Collectibles: insurance and security

Melanie Stern is Section Editor of Families in Business magazine.

Invest in your investments: provide for the many financial and physical risks in a high-end collection with adequate insurance and security. Melanie Stern reports

You've bought the impressionist painting you had your eye on, and your taste for fine wine is reflected in a growing collection. It's likely you spent well into the hundred thousands, millions – or billions – on your passion so, understandably, you want them out of harm's way.

But something that represents a tangible percentage of your family's wealth can't just be shrouded in dust sheets and stored in a hidden room; and if it's going to be on show at home or in a public place, every precaution needs to be taken to prevent theft or damage.

Buying coverage
The insurance and protection of high-end collectibles is well catered for by global insurance markets, with many leading providers segregating wealthy families as private clients – as the banks do – with differing levels of coverage for different types of collectibles.

There has been a considerable increase in the purchase of high-end collectibles among the wealthy and business families in the past few years. This has been fuelled by the lack of payoff from stocks, shares and bonds, and the general fragility of economies. A $1.5 million Picasso drawing is not only pleasurable to look at, it represents for some a way to measure one's wealth and is less speculative than financial investment.

"The art market, especially at the top end, has done very well in the last two years," says David Scully, head of underwriting at AXA Art Insurance. AXA Art Insurance has $20 million in premiums and is a leading insurer for high net worth and business family clients owning collections of everything from fine art, antiques and wine, to antiquarian books and golf putters. 

"I think very wealthy people are worried about the volatility of the stock-market and prefer to put at least some of their assets in high quality works of art. The Maastricht fair this year (sponsored by AXA Art) was a huge success and sells generally fairly conservative, very high-quality works of impeccable provenance and of pristine quality. Obviously, first-class art requires first-class insurance."

Evaluation
Insurers currently employ a variety of ways to value collectibles for insurance premiums. One common way is by creating a detailed inventory of a collection to assess the overall value. Robin Duthy's London-based Art Market Research, a provider of 'indices' that track the price movements of over 1,000 types of art and collectibles, is launching its first collection manager for this purpose.

AMR Collection Manager is aimed at both high net worth and family offices and the insurers evaluating their collectibles. The program allows the user to calculate the current market value of individual pieces or collections against its indices by offering a pre-programmed list of criteria. These include when it was made, where, by whom, the price paid for it and when. The user selects the right options and then simply hits a button to calculate the value.

There are currently a handful of collection inventory calculators on offer but the distinguishing factor is how Duthy's offers a detailed pre-programmed criteria and is automated. "A lot of families have their own system but it is primitive and often requires writing everything down in longhand," Duthy tells Families In Business. "Some families employ a curator to do this but to be sure of calculating your collections' current market value – for the sake of insurance evaluation or a possible re-sale – our software is easier to use, faster and more precise."

Security issues
Experts in the field of collectibles always advise their buyers to purchase only the most exceptional quality in any piece, be it art, yachts, wine, or jewels, to ensure a good investment and re-sale possibilities. This inevitably drives up not only the cost of insurance, but also storage and security.

Auctioneers Christies offer a specialised security service for high-end ­collectible pieces (CFASS) which due to a longstanding low-risk security record allows the company to negotiate low insurance premiums for its clients. A ­maximum-security compound in London offers optimum environmental factors to store delicate and expensive works of art, and is guarded round the clock.

Wine collections depend on optimum storage conditions – the right humidity, no ultra violet light – to retain the quality guaranteeing their re-sale value. Those who own 'in bond' wine (wine that is not duty paid) avoid paying tax on it only if it is stored and sold on from a 'bonded' warehouse, specially set up for untaxed wine. In the UK, the London City Bond, privately owned and run since 1870, offers bonded storage for such purposes.

Those with their own cellar should of course still seek good insurance – companies such as Axa and Chubb are two international companies offering this service.

Tax benefits
A very good reason to access the best insurance for your art collection, at least in the UK, is a tax scheme allowing families to avoid inheritance tax when inheriting collections such as old manuscripts, furniture or paintings.

Using a trust allows a family to pass these valuables onto future generations before they are actually inherited physically – protecting them from the taxman. They allow the trustee to maintain named ownership and physical control on works, but by passing them before death into the next generation's hands on paper, a charge of 40% tax is avoided at the time of death.

Most families want to keep their works at home for private enjoyment, but if the works are classed as national heritage property by the Inland Revenue, a conditional inheritance tax exemption is granted to the holders. The proviso granted by the Revenue is that the works must be shown publicly to gain the exemption.

"Most of our clients do not want to give public access to their private collections because of the security concerns. For the very wealthiest families owning artwork worth millions or more, however,  showing it to the public is a worthwhile option," explains Grant Thornton's head of UK private clients, Ian Johnson. "If you die owning a £10 million piece you receive a £4 million inheritance tax bill, and to pay that you either need £4 million in the bank – or you need to sell it to pay."

If a family is going to exhibit its works they must be adequately insured against the threat of theft, damage from fire or water, or simply human contact or mistreatment. If they choose to open their home to the public to do it – as Turkey's Sabanci family did, for instance – then the risks increase.

AXA's Scully adds that this strategy has another less obvious insurance advantage for high net worth clients. "This has the indirect effect of reducing insurance premiums – a family would only receive the sales proceeds for a work of art net the inheritance tax if they sold an item. Therefore they may only want to insure it for this lesser amount."

With the profiles of wealthy business families and of the very best collectibles growing, threats to the safety of these investments from theft or damage – even malicious damage – cannot be underestimated. Insurance is a small price to pay for their preservation.