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Protection In Fine Art Fights

Brian Madden

 
 
Art has evolved into a major asset class, with the fine art market spiraling past $40 billion in sales in 2007. But as art values continue to escalate and record-breaking sales of fine art create headlines, the frequency of costly ownership disputes and messy provenance issues are also on the rise.

 
Investors and art collectors seeking to mitigate their risk and exposure to litigation are increasingly turning to a tool more commonly used to protect real estate assets: title insurance.

In the real estate industry, title insurance is required to establish a clean chain of ownership so that a sale can be completed. The art industry remains largely unregulated and often relies on laws created for other industries to resolve issues of ownership. That means that even though you purchase a piece of art from a reputable dealer or auction house and have it in your collection for many years, you may not actually own it--a fact which a number of recent high-profile stories have brought to light.

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Director Steven Spielberg, for instance, became embroiled in a high-profile case last year after claims surfaced that the Norman Rockwell painting "Russian Schoolroom," which had been in his collection since 1989, had been stolen in a burglary three decades earlier.

Similarly, last November, Christie's pulled Picasso's "Portrait of Angel Fernandez de Soto" from auction when the heir of a former owner filed suit, claiming the painting had been sold under duress in Nazi Germany.

The kinds of title challenges today's collectors face are innumerable. Included among the major issues:

Stolen Art. The Federal Bureau Of Investigation estimates the black market for art to be worth $6 billion a year. Most buyers have no idea they are purchasing a stolen piece of art since the theft, like in the Spielberg case, may have occurred long ago. But stolen property remains stolen property, and clear title cannot be conveyed, even to good-faith purchasers totally unaware of their "tainted" purchase.

Consignment Problems. Sellers and living artists often consign their work to dealers under explicit terms. Recent court decisions have determined that sales which do not conform to these terms can convert the art into stolen property. A good-faith buyer is not protected even if the provenance is otherwise clear.

Liens. Borrowing against the value of art is an increasingly common practice. Because there is no place that these liens are required to be filed, even the best provenance searches can fail to turn up such potentially significant title problems.

Estate Issues. Works of art that have been in a family's hands for generations often do not have a clear chain of title because they have not been probated through multiple estates. The IRS has started to focus more aggressively on these kinds of estate issues.

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Art collectors and investors have the ability to address and protect themselves against these types of issues with art title insurance. Just as it does for real estate, title insurance is meant to create liquidity, promote transparency and standardize transactions for the art industry.

Art title insurance offers buyers, sellers and intermediaries protection in the event a sale is challenged. It mitigates or eliminates financial risk and permits transactions to proceed efficiently through:

--covering litigation costs in provenance and ownership disputes for works of art, whether already owned or being purchased;

--automatically extending coverage to the insured's successor in interest at law (heirs); and

--facilitating art-gifting transactions, exhibition and lending against the art as collateral.

By having art title insurance, individual, institutional and corporate collectors, as well as museums, art investment funds, dealers and auction houses transfer risk to a regulated insurance company. Legal claims then become the insurance company's headache.

As our society has become increasingly litigious, more and more people are looking for ways to make a profit by targeting high-net worth and/or high-profile art collectors. This type of opportunistic behavior is sure to lead to a surge in the number of challenges that arise.

 
 
A public dispute can be embarrassing, and it can compromise the value of the artwork in question. But with art title insurance, not only are owners insured against loss, but the privacy of both the transaction and the owner are vigorously protected.

The art market has matured. Even the best-intentioned handshake transactions and verbal agreements can carry with them perils unknown and unrecognized to both buyers and sellers. It is time to apply the type of creative financial and risk-management strategies that are associated with other major asset classes.