A review of insurance coverage issues for museums and how it works in practice.
The problem with insurance is that you do not really know if what you have bought provides adequate cover until catastrophe strikes and a claim arises. Even worse is when disaster strikes and you discover you have no insurance at all!
This report reviews the risks faced by museums, the type of insurance cover available and the providers. One of the most signifi cant exposures is the risk of loss or damage in transit when artefacts are out on loan. The report will look at a case study to examine how different types of insurance coverage interact when a loss occurs and the legal principles that apply.
The paper is based in English law, but many of the principles that apply are similar to those that apply in other common law (as opposed to civil law) jurisdictions, such as Australia and New Zealand.
Museums and Insurance
In 1999 the Museum & Galleries’ Commission Insurance Survey found:
- Insurance was a low priority for museum staff
- Cover was complicated and confusing
- Archaic terms and obscure jargon were used
- Costly and sometimes with inadequate cover
- Insurance industry unhelpful
Hopefully as a result of the Survey, these criticisms have been addressed in some measure.
Insurance – general
Insurance is a risk management tool whereby a defi ned element of risk is transferred for payment of a premium.
Insurance is often classifi ed as being either marine or non-marine insurance. A useful working defi nition of a “contract of insurance” is one whereby one party (the insurer) promises in return for a money consideration (premium) to pay to the other party (the assured) a sum of money or to provide him with a corresponding benefi t upon the occurrence of one or more specifi ed events1.
Marine insurance is defi ned by Section 1 of the Marine Insurance Act 1906:
“A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent whereby agreed, against marine losses, that is to say, the losses incident to marine adventure”.
Marine insurance plays an important part in the art world as so much is shipped around the globe on loan and the transit risk provides one of the most signifi cant exposures to loss or damage
Differences between marine and non-marine insurance
There are a number of differences between marine insurance and non-marine insurance2 but three main differences are as follows:
- Policies of marine insurance are “subject to average” which means that if the assured is under insured, he is deemed to be his own insurer for the uninsured proportion. Non-marine insurance is only “subject to average” if it is expressly provided for in the policy.
- The amount recoverable under a marine policy is measured by the value at the commencement of the risk and not by the value at the time of the loss. In non-marine insurance it is the value at the time of the loss that supplies the measure of indemnity.
- Adjustments “new for old” are regulated by customers in marine insurance. In non-marine insurance adjustments “new for old” are not so regulated, and depend on the terms of the policy wording.
Types of Insurance
First party insurance is the insurance of an interest in a res, or thing, such as an artefact. In the insurance market this is often referred to as specie insurance. It covers damage to, say, a painting owned by an individual or institution who has insured the specifi c work.
Third party insurance is the insurance of the insured against liabilities to third parties. So where a painting is entrusted by an owner to a carrier for delivery and through the fault of the carrier it is damaged, the owner as the third party will have a claim against the carrier who will usually have insured that liability with his third party liability insurers.
Reinsurance consists of one insurer (the reassured) ceding the risks to another insurer (the reinsurer). This is in effect spreading the risk by laying it off to reinsurers. The important point to note is that so far as the original insured is concerned, such as a museum, a claim cannot be brought against reinsurers directly as there is generally no direct right of action against reinsurers except in very limited circumstances.
The providers of insurance
The commercial insurance market (as opposed to Government provided insurance) is an international market, a feature that is shared with the art market itself. However, for historical reasons, the London insurance market has traditionally provided specialist insurance cover for museums, galleries and art works displayed in them. Underwriters at Lloyd’s and the companies’ market are notable for providing skill and expertise in relation to cover for fi ne art. Lloyd’s Syndicates such as Hiscox, Catlin and ACE, as well as companies such as AXA Art, Chubb and Royal & Sun Alliance, all provide specialist cover. The broker plays an important role in obtaining that cover, acting on behalf of an insured institution in advising on the appropriate cover, negotiating the premium and providing back up services. Again there are specialist brokers, such as Blackwall Green and Willis, which have dedicated teams devoted to the art market’s needs.
In addition to the commercial market there are government indemnity schemes (GIS). The UK GIS is a non-commercial insurance agreement that allows the public access to objects within the UK that might not otherwise be available. Cost free cover is provided for loss and damage whilst they are on short or a long term loan. Indemnities are issued by the Department for Culture, Media and Sport (DCMS) in England, to non-national museums, galleries and libraries. The GIS has covered many major exhibitions in the UK, including those of the works of Turner, Rembrandt, Canaletto, Monet and Van Gogh. GIS has also covered loans from around the world, including icons from Bulgaria, dinosaurs from China and mosaics for Italy.
GIS encourage non-national institutions to mount important exhibitions, or add to existing collections, without incurring the high cost of commercial insurance.
The GIS can cover objects and works of art whilst they are in transit, to and from the borrowing venue, storage, setting up, display and dismantling.
It covers objects on loan from private lenders and other non-national institutions. Any institution to which the public has access is eligible for indemnity cover, including local authority and university funded bodies and National Trust properties3.
Similar schemes are provided in the US and Australia (for the present – as there is some discussion as to the future of the Australian scheme ), but not, for example, by France.
The risks covered
Commercial cover is provided under a variety of products such as Combined Insurance, which might insure Buildings, Contents, Stock, Plant and Equipment, Shop Takings, Business Interruption/ Loss of Profi ts, Public and Products Liability, Employers Liability, Cancellation or Postponement.
However, specifi c Fine Art Policies cover, for example:
- All risks of physical loss or damage worldwide
- Fire, water damage, fl ood, accidental damage, theft
- Mysterious disappearance
If an item is partly damaged, the insured may decide whether insurers repair, replace or pay the value of the damaged item. If insurers repair it, they may pay for any loss in value. The most they will usually pay in total is the value of the item.
Where an item which has an increased value because it forms part of a pair or set is lost or damaged, any payment made by insurers will take account of the increased value, and the insured may decide if insurers are to pay the entire value of the entire pair or set, but only up to the value of that pair or set.
Upon payment of a claim and in the event of a recovery there is usually a “buyback” clause with insurers charging the amount they paid for the claim plus interest, or the fair market value of the item at the time it was recovered, whichever is less.
Prompt notifi cation of an incident which may lead to a claim is imperative. Specialist loss adjusters are usually instructed to deal with any loss which may arise.
Most policies have an excess which can vary to a signifi cant degree with institutions self insuring for quite substantial sums
The most common exclusions are in respect of:
- Loss or damage caused by wear and tear, gradual deterioration, inherent defect, rust or oxidation, moth or vermin, warping or shrinkage
- Mechanical or electrical faults or breakdown
- Loss, damage, costs or expenses arising directly or indirectly from biological or chemical contamination caused by an act of terrorism.
The amount recoverable
The amount recoverable under a policy of insurance depends on a number of issues. For example, it depends on whether it is a marine or non-marine policy. If marine, it may be a valued or an unvalued policy. There is likely to be a limit on the sum insured and there may be provisions relating to average. The policy itself may provide expressly for a basis of valuation4.
So what happens when a loss occurs? Upon satisfactory proof of loss, insurers will pay the insured under the policy whereupon insurers become subrogated to the rights of the insured. Subrogation may be described as the right by which underwriters, having paid the insured’s clam, step into the shoes of the insured and assume the insured’s rights and remedies, in relation to the subject matter insured, including rights of recovery against third parties. Such proceedings for compensation or recovery will normally be brought in the name of the insured against any third parties who caused the insured’s loss. In subrogated actions the court operates on the well-established fi ction that the insured is the true plaintiff; the fi ction apparently dates back to the time of jury trials in civil actions where the knowledge that the insurer was the true plaintiff might infl uence the jury5.
Again there is frequently a provision in the policy dealing with the respective rights of insurers and the insured. An example is as follows:
“If the underwriters become liable for any payment under this insurance in respect of a loss, the underwriters shall be subrogated, to the extent of the payment, to all the rights and remedies of the insured against any part in respect of the loss and shall be entitled at their own expense to sue in the name of the assured. The assured shall give the underwriters such assistance in his power as the underwriters may require to secure their rights and remedies and, at the underwriters’ request shall execute all documents necessary to enable the underwriters effectively to bring suit in the name of the assured. The underwriters shall be entitled to all recoveries from any third party up to the amount of their outlay including their own costs and expenses.”
The type of action envisaged involves pursuing claims against carriers for loss or damage in transit, or against other custodians of the work of art, such as warehousekeepers, dealers, galleries and the like6.
Let us now turn to our case study and a set of circumstances which gives rise to a claim under the various policies of insurance in play.
The owner (O) of a work of art worth £20,000 lends the piece to a museum (M). The piece is entrusted to a specialist carrier (C) to carry from the premises of O to the premises of M.
O insures the piece commercially against loss or damage. This is fi rst party insurance. Let us call these insurers “FPI”.
C has a policy of third party liability insurance, insuring its liability for loss or damage whilst the piece in question is in its custody and care. Let us call these insurers “TPI”.
C has a contract with O agreeing to carry the piece. The contract contains a limitation of liability clause limiting C’s liability to £2,500 per piece.
During the course of transit, the piece is damaged due to the fault of the carrier. The cost of repair amounts to £20,000.
All the events incur in England and the policies and contracts are subject to English law.
How does this all play out then, in terms of claims and recoveries as between the parties and their respective insurers?
O has a claim on his policy with FPI for damage to the piece. The amount he is entitled to recover from his insurers, FPI, is £20,000. O’s insurers, FPI, are “subrogated” to the rights of O against the carrier, C. Proceedings may be brought by O against the carrier, C, for the recovery of the damage. Those proceedings may be brought by O’s insurers, FPI, in O’s name under the doctrine of subrogation.
C can limit its liability under the contract with O to £2,500 by reason of the limitation of liability clause.
If C is found liable to O for £2,500, he can claim an indemnity from his third party liability insurers, TPI. Normally TPI will take over the handling of the defence of the claim brought by O and his insurers FPI against C.
The moral of this paper is that museums need to evaluate the risks they face carefully and take out adequate and appropriate cover to insure the risks they have identifi ed, having taken specialist advice fi rst.