Mastering the Fine Print in Fine Art Contracts
by Lynn Marcin, SVP, Huntington T. Block Insurance Agency, Inc.
A Tale of Two Fine Art Loans
Museum Alpha is hosting a weekend fundraiser. Fifty artists donate the proceeds from the sale of their works for the exhibition. The event is handled by the events coordinator, who decides that executing a loan contracts with each artist requires too much paperwork.
The terms and conditions of the loans are not put into writing. They are not even discussed.
After the event, one of the artists contacts the museum to say that the pieces she had on display were returned to her damaged. The events coordinator contacts the registrar asking to report a claim to their insurance company. When the loss adjuster calls, he asks: “Where is the loan contract?”
Then the registrar replies, “We don’t have a loan contract,” that’s when the finger pointing begins. The museum was under the assumption the artist had their own coverage. The artist claims the museum promised they would take care of everything.
The claim adjuster wants to know: “Who was responsible for the art? When did that responsibility begin and end? What were the stated values of the damaged pieces?” When nothing is in writing, nothing is clear. Everything is gray. If the claim is settled it will be after a long, protracted period of time.
Museum Beta accepts a valuable set of old masters’ paintings on loan from a prominent New York collector. They work out a loan contract in writing. The insurance clause spells out that the museum is responsible for the collection from the moment it is picked up to the moment it is returned, and everywhere in-between.
Should a piece be damaged during the shipping or installation process, there is no gray area. The claim process will run smoothly so long as the loan contract aligns with the insurance contract.
Loan Agreements
It is understandable why Museum Alpha did not want to execute loan contracts with fifty different artists for a two-day event. It’s time consuming. In such situations, at a minimum, the museum should have gotten the artists to sign hold harmless agreements that stated the museum was not responsible for any damage. It’s clear. Should a problem arise, there’s no finger pointing.
Whenever a problem arises involving borrowed art, the claims adjuster is always going to ask to see your contracts. It doesn’t have to be a formal loan contract; it could be a consignment contract. Something in writing that states the two parties’ intentions.
In Museum Beta’s case, the collector’s attorney crafted a formal contract that outlined the details of the loan and the responsibilities of each party:
- Who is the lender? Who is the borrower?
- What pieces are being loaned?
- Who is responsible for the artwork?
- When does that responsibility begin and end?
- What are the values of the art being covered?
Without a loan contract the insurance company could argue that the museum may not be responsible for the risk and not pay the claim. They could also dispute the lender’s value if not established prior to the loan being in effect.
Condition Reports
When should a museum’s insurance take responsibility for a loan? Underwriters don’t want to pick up a claim for a work that has been in transit and is sitting for a prolonged period in a crate in storage, and no one has done the final condition report. It could be sitting there damaged.
As the one benefiting from the lender’s magnanimity, typically the museum bears the brunt of the insurance responsibility for the loaned collection. The optimum way to protect both parties from any uncertainty later is to do a condition report.
A registrar with a careful eye and detailed vocabulary inspects each work of art closely to see what the existing surfaces look like. Ideally the insurance company takes on the risk once the condition report is completed, because now they know exactly what they are insuring.
The museum should do a condition report before the coverage starts. The best place to do it is at the location where it’s currently residing. If it’s moving to different venues, they would examine the artwork each time it’s in transit and once it arrives—all the way until the end of the exhibition and it arrives at the lender’s home. Then you condition report it one last time.
Most damage to artwork occurs when it’s been taken installed or de-installed, packaged, or shipped. Doing a condition report at every ‘movement point’ gives the lender and the museum a clear picture of the artwork at every leg of its journey.
Contract Changes
Let’s say a museum prepares a contract for a high-valued loan. It takes several months to agree on the values and get it signed by the lender. Then something changes. The bigger the value of the loan, the more likely the numbers will change. With every auction come new results and values escalate. Or it could be a change to the loan date. It’s common occurrence.
I generally learn of the change because a museum contacts me to ask for a revised certificate of insurance with a different coverage amount. In such situations, I ask: “Did you change the loan contract?”
The response from my client is usually, “I did not think of that.”
If something goes wrong, the museum is tied to whatever values are on the loan contract. I could modify the insurance value on the COI, but it’s just a memorandum. It doesn’t change a thing if they don’t amend the loan contract.
From the museum’s perspective, they may have had a hard time getting the original loan contract signed and executed. Perhaps the lender was reluctant to commit to a value. Perhaps they sat on the contract for months before signing it. The registrars panic when they think they need to reissue the contract.
Fortunately, that’s not the case. All the museum needs is an addendum to the original contract in order for the change in values to be effective.
The Current Hot Topic: Total Liability
In the past, the loan contract mirrored the insurance contract and there was no problem. Life was easy for museums who took on loans.
Today the stakes are higher. Artwork values are constantly increasing. Private collectors are using legal counsel more often. On occasion, their counsel does not have an art background and may seek changes to the insurance that are difficult if not impossible to comply with.
Legal counsel can sometimes complicate a simple agreement by requiring something known as total liability. It’s quickly become the hot topic of the moment.
The boilerplate language in a loan contract states, the borrower is responsible for providing “all risk insurance, subject to the standard exclusions.” There are five standard exclusions on a fine art policy available through Huntington T. Block: war, nuclear event, inherent vice, wear and tear, and damage during the conservation process.
Lately legal counsel has been deleting the phrase “subject to the standard exclusions,” thereby making the museum responsible for everything that could possibly go wrong, including the five policy exclusions.
Often this is done by attorneys who are not aware of the insurance exclusions. In those cases, the situation can be quickly addressed. But on occasion, it does not matter. It could be because they’re loaning $500 million worth of art. The collector’s legal counsel wants literally everything covered.
Whenever I see a total liability clause, I respond: “Here are the five exclusions. What are you afraid of?” Sometimes I win that battle. Sometimes not. It’s a war we’re all waging right now, one that keeps registrars and fine art brokers awake at night.
If the museum agrees to the total liability clause, it would be responsible for paying the lender for an uninsured peril. With the high values of artwork, this could be a significant financial liability for the museum, one that could put them out of business.
At Huntington T. Block we have never seen a claim as a result of a request for total liability. Not yet.
Closing Recommendations
Read the contract. Ask your fine art insurance broker for advice when seeing unusual language. Twenty-five percent of my day is spent reviewing museum loan contracts.
Please note that we are insurance brokers and not trained legal counsel. We can advise changes to the loan contract to bring it in line with the insurance contract. If there is a disconnect between the two documents, be aware the museum is taking on risks for clauses the insurance will not insure.
Lynn Marcin is a senior vice president at Huntington T. Block Insurance Agency, Inc. Lynn has 26 years of experience assisting museums with their fine art insurance. For more information, contact Lynn at lynn.marcin@huntingtontblock.com or visit www.huntingtontblock.com.
This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.
Huntington T. Block Insurance Agency, Inc. is a licensed insurance producer in all states; Texas License # 17489; operating in CA under License # 0825502.