brant
is the painting's rightful owner because he bought it in good faith from
a legitimate dealer — although the dealer himself was sentenced to three
years in prison in Sweden for his conduct in the case.


When a potential client comes to ARIS to purchase insurance for a work
they either own or are planning to buy, ARIS searches the public records
for any liens against the work. It checks the artwork's stated
provenance, which may contain gaps or outright fictions, Mr. Shindell
said. ARIS may contact previous owners, press dealers for information,
and in general "stress-test" the provenance, by making sure, for
instance, that a gallery said to have owned the work at a certain time
actually existed then and dealt in that artist's work.


Mr. Shindell declined to say how many staffers ARIS has doing this
research, but said that they include people with backgrounds in law,
insurance underwriting, and art history. He said that the process of
underwriting takes an average of between two and three weeks, though
ARIS hopes to make it more efficient as time goes on.


Because of the research ARIS does to ferret out potential title
challenges, the fallout from the collapse of the Salander-O'Reilly
gallery could have been prevented if all the buyers had purchased title
insurance, the former speaker of the New York City Council, Gifford
Miller, who now sells ARIS's policies in New York through a company
called the Liberty Art Title Agency, said.


"In a world in which [purchasing title insurance] was adopted as a
standard practice, it would be extraordinarily difficult for somebody
like Mr. Salander to be successful at what he's alleged to have been
successful at," Mr. Miller said.


And although it is often the buyer in a transaction who would purchase
title insurance (or ask that the seller purchase it on his behalf),
sellers may also have uses for it. Buying title insurance before putting
a work on the market protects the seller against the chance that someone
will come out of the woodwork with a claim — which is not uncommon if
the work has not been for sale or on public view for many years.


This could be particularly important in the case of an estate that sells
art at auction to pay estate taxes. If a claim subsequently emerges, the
estate may not have the money to refund the purchase price, as the
auction house would require it to do, but a title insurer would put up
the money and then defend the title.


"In a world in which provenance — or, more precisely, title — is a real
risk for collectors, there's a need for a product like title insurance
to allow investors to protect their investment and ensure that their
transactions are final," Mr. Gifford said.


Of course, there are skeptics. The author of the Art Law Blog, Donn
Zaretsky, said in an e-mail that he would be concerned about what he
called the adverse selection problem — namely, that "the people who buy
the coverage are more likely to be people who have a reason to be
concerned about possible defects in title (and may in fact be acting on
information they have but the insurer does not)."


ARIS attempts to protect itself against this risk. It excludes from its
coverage losses arising out of situations that the collector was aware
of but did not inform ARIS about. It also excludes losses arising out of
bankruptcy proceedings, Mr. Shindell said, because this is another
avenue for potential fraud.


Still, the biggest challenge ARIS faces may simply be getting people in
the art world to change their habits. An art lawyer at Flemming Zulack
Williamson Zauderer, Dean Nicyper, said that he thought that title
insurance, if widely adopted, would create more stability in the art
market. But, he added, "people in the art world have a way that they've
done business for years, and they have a difficult time adjusting to
anything new."


In a sense, too, marketing title insurance involves calling people's
attention to something they may prefer to ignore: namely, how difficult
it is to determine the complete history of ownership of a work of art.


"Our job is, for better or for worse, to point out that the emperor has
no clothes," Mr. Miller said. Still, he said, "I think it's inevitable
that this gets adopted by both the auction houses and the vast majority
of the legitimate art market. The question is how long it takes, and
what is the pricing when it occurs."