Help Your Clients with High-Value Collections Embrace a Risk Management Approach
by Katja Zigerlig
Katja Zigerlig is Vice President of Art, Wine, and Jewelry Insurance for the Private Client Group division of Chartis. She can contacted at firstname.lastname@example.org.
Private collections-a term that includes everything from paintings and sculpture to antique furniture, wine, and jewelry-represent a burgeoning form of alternative investment.
You've likely witnessed this trend as you converse with clients or keep tabs on the high-net-worth marketplace. Some collectors bristle at the suggestion that their carefully honed collections are commodities to be sold, yet smile when items similar to theirs break records at auction. The financial community wants the magic formula for picking art or wine with high returns, and educational seminars on this topic are more prevalent than ever.
One of the most substantial factors leading to the growth of collectibles as investments is drastic improvements in access to information. The proliferation of collecting venues-both virtual and real-encourages the budding hunter and gatherer in all of us. Unlike a decade ago, today's collection enthusiast can make savvy acquisitions online (from artnet.com to paddle8.com to the VIPartfair.com) or jet-set around the globe to partake in art fairs in London, Paris, Hong Kong, and Dubai. It is difficult to assess the full extent of the numbers; the majority of sales are private. However, strong art and wine auction activity in 2010 and thus far in 2011 is a continued indication. Sotheby's is the only publicly traded auction house and therefore functions as a bellwether of auction market health. YTD earnings reports through the end of June 2011 reveal total sales of $2.9 billion (Sothebys.com). If sales maintain that pace for the rest of the year, the auction house will exceed last year's annual sales of $4.8 billion.
Those who accumulate significant wealth through career success and shrewd investing are the likeliest candidates to purchase art, high-end furniture, antiques, and jewelry. Most collectors evolve parallel to their increased income and expanded taste. For example, a wine collector may develop his/her palate at business dinners, and then be inspired to visit wineries and join wine clubs. A few bottles turn into a few cases, and eventually there's a cellar full of prime picks. Similarly, art collectors may begin buying online, and then cultivate relationships with local galleries and museums.
As the commitment to collect increases, there needs to be a corresponding change in perspective. The items are investments and should be handled as such to ensure they maintain their value. One key difference: unlike financial investments, collectibles require additional attention to the objects' physical care to maintain their value.
Whether collecting for love or money, there is a common burden: if an item is damaged, it loses its aesthetic appeal and monetary value.
Financial advisers are in a pivotal position to help their clients protect their collections. Collections are not only culturally and aesthetically valuable but also they are a tangible asset that should be addressed in a wealth management plan. Acknowledging (and clearly defining) the investment value can help a collector make smarter decisions when it comes to protecting the collection over time.
Distinct insurance coverage is available for fine art, jewelry, wine, antiques and other collectibles, yet many include these items in a homeowners' policy and unknowingly diminish their protection. Regardless of the overall insurance limit, homeowners' policies generally cap limits on "contents" coverage. The value of covered items also may be subject to depreciation. Insuring high-value collections appropriately can provide broader, more flexible protection.
Whether because of misconceptions about confidentiality or reluctance for other reasons, many people do not properly insure their collections. Here are a few compelling points you can share with your clients. A private collections insurance policy:
- Protects against the largest cause of loss-breakage and accidental damage
- Provides coverage not usually offered on a standard homeowners policy, including:
- o Automatic coverage for catastrophic perils
- o No class limits for scheduled items
- o Coverage for diminution of value
- o No deductibles (typically)
- o Worldwide coverage
- Can be set up in a variety of ways, including through trusts, estates, LLCs, foundations, or additional named insureds
The collections insurance sphere is also different in that tremendous emphasis is placed on vulnerability assessments, risk management, and loss prevention. Whether owning rare old master canvases, a cellar of vintage Bordeaux, or a stable of rare prewar Bugattis, properly insured collectors can rely on the fact that everything possible has been done to prevent damage or loss to what in many instances is an irreplaceable item. The bottom line: insurance is an aid, not a barrier, to the fiscal and physical protection of collections.
Following is an overview of the private collections insurance landscape, broken down by class.
I. Fine Art
Fine art is one of the broadest classes of collectibles, encompassing everything from traditional oil paintings to shrunken heads.
Whether a collector buys for aesthetic or investment purposes, the loss of art-through partial damage or total destruction-requires time, money, and planning for conservation or replacement. Proper insurance, updated appraisals, and thorough risk management make the foundation of a thorough art/asset protection plan. Independent insurance agents or brokers can point you to the best-in-class providers.
Look for a policy that includes:
- Worldwide protection. Coverage should apply to fine art in global locations as well as during transportation.
- Immediate coverage for new acquisitions. Many specialty carriers offer between 60 and 90 days to notify the broker of a purchase.
- Care, custody, and control coverage. This provides coverage if the collector takes an art object on loan to determine whether he or she will commit to purchase.
- Coverage for catastrophic events such as windstorms, flooding, fires, and earthquakes. These coverages may be subject to a special peril-specific deductible.
- Collections as collateral. Some collectors use art as a loan guarantee. In that case the lending institution will request to be added as an "additional named insured" or "loss payee" to the insurance policy.
Tips for Your Clients
Sound insurance protection is a large part of the equation, but other steps can be taken to preserve the long-term value of fine art. Share the following considerations with your affluent clientele:
Follow the numbers
The art market rebounded in 2010 with strong sales across the market-from African tribal sculpture to Chinese antiquities and first-edition books. To keep up with the upswing, obtain new appraisals for items purchased more than three years ago. Many modern and contemporary art values have gone up significantly within the past year alone. Collectors can research auction results for their artists through numerous online compilations of records. If similar works are selling for more or less than the current insured value, it is time for an updated appraisal. Professional assistance is available from associations such as the American Association of Appraisers or American Society of Appraisers.
Get it in writing
For a long time, art deals were transacted on a handshake. In an increasingly litigious world, your clients can protect their interests by having all transactions documented in writing. This includes loan and consignment agreements, value of the art object, an identified party responsible for insurance, and explicit terms of when the title transfers if the art is for sale. In addition, advise your clients to check with the Art Loss Register prior to new purchases to make certain there are no outstanding theft claims on the work they wish to acquire.
Avoid damage during transit
Your clients may buy artwork at auction or on vacation as well as move pieces back and forth from seasonal residences. Anytime art is moved, it is at risk. The best remedy is to use a specialist art packer and shipper; the popular shipping companies we all entrust for everyday packages were not designed to transport fragile works. Prior to packing, a condition report should be prepared that includes photographs and descriptions of any existing damage for each item. If items are in perfect condition, this should be noted as well.
Fly with confidence
If your clients are traveling with art, there is more to consider. As of August 2010, the Transportation Security Administration (TSA) has the right to inspect all cargo sent on passenger airlines. Certain fine art specialty shipping companies are designated as "certified cargo screening facilities." This means they are TSA-approved; using this resource minimizes the possibility of the crate being opened by inspectors.
Be properly "hooked" up
Analysis of fine art claims (between 2000-2009) within the Private Client Group division of Chartis showed that breakage and accidental damage are the leading causes of loss. Standard hooks from hardware stores are not always the best solution for hanging high-value items. Advise your clients to consult professional art handlers and conservators for their installation needs.
Take advantage of technology
Many collectors take a laissez-faire approach to the receipts for their artwork, which makes it harder to protect their overall investment. Numerous art management software options are available, enabling collectors not only to record the price but also to keep track of provenance, appraisal history, and exhibition details. Collection management also facilitates organization so appropriate decisions can be made about insurance, appraisals, and tax and estate planning.
Heat and direct light from the sun or lighting fixtures cause gradual deterioration to art. Your clients should keep works out of direct contact with sunlight. This may mean moving items on the wall throughout the year as the sun changes its course in the sky. Soft light bulbs should be used year-round as well.
Plan ahead and play it safe
Some of your clients reside in locations subject to catastrophes such as earthquakes, hurricanes, and wildfires. Other areas are vulnerable to flooding or power outages as a result of storms, or excessive heat or cold. Creating an emergency plan for art and other valued collectibles can minimize the likelihood of damage in the face of a natural disaster or other emergency. Many preparations can be executed well in advance, such as purchasing a back-up generator or obtaining custom-sized crates to move art to a safe storage area.
Additional Considerations: Art and Estate Planning
Valuable collections should always be considered part of a person's estate value. The constant fluctuation of the exemption limit necessitates thought and attention to the planning of assets within an estate, including collections. Changing estate taxes can have serious implications for your clients who own private collections. From 2009-2011, the federal estate tax and federal exemption amounts change significantly:
Federal estate tax
For most collectors, the collection will outlive them. It is prudent and fiscally responsible to decide how to distribute art assets, whether during their lifetime or at death. Their options-including bestowing or bequeathing their collections to their families, charities, or museums-have implications for insurance coverage. Some collectors erroneously assume insurance is no longer important if they are dispersing their art assets. However, inadequate or absent insurance increases physical and financial risk for the collector.
Insurance protects the value of the estate for heirs and beneficiaries. As a trusted adviser, you can help your clients effectively manage the transfer of high-value collections. Whether bestowing collectibles individually or through the establishment of a foundation, insurance is an integral part of estate planning.
Many collectors inaccurately believe that by purchasing an insurance policy or having an appraisal, they will have a higher tax burden. This is incorrect. It's crucial to advise your clients who hold this false assumption and in turn choose not to insure their collections. Collectors usually encounter a taxable event when they purchase an item (sales tax), sell an item at a profit (capital gains tax), have a taxable estate (estate tax), or exceed their lifetime gift allowance (gift tax). An appropriate insurance policy provides protection for the duration of ownership, from the moment it is purchased until it is de-acquisitioned. Essentially, insurance protects the value of the estate for heirs and beneficiaries.
In order to effectively plan for the dispersion of assets, it is important to know the value of the collection. A big mistake collectors often make is not planning for the distribution of their valuables. An undocumented, unappraised collection may increase estate costs.
An appraisal is the most important first step in assessing the value of a collection, but please note that many collectors do not realize a collection can have a different value depending on the purpose of the appraisal. Insurance appraisals require "retail replacement value," but donations and estate appraisals are based on "fair-market values"-an important distinction. Retail replacement value is the cost to replace an item of like kind and quality within a limited period of time. Fair-market value is the cost to replace an item without the pressure to buy or sell and is therefore the lower value.
When claiming a tax deduction or credit, appropriate appraisals must be filed with tax returns. Appraisals for charitable donations, estates, and gifts are reviewed at $20,000 and higher by the IRS Art Advisory Board. Help with locating qualified appraisers can be found at www.appraisersassoc.org or www.appraisers.org.
As with fine art, building a wine collection is not just a passionate pastime; it also can be a savvy financial move. 2010 was a record-setting year for global wine auctions, as collectors spent more than $400 million in the pursuit of prestige vintages. Sales and demand both remain strong in 2011.
Many investment-grade wines-including high-end Bordeaux, burgundies, and cult California cabernets-get better with age, giving your clients time to decide whether to drink or sell select bottles. Either way, steps can be taken to preserve both the taste and value.
First of all, know the threats. Most claims result from these five areas: temperature control malfunctions, theft or disappearance, power outages; water damage from flooding, and bottle breakage.
Again, the majority of collectors do not have adequate insurance. They accumulate wealth in their cellars, but few think about the perils facing their "liquid" investments. Most homeowners' policies specifically exclude coverage for perishables such as wine. The easiest way to insure wine is via a distinct private collections policy. A good wine insurance policy will include:
- Mechanical breakdown coverage. Wine is typically stored in cellars or refrigerated units. A power surge or similar occurrence could lead to spoilage.
- Worldwide coverage. Grape enthusiasts enjoy global travel to esteemed wineries in Argentina, Australia, and Italy. If they buy cases abroad, this ensures coverage every step of the way.
- Coverage for bottles in transit. In 2010 Hong Kong became the largest wine auction market by dollar volume. As a result, many collectors based in the United States are participating in the Hong Kong auctions for the most highly sought-after bottles. If collectors have a winning bid, their wine will be shipped from the port city to the client's residence, and coverage for that long distance is necessary.
- Immediate coverage for new acquisitions. Rather than have to worry about calling the insurance company immediately following a purchase, this coverage allows a grace period (usually 60-90 days) to make that call, yet still be protected.
There are two common options for wine insurance: "blanket" and "scheduled" policies. A blanket policy features one overall coverage limit, and it is the best choice if you eventually intend to drink what you have acquired. This option also affords the flexibility to add and remove bottles without having to notify the insurance carrier-unless the value of an individual bottle exceeds the limits on the policy.
Alternatively, if your clients own high-priced bottles and/or intend to hold on to the collection, a scheduled policy is a better option. With this policy, each bottle or case is itemized and insured individually.
Tips for Your Clients
Set the stage for graceful aging
Wine is both high maintenance and low maintenance. It is highly susceptible to changes in temperature, light, and humidity. Therefore the crucial considerations for storage are steady temperature (approximately 55 degrees Fahrenheit), consistent humidity, and darkness. Once these criteria are met, wine becomes low maintenance; it can be left alone.
Security is "key"
The easiest way to minimize your exposure is to put a lock on the cellar and link the security system to central station fire and burglar alarms. Ideally the temperature control for your cellar will be hooked to the alarm as well, alerting you to temperature extremes, which can be caused by blackouts or power surges.
Keep an up-to-date inventory
If bottles are not tracked properly, it is much harder to determine how much insurance coverage is needed. A high level of transparency exists in the market prices for investment-grade wine because of the accessibility of retail and auction prices. Websites such as www.cellartracker.com allow collectors to check the retail value of their wine. In addition, major wine auction houses such as Zachys, Acker Merrall & Condit, and Hart Davis Hart release the results of their auctions.
Cellar Feng Shui
Keep bottles at least 8" off the ground to avoid damage if your basement or cellar floods. Also avoid storing cases on the floor.
Despite the recent economic downturn, precious metal prices have remained bullish. In 2005, the price of gold was less than $500 an ounce. As of September 2011, the price per ounce remains above $1,700. Platinum was priced at $1,200 per ounce in 2006, peaked at over $2,200 in 2008 and has hovered around $1,800 in September 2011. Even silver-historically the "cheap" metal for jewelry, with prices barely tipping $10 an ounce up until June 2006-has escalated dramatically in 2011 to a current price ounce price of $40.1
In a weakened economy, investors historically have turned to valuable gemstones and precious metals in lieu of stocks and bonds. This may be the reason for the enduring value of jewelry. "In extremely soft economic times, people look to very hard assets, and diamonds prove to be less volatile than pretty much anything else I can think of," said Sally Morrison, director of the Diamond Information Center.2 As a result, jewelry lovers have to pay more for their adornments containing precious and semiprecious metals, and appraisals take on added importance.
As with most collectibles, a homeowners' policy is not an adequate insurance solution for jewelry. Most homeowners' policies specifically limit coverage for jewelry. The value of wedding rings and an expensive watch would exceed the limitations in most cases.
Insurance is particularly important for jewelry; the possibility of losing a beloved piece is an unfortunate reality. Over $1.5 billion worth of jewelry and watches are stolen annually in the United States, and only 4 percent of those items are recovered.3 When the Private Client Group division of Chartis analyzed its top 200 jewelry insurance claims from 2000-2009, 41 percent resulted from theft/deception and 52 percent resulted from mysterious disappearance-the insurance industry term for lost items.
Look for a policy that includes:
- Coverage for pairs and sets. In the event you lose a single earring or cufflink, there should be policy wording describing how the pair will be made whole, such as payment for the missing piece or compensation for surrendering the remaining item.
- Immediate coverage for new acquisitions. Jewelry purchases are often impromptu, so many specialty carriers offer between 60 and 90 days to notify the broker of a purchase.
- Inflation protection. Unlike a painting on canvas, a diamond set in platinum will always have value as a result of the global market for precious metals and gemstones. As prices for these commodities continue to increase, many insurance companies will stipulate an automatic annual inflation increase of 5 percent to 15 percent.
- Coverage for jewelry in a bank vault. Collectors who keep items in a bank vault can benefit from reduced rates for the superior security and safety of the location.
- Worldwide coverage. Many people wear watches and meaningful pieces of adornment frequently as well as take beloved pieces on vacation.
Tips for Your Clients
Play it safe at home
Store jewelry in a safe and only remove it just before putting it on. Safes should be bolted into the structure of your home so they cannot be removed and broken into later. For high-valued collections, an Underwriters Laboratory-listed safe rated to withstand a two-hour burn is optimal. And for added protection, install a secondary safe in the master bedroom for frequently worn items. This can mislead would-be thieves when under duress. Finally, conduct background checks on private staff. Unfortunately, many jewelry thefts are inside jobs.
Stay alert while abroad
Jewelry should be worn or kept on your person at all times (never in a checked bag). Treat jewelry as if it were a wallet-never let it out of sight. When traveling, keep a list of the items you are carrying and leave a copy at home or in a place separate from the jewelry. Wearing jewelry in airports and on commercial aircraft increases the chance of loss and can compromise personal safety. Upon arrival, always store jewelry in the hotel safe or safe deposit box when it is not worn and protect it from damage in a padded jewelry portfolio.
Ship with caution
The risk of jewelry damage or loss is greatly elevated during shipping. Shipping should only be considered as a last resort. Valuable jewelry should only be shipped using specialized jewelry shipping services and not standard overnight services. Shipping jewelry via a specialized jewelry shipper is also recommended when purchasing items on vacation or moving them to a seasonal residence. When possible, identify local jewelers for all repairs, maintenance, and appraisals.
IV. Collector Cars
Car enthusiasts build collections for a variety of reasons-for aesthetic enjoyment, to diversify an investment portfolio, or sometimes simply to satisfy a lust for a particular car first seen as a teenager. Preferences can range from Ferraris, Cords, and Jaguars to hot rods, concept cars, and exotics.
In addition, an estimated 10,000 auto gatherings take place every year in the United States. They range from grand spectacles, such as the Pebble Beach Concours d'Elegance and the Cavallino Classic at the Breakers Hotel, to small gatherings in a McDonald's parking lot, where local collectors show off their favorite rides. Passionate American collectors also attend international car events such as the Mille Miglia in Italy.
Collector car auctions have grossed more than $500 million annually over the past five years.4 2010 was a record sales year with more than $800 million in annual auction sales. Prices remain solid in 2011 as collectors enthusiastically snap up choice vehicles. Enthusiasts may spend more than $1 million on a Porsche formerly driven by Steve McQueen, or a more modest $24,000 for a Billy Boy motorcycle replica from the cult film Easy Rider.
No matter the level of participation, the popularity of these auctions and car events points to an ongoing love affair with the automobile and the continuing growth of car collecting as a pastime.
For many collectors, it is a lifelong passion. Some collect numerous examples of a single marque; others search for a particular elusive automobile with an unmatched provenance and racing history. Roughly four million collector autos are in the United States, and that number is growing. In keeping with the tremendous interest in collecting cars, there exists a specialty niche in the insurance industry to protect them.
Unlike a regular-use automobile or motorcycle, collector vehicles should be insured with a specific policy that addresses their unique risk exposures. Coverage details can vary from carrier to carrier, but some of the more important aspects to look for are:
- Agreed value coverage. Most auto insurance is for "actual cash value," which means depreciation will be factored in at claim time. A true collector vehicle is expected to maintain its value and could potentially increase. Agreed value coverage will make the collector less vulnerable to its depreciation.
- Worldwide coverage. Collectors may transport their cars around the world to participate in historic rallies or road trips.
- Full-transit coverage. This feature provides coverage for transport, whether by boat, plane, or train cargo as well as transit by traditional auto trailers.
- A single liability policy for the entire collection. Because collector cars are driven significantly less than a regular-use automobile, the owner can obtain one liability policy to cover the entire collection.
- Repairs with original manufacturers' parts. In the event of loss or damage to a car part, the insurer will try to replace it with an exact or similar part from the manufacturer (if it's still available). This is important in retaining value and authenticity.
- Spare parts coverage. Car and motorcycle enthusiasts also may collect spare parts for their vehicles, such as hood ornaments, engine parts, and steering wheels.
Tips for Your Clients
Value your wheels
Make sure proper appraisals have been performed. Researching prices in collector car guidebooks is not enough, as provenance, condition, and inclusion of original parts are key factors to value. Repairs or restoration should be performed by qualified experts at a specialty car repair shop. This will help maintain the value of the collector vehicle.
Home is where the garage is
Garage facilities need to be properly constructed to withstand tremors or storm surges. Structures considered "commercial," such as warehouses and garages, are not subject to the higher construction standards of catastrophic protection for residential buildings. Therefore build garages or collector auto buildings to residential codes or look for locations that have building standards matching the residential code standards.
Use a transportation company suited to the needs of the car and the move. The collector vehicle should be moved in an enclosed auto transport truck with an air-ride suspension system. This will provide protection from weather, dust, dirt, rocks, and other flying debris. Make sure the selected transporter prepares the vehicle properly. Once loaded, all four wheels should be secured with nylon wheel tie-downs. The entire car should be covered first with cloth and then with plastic for additional protection. These precautions help to ensure that the car arrives in the same condition as it was before shipping.
Plan for emergencies
Assess the natural catastrophes where the collection resides and create the appropriate emergency plan. In addition to the perils of earthquake, windstorm, and flood, include a plan for fire emergencies.
Talking to your clients about their collectible investments will help ensure that monetary and sentimental values are preserved for many years to come. By better understanding their assets-and their vulnerabilities-you can connect them to best-in-class solutions and deepen your overall relationship.
1. Pricing data according to www.kitco.com.
2. "Wealthy Clients Investing in Significant Jewels," 2009, National Jeweler (February). http://www.nationaljeweler.com/nj/majors/article_detail?id=18007.
4. According to sportscarmarket.com.