Introduction

S
teven Spielberg, the movie producer and art
collector, decided that he needed a Norman
Rockwell painting. He called the gallery
he usually purchased art from and was told that
a Rockwell was available. He went to the gallery,
saw the work and was smitten. He purchased it for
$700,000, took it home and hung it with his other
works. Sometime later Spielberg was sued by the
previous owner who claimed that the gallery was not
at liberty to sell the work because it lacked the proper
documentation. In point, Spielberg had defective title
to the work, and as such, he did not legally own the
Rockwell.
Defective Title
Like a piece of real estate undergoing the process of
being sold, regulations and laws exist requiring that
the piece of art for sale has no issues regarding proper
ownership by the seller. In order to protect buyer, seller
and banks providing the mortgage, title insurance
companies provide insurance against titles which later
prove to have issues. Titles for properties, which do
have issues, are identifed as defective. Quite simply,
defective title pertains to the fact that the property
sold did not have documentation establishing that the
person selling it unequivocally owned it. The hunt for
proper title in todays fne art market is exemplifed
by Nazi era thefts of fne art in countries it occupied
by Dr. John Daab, Certifed Fraud Examiner
TITLE INSURANCE FOR
THE ARTS:
PROS AND CONS OF PURCHASING
during World War II between 1939 and 1945. The
looting of the Iraqi Art Museum during the current
US war in Iraq is another example.
Spielbergs relationship with his art dealer allowed
him to walk away with a substitution for the Rockwell
painting he had bought but did not cover the $50,000
in court costs which he spent fghting the defective
title. Without this relationship a typical buyer would
not only spend a fortune on court costs but would also
lose the purchase price.
ARIS: The New Kid on the Block
Up until 2006, there was no title insurance to
protect purchasers of fne art. In 2006, a company
named ARIS introduced fne art title insurance to art
collectors. The introduction of fne art title insurance
represents a major step in consumer protection.
In the absence of it, art purchases run the gamut
of challenges and attacks from past owners, false
provenance, and hefty losses resulting from attorney
fees and court costs. The current title insurance
product and process protects from defective title and
defends against legal costs. There are however, some
questions, issues, and problems with the current
product.
The Current Offering
ARIS is a New York State licensed title insurer.
The company has written 300 policies ranging from
$20,000 to $4 million. The policies are written for the
present value of the art, and cost about $1.75 6.75
per thousand dollars of value. So title insurance for
a $100,000 work of art would cost approximately
$1,750 $6,750, with no renewal costs. The policy
covers the present owners and their heirs. It protects
owners from defective title in that if title is challenged
the policy covers legal costs and the loss of the work
if in fact the insured does not have legal title to it. In
the case of Steven Spielberg and the challenge to his
ownership of the Norman Rockwell painting, fne art
title insurance would have taken care of court costs
and the value of the work purchased.
The Process of Insuring Fine
Art from Defective Title
According to the present fne art title insurer, the
process of insuring a work of art begins with a written
statement provided by the individual who wishes
to purchase insurance, outlining the facts about the
art. The statement will identify where the purchase
was made, who owned it previously, its cost and any
information pertinent to the work. From that point it
takes about three weeks using various art professionals
to corroborate the provenance of the given work.
If no problems are found, the insurance is issued.
A reinsurance company situated in London and
associated with Lloyds of London is working with the
present title insurance company to provide greater
protection.
Costs vs. Benefts
The insurer notes that there is tremendous risk
associated with title ownership given the fact that
there is an international movement to take back
art which was removed, from rightful ownership.
Whether museums or individuals hold works of
questionable title, genuine owners are using both
legal and diplomatic powers to secure art which was
removed without proper title or just plain stolen. The
Indiana Jones days of taking art by force or chicanery
has been replaced by various watchdogs such as The
Commission on Looted Art in Europe and a host of
various worldwide agencies and courts requiring that
proper title be provided by those holding works. As
recently as February 2009 a German Court ruled that
the rightful owner of propaganda posters stolen in
1938 by the Nazis belonged to Peter Sachs and not
the German Historical Museum. The costs associated
with establishing title once it has been questioned or
deemed defective may easily ruin a collector fnancially
and psychologically. According to the insurer, the
benefts of fne art title insurance well outweigh the
cost. For about 3-7% of the value of a work, on a
one- time cost basis, a collector would be insured for
defending against defective title and the value of the
work. In point, for a maximum of 7% of the value of
the fne art, the insured is protected against the loss
and legal costs associated with establishing correct
ownership. Spielberg would have paid about $49,000
to insure that he would not lose $750,000. The insurer
notes that in one auction the fact that a piece sold for
substantially more than its estimated price was largely
due to the fact that title insurance backed the sale.
Issues of Fine Art Title Insurance
Fine Art Title Insurance and Its Implausibility
Fine art title insurance is a new product, untested
and without a history of success. The fact that the
major insurance carriers have not in the past and
do not currently provide such a product leaves a
heavy question to be answered. Why? Although the
insurer claims that research supports that the untested
product works, the fact that the old timers did not
provide fne art title insurance says that there may
be a problem with the research. It would seem that
a few successful challenges to title on the grounds of
defectiveness borne from a faulty pool of provenance
data or information would quickly sink the fne art
title insurance ship. According to recent comparative
study of pre-sale authenticity identifers such as
style, signature, provenance documentation and so
on provided by galleries, auction houses, and private
sellers undertaken by the investigator, provenance data
came in last as substantiating authenticity of given
paintings more than fve years old. It is recognized
that the insurer is not focused on authenticity but the
fact is that provenance or documents supporting fne
art title were only minimally supplied in the above
investigation. In point, the quantity of information
supplied to document who had owned a given
work offered for sale a signifcant criterion for
authentication was minimal compared to other
criteria. How then is the insurer going to provide title
if very little provenance or documentation is supplied
by sellers of fne art?
Questionable Provenance Sources: GIGO
According to the company, research has proved
the fne art title insurance to be a workable product.
Because they have not been willing to share the data or
process supporting their statement, one can only make
the assumption that what the stats or data demonstrate
is that given the present state of the art market, there is
an extremely low probability that the insurer will have
to pay out in claims greater than the insurers proft.
For example, the premiums paid by the 300 clients
on board presently will exceed the cost of claims
paid out, with a resulting proft for the insurer. Given
that the level of provenance may or may not support
defective title there are problems getting, securing,
and ascertaining reliable title data the insurer enters
the realm of extreme risk based on questionable
data, and low levels of data. Over the last year it has
become all too clear that the insurance companies
billions of dollars of losses have been attributed to
an inability to secure sound data and information
enabling the companies to accurately assess risks and
therefore make a proft. The bottom line is that by
the assumption of questionable data there emerge
questionable conclusions. GIGO, garbage in creates
garbage out. The lack of adoption of fne art title
insurance and the dubiousness of existing research
sources weigh against the likelihood of its long-term
success. Given that fne art title insurance is a welcome
frst attempt, some sort of plausible explanation must
be provided as to how the new kid will work after the
old timers left the game.

Processing Diffculties
Securing provenance for a given work is a
long tedious process. For the most part genuine
documentation is not available. Sellers dont have
it, are unwilling to part with it if they do, and most
amounts to garbage in garbage out. The question
emerging is how will the insurer, in two to three weeks,
gather data and information about a given work when
no existing database is available supporting such a
short research time. Title searches in real estate take a
few weeks only because such research has a base going
back more than 125 years.
The People Exhuming Provenance Documents
The insurer notes that it has attorneys, insurance
experts and art historians carrying out the research.
The insurer does not list the expertise or professional
background of the provenance experts. Merely
because someone has a law degree, insurance
background or graduated with an art history degree
does not mean that they know how to secure, examine,
and develop conclusions about the documents
supporting ownership. Documents are easily forged,
especially in our digital age, and given that works go
back hundreds of years, no note was made about how
the insurers experts would be able to unequivocally
identify real documents from fake ones.

Insurance Requirements and Exclusions
In normal real estate title insurance processing
the owner or purchaser is never asked to supply any
information about the property undergoing title
search. In the new fne art title insurance the owner is
expected to provide information about the piece being
insured. Further, the exact nature of the information
is not really identifed except to note that if defective
title claim arises and the information supplied was
weak the insurer may walk away from the claim. This
exclusion among many is not unusual since insurers
use exclusions as protections against risk. It also allows
them to avoid paying claims. The more general and
the more excessive the exclusions, the better the
chance an insurer will fail to pay the insured. Auto
insurance companies protect against damage to a
car parked on an owners property by excluding it
from claims if a tree falls on it. If collision insurance
existed it would be covered. They also protect via
time windows for claims, and by requiring the insured
to supply much information within the time frame
allowed. In effect, exclusions limit liabilities for an
insurance company.
Another exclusion is that during the course of a
claim the insurer may want to settle for less than
the value insured for. This leaves the insured with
potentially less than the value of the work paid for
even though the insurance cost was based on the
original value. Here the insured loses part of the value
of the work, and also some of the premium paid. To
the extent that many exclusions exist I count about
ten the present form of fne art title insurance serves
more to protect the insurer. The insured must evaluate
risk of premium paid and settling for less than the
value paid versus whether the insurer will pay the costs
associated with title issues.

Pros
In todays economy of egregious consumer losses
developed as a result of Peter Principal corporate
leaders pushed beyond their level of incompetence,
any activity or insurance to protect the consumer is
benefcial. Of further beneft is not to have to search
out for a frm to address defective title issues. It is
not always clear what frms are the most expert in
challenges of defective title, and ARIS has the staff ,
which seems to satisfy a defective title company. The
psychological beneft of not having to become involved
in the defense of the challenge is an additional beneft.
The cost of such protection may be high for some, but
it is a one shot deal. The insured is not paying every
year.

Cons
The product is new without any success stories, and
it seems to fy in the face of what experienced insurers
would be involved with. Its requirements of having the
insured provide information about the property to be
insured has no basis in normal title insurance process,
and its exclusions seem to place the insured at greater
risk than the insurer. The art market is uncontrolled
and unregulated, with the capacity for fraud and
forgery rampant. It is questionable that the new kid
on the block will be able to navigate through such a
snake pit. A more important question is whether it is
really necessary that title insurance be purchased. We
are led to believe that based on the quantity of title
related issues one would be best served to secure the
insurance. One asks however What is the probability
of running into a defective title issue? Here no
data is provided. One would assert that very few
title problems arise in regards to the general public
purchasing art. The examples provided by the insurer
probably equal to $30m out of $50 billion, which
amounts to maybe 1%.

The Risk of Purchase
The purchase of fne art title insurance has to be
made via a cost/beneft analysis. The purchaser
must evaluate the overall costs versus the overall
benefts. This requires that one examine all parts of
the purchase. The problem here is that we really do
not know what the costs and benefts are since the
product is new and untested. Lacking a set of data
or information about cost/beneft, it is necessary to
analyze the risk of purchase: how risky is the product
in terms of the costs? How much will the policy cost,
and what are the risks associated with the purchase?
What will the purchase price provide to the buyer?
Without a past history it is not clear what the buyer
will secure. Yes, the insurer says it will insure title.
However, as pointed out there are some issues and
problems, which may prevent the insurer providing
what it says it will provide or excuse it from doing so.
One may reasonably assert that at this point there
might be more risk to purchase than being potentially
provided with a claim settlement, which may never
take place.

Smoothing Out the Road
Although there are some bumps in the road to
offering insurance protection for fne art title, the
potential for making the offering to the buyer more
palatable is available.
Authenticity
The insurer seems to have no interest in whether
the work being provided clear title is authentic. If it is
found to be inauthentic will the insurer pay the claim
knowing full well that if it is bogus it is probably not
worth the value of the policy? Will the insurer reject
the claim on the grounds that the insured did not
provide due diligence. The insurer should make it
clear what consequences will follow if a work is clear
title but inauthentic.

Costs
The current pricing structure is excessive for a new
start up with an unidentifed success history. The
current premiums should be aligned with real estate
prices. Unless the insurer provides evidence that the
costing structure is different, why should the buyer
pay more for insurance of an asset of the same value,
merely because one is a work of art and the other a
piece of real estate?
Transparency
The process and actors involved should be identifed
and expertise and professional qualifcations clearly
established. What is involved in securing provenance?
What documentation is sought, how long does it take,
and what exactly establishes fnal provenance? Just
because A is an attorney does not make him an expert
in art provenance; just because B is an art history
major does not make B an art expert.
Exclusions and Requirements
There are too many exits for payment of claims
based on the responsibilities of the insured, and the
ambiguity of some of the exemptions and conditions
could easily create a paper war between the parties
sliding rapidly downhill to litigation. This is a case of
an uneven balance in the insurance equation favoring
the insurer. The exemptions and conditions should
be reduced and the language tightened up so that the
balance is more equal. The requirement to provide
data about the artwork being insured should be more
clearly identifed.
Success Stories
The insurer should begin to provide some claim
settlement evidence indicating that its start-up nature
is beginning to be morphed into that of an established
insurer.

FAR, Fine Art Registry and the Fine Art Registry Logo are registered trademarks of Global Fine Art Registry, LLC. 2009 Global Fine Art Registry, LLC. All Rights Reserved.