As most works of art cannot be easily replaced – or given a straightforward ‘replacement value’ – a ‘basis of valuation’ clause in your insurance contract will stipulate the formula for calculating the amount of money which you may expect to receive if you experience a covered loss.
For a fine art dealer policy, the most common of these equations is ‘Cost price plus 30% or Selling price less 20%, whichever is greater’, which is applied to unsold stock.
Policies which insure against ‘all risks of physical loss or damage’ are not intended to cover your potential profit, but rather to indemnify you for any financial loss suffered.
This incorporates the purchase price of the object and takes into consideration the increased costs of replenishing your stock, plus expenses and overheads, such as storage, photography or exhibiting at fairs.
Incorporating both the ‘cost plus’ and ‘selling less’ elements in the policy will buffer against most of the fluctuations of value in the art market.
If, for example, you acquired a piece by an emerging artist whose appeal increases exponentially during the period of your insurance policy, you should still be indemnified by applying the reductive factor to the selling price. In a falling market the ‘cost plus 30%’ may be more applicable.
Most fine art insurance policies are renewed annually, offering an important opportunity to review the limits expressed in your policy. The stock value which a dealer presents to an insurer is the key lever in how premium is calculated. It should accurately reflect the amount that you would expect to be paid in the event of a claim.
This underlines the importance of maintaining stock records which are accurate and up-to-date, as insurers may request to review them as part of their due diligence.
Certain categories of stock should also be considered differently. If an item is sold but not yet delivered, then the basis of valuation will usually be the selling price in full (as that figure now represents your actual financial loss).
Similarly, if you have bought a work on behalf of a client, then the insurance should cover the purchase price plus any pre-agreed commission. When works are on consignment to you from a third party, then the basis of valuation will be your legal liability to that party, which should be supported by a consignment agreement.
If no such agreement is in place, then the default position would revert to market value (verified by a third-party valuation). Where items are jointly owned by several parties, the ownership agreement should specify who has responsibility for insuring and at what value.
Fine art insurance policies should also contain provisions for partial loss or damage, where insurers will cover the cost and expense of restoration, plus any resulting depreciation in value.
Most fine art insurance policies are sold by insurers through brokers. With that in mind, whenever you are faced with a situation which falls outside the normal parameters of your policy, always discuss this with your broker to ascertain whether a bespoke solution can be found for the specific scenario you face.
There are many insurance companies, but fine art specialists understand the marketplace and will endeavour to support your business as it evolves.