"In the end, you need an open line of communication between the financial advisor and the insurance broker," he says. "When there is a loss, the insurance company is not your adversary and the collector is going to want some hand-holding."
The financial advisor maybe the one doing the handholding, at least at first, says James P. Kane, president of Hub International Personal Insurance, a Chicago-based brokerage of Hub International that serves high-net-worth individuals. "People buy insurance like they eat spinach, because they know it is good for them, but they will do everything to avoid it. It takes work to inventory everything and maintain theinventory.
If it is an active collector, the advisor or carrier will want to negotiate the number of days a piece has blanket coverage after it is acquired and the amount that will be covered (which is usually limited to a percentage of the value of the entire collection), until it can be added to the itemized inventory."
Losses are usually caused by damage to a piece rather than complete destruction or thefts, which are rare, says Newman, so you must consider insurance coverage for restoration costs. Modern works, which are often acrylic, are more difficult to restore than the oils used by old masters. Modern works also lose more of their value when damaged because there are usually numerous examples of work by the same artist available in pristine condition.
Advisors will want to take into account where the client lives. In California, fire and earthquake damage has to be included, in Florida it's hurricane damage, and in New York City terrorism damage can now be covered, says Katja Zigerlig, fine arts underwriting manager for AIG Private Client Group. "The advisor needs to know if the client has a $50 million collection, and maybe he only wants to insure for $10 million and assume the rest of the risk himself. You need to know your client and the options."
Other considerations include creating strategies to avoid excess tax burdens when works are bought and sold, notes Stewart R. Massey, founding partner of Massey, Quick & Co. LLC, financial advisors of Morristown, N.J. "A charitable remainder trust is one way to shield a client from taxes. The question arises because many collectors are now considering selling works. They acquire them because they love them, and then the work appreciates significantly in value and the question becomes how much do you like it? Because of the appreciation in value many collections are underinsured. This is especially true for people who inherited works or have owned them for a long time. They may be severely underestimating their value."
The rapid escalation in value has created some unusual circumstances, including the creation of hedgefunds for art investment, notes Ken McKenna, Executive Vice President and Chief Financial Officer for Doyle Galleries in New York City, but increases in values are not guaranteed.
"Tastes in art are purely subjective. So an investor should buy works he likes," McKenna advises. "Then, if it does not go up in value, at least he can enjoy the work."