In the world of artworks, whether they be masterpieces by recognised greats or works produced by up-and-coming artists, values are constantly fluctuating. Demand can be fickle.
Trends and tastes can change with the wind.
A work that was considered invaluable two years earlier can now be all but unsellable.
A piece that was purchased on a whim could suddenly command a fortune.
And a change in self-managed super fund (SMSF) regulations can send tremors everywhere.
Artworks, of course, can also be damaged or lost. They can degrade and are susceptible to moisture, smoke, heat and fire.
They can be stolen or unintentionally damaged as they are being transported. Pieces of art must be insured for their current value, and that value must be constantly re-assessed.
“A lot of artwork is underinsured because it was insured six years ago and has not been revalued since,” says John Kelly, Managing Director of Consult Insurance Solutions.
“Just as likely, many are over-insured because specific markets have collapsed or simply cooled off.”
He gives the example of The Rare Coin Company, based in Western Australia.
Its collapse in 2013 not only meant a long list of investors were owed six-figure sums, but it also caused a crash in the value of rare coins.
“Some who had purchased coins worth $500,000 to $800,000 are finding the coins are really only worth a third of that amount,” Kelly says.
“In property terms that’s a market crash.
“A lot of the art and collectible market is extremely difficult to value. It can be subjective. You need the input of professional valuers who have a world of experience and knowledge of values of similar pieces.”
Ironshore Australia Underwriter Caroline Jones says it’s important for brokers to communicate to their clients the unique nature of art as an asset and the fact that their insurance should reflect that.
“You shouldn’t treat fine art as you would your other tangible assets,” Jones says. “The art market is exactly that – it’s a market which can fluctuate. Regular valuations are therefore very important to ensure that the insured values provided are up to date.”
Call it what you will
Fine art and specie insurance is not just about paintings and sculptures, Jones says.
You run the risk of an inferior product. Such policies are not well designed for art.
A customisable form of cover can be provided for a wide range of high-value items such as gold bullion, items in safety deposit boxes, precious metals, classic cars and collections of wine, stamps or coins.
The main perils for which items are covered are physical loss and damage of items, particularly when they’re in transit but also in storage or while being exhibited.
Professional fine art storage and transport options should always be sought, but insurance providers also understand that, outside the SMSF arena at least, fine art is not just a financial investment.
“We try to be flexible to our insureds because fine art can be an asset people want to take enjoyment from, or can be held in a superannuation fund to be used as an investment,” Jones says.
Matt Stock, Catlin Australia Specie and Fine Art Senior Underwriter, says many people will assume their private collections are covered under a domestic policy.
“But they need to be careful that there are not sub-limits that limit the cover for these special items which means that, in the event of a loss, they will find that they have been paying for no real cover at all.”
ATO shakes it up
The lower end of the art market, defined as items or collections valued under $40,000 is heavily propped up by the SMSF market.
It holds about $771 million in artworks, collectibles, metals and jewels.
But there are turbulent times ahead for this end of the market thanks to changes in SMSF regulations.
Any such items purchased after 1 July, 2011, cannot be kept at the investor’s home.
Specifically, any valuables held within an SMSF must be covered by standalone insurance, must be independently valued and must not be held in an environment in which a party related to the SMSF receives personal benefit from them.
Artworks and collectibles must also not be leased to any party related to the SMSF and the reasons for deciding on a specific storage space must be kept in writing.
To ease the transition, items purchased before mid-2011 do not need to be insured until 2016.
Catlin’s Matt Stock says this is a key arena for brokers to prove their value.
“Most people will be shocked to know that they are legally required to insure new items purchased within seven days,” he says.
“They will also be shocked as to how inexpensive the cover is.”
Consult Insurance Solutions’ John Kelly says it is an area in which brokers should take care.
“Sometimes people will want to insure their artworks through their home and contents policy, and that’s fine if you don’t have to comply with SMSF rules.
But even then you run the risk of an inferior product. Such policies are not well designed for art and collectibles,” he says.
“Some who would like to insure their SMSF-held artworks go to a gallery or an art dealer who arranges a group policy on behalf of all of their clients.
“Some say this satisfies the ATO rulings but it absolutely does not.
“If the funds are simply noted for their interest in the asset, within a group policy, then this does not satisfy the ATO’s regulations.”