The Importance of Appraisals for Museums

APPRAISALS AND THEIR USES
An appraisal is an opinion of value. Appraisers must first know what the “intended use” of an appraisal will be. That information will dictate the basis of valuation. This is because there are definitions for distinct types of values which are dependent on considerations such as the tax code, effective dates, and the use of value sought.

There are two types of value most often used for museum appraisals:

• Fair Market Value (FMV): This term, which is defined by IRS, requires appraisers to use the market where the donated property would be most commonly sold to the final consumer. It is primarily used for donors who need appraisals for income tax purposes. The IRS defines FMV as the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.¹
• Replacement Value: Appraisal societies may use different terminologies, but the general definitions are the same. This value is used predominately for insurance purposes with the goal of making the insured party whole. The American Society of Appraisers defines Replacement Value as “the price in terms of cash or other precisely revealed terms that would be required to replace a property with another of similar age, origin, appearance, provenance, and condition, within a reasonable length of time in an appropriate and relevant market.”²

WHAT TYPE OF APPRAISAL IS USED FOR A MUSEUM’S FINE ART INSURANCE POLICY?
A museum’s fine art insurance policy will typically state that in the event of loss or damage, the basis of valuation will be the “current market value.” Current Market Value is rarely defined and is deliberately open ended. As Replacement Value is the expected price to pay for the same or similar item in a retail setting at the present time: this is the closest basis of valuation to “current market value.”

As the art market continues to evolve, so does the value of objects. Value is a hypothetical concept, and as such, is dependent on and will fluctuate with market variances and react to general economic principles. To avoid underinsurance, it is crucial for museums to update the value of their collections on a regular basis. Engaging the services of a qualified appraiser would help ensure that values are accurate and a reflection of the current market.

WHAT ROLE DO APPRAISALS PLAY IN DETERMINING MUSEUM POLICY LIMITS?
Appraisals are important tools to help museums determine the limit of insurance needed for the collection. The cost of appraising a museum’s entire permanent collection can be prohibitive. One way to mitigate this is to focus in on specific areas of the collection. 

QUESTIONS FOR MUSEUMS TO CONSIDER: 

• Is the limit of insurance based on the museum gallery, storage area, or building representing the highest concentration of values? 
• Has there been a determination of which objects in the collection might be most susceptible to recent art market changes?

Is there agreement on which objects are most critical to the mission of the institution? (e.g., which are most frequently requested by borrowers?)

Museum staff should review when the last time items were appraised and plan accordingly. Once an appraisal of the collection has been completed, inform your insurance broker about any changes to the total value of the collection. Brokers are particularly adept at discussing how updated values have an impact on the museum’s fine art insurance.

WHY HAVING A FINE ARTS BROKER IS IMPORTANT
Each institution’s collection is unique and working with a fine arts insurance broker provides reassurance that you are working with someone who shares your passion and knowledge base for your treasures. For more information on how to insure your institution’s collection, contact a representative from Huntington T. Block at HTBinfo@huntingtontblock.com.

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Huntington T. Block Insurance Agency, Inc. is a licensed insurance producer in all states; Texas License #17489; operating in CA under license # 0825502.
¹ 26 CFR §1.170A - 1 (c) (2)
² Personal Property Committee, American Society of Appraisers, Monograph #2, Type of Value, 2012.
This article is provided for general informational purposes only and is not intended to provide individualized advice. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.
Huntington T. Block Insurance Agency, Inc. is a licensed insurance producer in all states; Texas License #17489; operating in CA under license # 0825502.

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