Notable: Title Insurance for Art

Painting by the Numbers: Title Insurance for Art 

Remember, as a child, grabbing the ball and shouting, "Possession is nine-tenths of the law"? It probably wasn't correct then, and it certainly doesn't hold true when it comes to art. A German museum recently agreed to return a $12.5 million painting that the Nazis forcibly took from a Jewish family before World War II. Thousands of other artworks that currently reside in private collections or well-known museums might be subject to similar claims. And now claims are being brought against collectors by countries who say their historic artifacts were illegally exported.

Those aren't the only worries collectors face when it comes to buying expensive artwork. Does the seller have "clear title" to the artwork, which entitles him to sell the piece? Was a lien placed on the artwork, perhaps by a bank lender? Or in a divorce settlement?

Art Doesn't Imitate Life

Unlike real estate, where title ownership can be traced and insured, the art market has had no such form of verification of the chain of ownership and clear title.

There is typically a "provenance"—a listing of past owners that accompanies an artwork—but no guarantee that the work is owned free and clear by the seller.

Now, one company has created a solution to address this concern. ARIS founders Lawrence Shindell and Judith Pearson (www.aris-corporation.com) have worked on this project for six years, finally creating a title insurance policy that protects against loss of the artwork itself —as well as the costs of defending a title claim—because of defective legal title.

The ARIS policy protects the art buyer as long as the individual or his heirs own the artwork. Policies can also be structured at purchase, or to cover already-owned artwork, back to the date of purchase. A one-time premium covers the complete cost of the insurance policy for the indefinite term of ownership.

This new policy has gained immediate credibility because it is re-insured by Lloyd's of London, and has attracted the attention of some of the world's top collectors.

Questions spring to mind immediately. There's so much art already in existence that has previously been transferred, how could you begin to create such a policy?

Pearson explains: "It's like real estate title issues over 100 years ago, when nothing was recorded accurately. But they made a start, and created the first title plant, a database structure for real estate. We're doing the same for title insurance for fine art risks."

Pricing the Risk

"We've done two actuarial studies in terms of what the price should be and assumptions of paying losses. In fact, unlike real estate title insurers that perform risk elimination underwriting, we assume ARIS will pay some claims. So the underwriting and pricing decisions by ARIS are based on the known history of ownership of the artwork—the provenance—as well as an examination of other potential risks to clear title."

That, of course, brings up the question of ARIS' ability to back the policy guarantees.
Pearson has a ready response: "That's the reason we strongly wanted to be a regulated insurance company, licensed in New York, where regulators have vetted the model, and to have reinsurance through a top syndicate in Lloyd's of London that has vetted the actuarial model, understands the art world, and is willing to take reinsurance risk."

Calculating the Premium

If the potential exposure is to a World War II issue, the cost might average 5 percent of the value of the work. For individuals simply wishing to insure a purchase against a future claim, gallery owners wanting to reassure potential buyers, or for a bank wanting clear title insurance before lending money on a work of art, the cost could be far lower.

One thing that both Shindell and Pearson make very clear: This policy is not a guarantee of authenticity. However, it does guarantee the greater title risk in the art world: That what you own, lend, gift or have purchased, is legally yours.