Sunday, January 24, 2010

Insuring Your Art, A Sign of The Times

If there is one question I am asked more often other than "what kind of wood is this", it is what should I insure in the collection. Not being an expert in insurance I won't advise anyone on the types of coverage that can be purchased from a company. However, some thoughts may be helpful - especially as the insurers are evolving in their coverage of art.

Insurance is basically risk management on the part of the insured and the insurer. The Insured wants to minimize the potential loss of a valuable asset. The insurer wants to minimize their risk in having to provide to provide insurance coverage and maximize their profits for providing this service. In a perfect world this relationship can be a win-win situation. Unfortunately, more often than one might like the insured is either under insured, over insured, or not adequately protected with proper documentation of their assets.

Here are some basic thoughts:

* Photograph and document your collection, or at least the most valuable works in your collection. Include current appraisals, original sales receipts, and any additional paperwork that speaks directly to the value of your art.

* Buy as much insurance as you can comfortably afford, whether or not that amount covers the entire value of your art. Most loss, damage, or theft affects only a portion of a collection, not the entire collection. To repeat-- receiving some compensation is better than receiving no compensation at all. See the definition of terms at the end of this article.

* Make sure you understand your insurance policy. This means reading the fine print, and asking every question about every conceivable loss or damage situation that you can think of. You don't want to find out after a loss that you were not covered for that specific type of loss. Important questions should be asked and answered by written communications that you can file and retrieve later if necessary.

* Theft/damage insurance for art, added onto your home insurance, generally costs $1-$2 annually per $1000 of coverage (less if you have a good security system in place). Several insurance companies specialize in covering art and antiques exclusively. Coverage details can be discussed and/or negotiated with your insurance company. There's no excuse for not insuring an art collection. If you can afford the art, you can afford the insurance. And remember-- you don't have to insure for every last penny of value in your collection. Loss or damage rarely affects an entire collection, and you'll find that in the large majority of cases, even partial coverage will reimburse you for a substantial percentage of the dollar amount involved in most occurrences. Understand you risks and the most likely event you are insuring against. Are you in a flood plain, earthquake area, tornado prone state etc. ?

Homeowners Insurance policy:

If one was to look at a home insurance declarations page, which is usually the first page in a home owners insurance policy, they would see Part I: Property Protection. This protection is usually broken down into four additional sections:
A. Dwelling
B. Other Structures
C. Personal Property
D. Loss of Use
Coverage A.
Dwelling typically covers your house, attached structures, fixtures in the house such as built-in appliances, plumbing, heating, permanently installed air conditioning systems, and electrical wiring.
Coverage B. Other Structures typically covers detached structures such as garages, storage sheds, and fixtures attached to the land including fences, driveways, sidewalks, patios, and retaining walls. Detached structures used for business purposes are not covered under a personal home owners insurance policy.
Coverage C. Personal Property typically covers personal property including the contents of your home and other personal items owned by you or family members who live with you. This protection can be based on actual cash value or replacement cost. Home insurance policies may provide limited coverage for small boats, however, most home insurance policies do not cover motorized vehicles unless they are unlicensed and used only at your home. Some items may have coverage limits such as firearms, artwork, business property, electronic data, jewelry, and money. Extra coverage is usually available by adding endorsements to your policy.
Coverage D. Loss of Use typically covers living expenses over and above your normal living expenses if you cannot live in your home while repairs are being made or if you are denied access by government order.

Endorsements can also be added to your home owner insurance policy at an additional cost to provide extra protection. Examples of endorsements include:

1. Guaranteed replacement cost coverage will pay the cost to rebuild your home as long as you have met the requirements of your home insurance policy.
2. Extended replacement cost coverage insures your home for a specific value and usually adds a 20-25% extended limit if reconstruction costs run over.
3. Inflation Guard increases the amount of your home owner insurance to keep up with inflation so that you can maintain adequate coverage to replace your home in the event of a loss.
4. Scheduled personal property protects articles such as jewelry, furs, stamps, coins, guns, computers, antiques, and other items that often exceed normal policy limits in your regular home owners insurance policy. It often provides coverage that is broader than the coverage in the home insurance policy. There normally is not a deductible for this coverage. Increased limits on money and securities provide additional coverage for money, bank notes, securities, and deeds.
5. Secondary residence provides protection for a second home such as a summer residence.
Theft coverage protection broadens the theft coverage to include personal contents in your motor vehicle, trailer or watercraft to be covered without proof of forcible entry.
6. Credit card forgery and depositor's forgery coverage provides protection against loss, theft or unauthorized use of credit cards. It also covers forgery of any check, draft, or promissory note. No deductible applies to this endorsement.

Important: Check your policy. Some policies have limits of coverage under your homeowners by class of property. Some policies calculate your homeowners by a percentage of the total value of the house. For example your house is worth $200,000 and your contents policy is 50% or $100,000. If you have a piano that is worth $50,000 then all you have remaining is $50,000 for the rest of the contents. If your house burns down, you have a problem. It is also important to note that coverage on a homeowners is usually a named peril. Not included unless scheduled separately would be your baby throwing your diamond ring into the running garbage disposal.

Check your policy for a co-insurance clause. If you have both a loss and this clause in your policy you may be disappointed in the final settlement by the insurance company. Basically this clause states that if your scheduled property is under-insured then if a loss occurs you will share the loss with the insurance company. The theory behind this is that you are self insured for the difference thereby limiting the liability on the part of the insurance company. If it has been some time since the insured has updated values, this is definitely a concern if a claim is made. On the flip side during economic downturns the only punishment for you the insured is that you may be paying premiums that do not reflect the true value of the property.

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