Art business: how do you insure a work that might—thanks to what it's made of—melt, disintegrate, or be eaten?

Apollo, March, 2008 by Ben Wright

Contemporary art may occasionally confuse gallery goers but that is as nothing compared to the puzzlement it engenders in insurance brokers who must work out the premiums needed to cover the works. How much, for example, does it cost to insure a pickled shark, in the case of Damien Hirst's The Physical Impossibility of Death in the Mind of Someone Living (1991)? Hirst has replaced the shark once but will he do so again? What about Marc Quinn's Self (Fig. 1), busts that the artist makes every five years from his own blood, one of which was reported to have melted when the freezer it was kept in was accidentally switched off. What are the premiums on Dan Flavin's installations of glowing neon tubes (Fig. 2)? If a bulb blows, does the work lose value?

These are the kinds of questions that the art insurance industry has had to wrestle with in the past few years as works classed as contemporary have become an increasingly large portion of the business they underwrite. The proportion of the art underwritten by insurers that can be classed as contemporary, differs from market to market. In the us, private collections are predominantly modern and contemporary. In Europe, however, the core of such collections is more likely to be traditional art. Nevertheless, even in Europe the trend--in what is being collected and, therefore, in what is being insured--is towards art of today. Between 2001 and 2005, the Mei Moses All Art Index suggested that the financial returns for contemporary art averaged around 19% a year. In 2006, the return was about 45%, with 2007 performing as well or better than 2006.

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There are a number of calculations, beyond the value of a piece of art, that go towards working out the premiums on any work or collection that is underwritten by an insurer, regardless of its age. Most insurers base their premium calculation on a rating structure that takes many factors into account, including, but not limited to, location, exposure to natural catastrophes, loss history, the nature of the security systems in place and the total amount of insurance that is purchased. For example, there is an additional charge if the collection is in an area prone to earthquakes or hurricanes. Premiums for galleries are higher because they constantly ship art and this increases the risk of damage.

However, there are some additional considerations that need to be taken into account when it is a contemporary work of art that is in question. The most important of these are the fragility of the work and the potential loss in value that can be expected if it is damaged. A number of high-profile accidents have highlighted the value that can be destroyed. Casino developer Stephen Wynn managed to put his elbow through a Picasso that he had just sold for $139m, scuppeting the deal in the process.

In the majority of cases, contemporary works can lose a greater percentage of value if damaged than Old Masters or modern masterpieces. But there are examples--some conceptually-based works for instance--that might not suffer any loss in value, and the only cost to the insurance company would be the cost of replacing a part of the work. The industry has also seen a few cases where works have been conserved or restored directly by an artist or under his supervision, as was the case with Hirst's shark. These restored works suffer no loss in value.

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Insurers will underwrite works of art made from biodegradable materials, according to AXA Art, which insures works made from frozen flowers, chewed-up chocolate bars and preserved specimens. Inherent vice--as insurers describe the tendency of a work to deteriorate due to the essential instability of its components--is excluded from the policy, so a work of art's natural process of decay is not insurable, but accidental destruction can be.

Differentiating between the inevitable deterioration of an object and accidental damage is usually a simple assessment of whether the loss resulted from a single event or over time. Dropping a picture is an event; the natural fading of a watercolour over a decade is not. Some challenging cases necessitate the involvement of conservators with the tools and knowledge to determine the nature of the damage. But there is no doubt that fragile works, or works that have started to deteriorate over time due to the nature of the materials used, are more prone to accidental damage.

Conservators, museum professionals and art-handling companies continually develop new and better ways to preserve fragile objects--from bulletproof glass to computer-engineered shipping crates. Laboratories can now convert organic, biodegradable materials on a molecular level into much more stable resin-based material, thus preserving, for example, the appearance of a loaf of bread indefinitely.

The value of some art has surged as much as 500% in the last two years, according to insurance brokers. While not all contemporary works have soared in value to this extent, it is still easy to see how collectors can very quickly find themselves underinsured if values are not kept current. To combat the surprise of underinsurance, insurers recommend regular reappraisals of collections of contemporary art--AXA Art, for example, recommends that this should be done every two to three years. Works by some artists, such as Andy Warhol, have experienced such continuous rises in value that they may warrant revaluation every year. Many insurers Hill notify clients of large shifts in the market--as can occur when an artist dies, for example--and suggest when reappraisal may be beneficial.