Despite the best efforts of transacting art market participants, gaps in provenance and unknowable information often cause legal uncertainty. How can art market participants protect themselves against the financial damage arising from title risks? I discussed this with Judith Pearson, who is the co-founder and President of ARIS Title Insurance Corporation, the leading art title insurer in the world.

What is art title insurance?

Art title insurance protects the insured against defects in legal title of fine art and other important collectibles. Art title insurance is relevant for both the demand side (private collectors, museums, art funds, art lenders, etc.) and the supply side (galleries, art dealers, auction houses, etc.) of the art market.

How did the idea to insure art title risks come about?

Years ago, Lawrence Shindell [co-founder and Chairman of ARIS] had the idea of creating a company to provide transactional due diligence services for the purchase of art, as opposed to the more common historical advisory work. When I was opening up the Denver office a museum called because they were advising a patron to buy a French impressionist painting. The painting had a provenance gap during World War II and no matter how much research the museum undertook they were unable to close this gap. Neither the seller nor the owner were willing to indemnify the buyer for any claims relating to this interim period, so we stepped in and created a one-off insurance solution providing the buyer with a protection for this gap. We stepped back and realized defects in title were the most important issue for art transaction and we created a broad market solution. This is how we created ARIS.

What are the most common title risks you observe in the art market?

When most people think of title risks in the art market they think of theft. However, only the minority of title claims (c. 25%) that are brought to our attention are related to contemporary or historical theft, such as World War II, Russian revolution and Cuban looting. The vast majority of the title claims (c. 75%) concerns traditional liens and encumbrances. The artwork might be subject to a government claim for unpaid taxes or tied up in estate disputes, divorce or bankruptcy proceedings. If the bill of sale includes a right of first refusal, i.e. if and when the owner wants to sell an artwork, he/she must first offer it to the holder, that would also constitute an encumbrance. All these title risks are difficult to research because of the lack of transparency in the art market.

What new areas of art title risks do you observe?

Art title risks are ubiquitous and here are some of the trends we observe:

(i) Warehouseman’s Lien – Owners storing their artworks in commercial warehouses should be aware that the storage companies may obtain a warehouseman’s lien and seize their artworks pursuant to the U.S. Uniform Commercial Code (‘UCC’) and similar U.S. state laws to satisfy outstanding storage fees. Before selling the artworks, the storage companies must follow statutory notice and other procedural requirements (see sections 7-209 and 7-210 UCC). Buyers should be cognizant of potential title claims brought by parties whose artworks were sold under such circumstances.

(ii) Art buyers’ UCC protection – Buyers in the ordinary course enjoy certain rights and protection under the UCC. Nowadays many art buyers are advised by their lawyers and consultants. We are starting to see a trend that these well-advised non-commercial buyers may be treated as merchants under the UCC. As a result, they do not obtain the same protection as buyers in the ordinary course if they ignore red flags indicating impropriety in the transaction and fail to meet higher standards of inquiry.

(iii) Directors and Officers (D&O) Liability – We observe a trend of claims against the individual directors and officers of institutions over failure to investigate the provenance and legal title when accepting donations or acquiring art. A recent example is the lawsuit filed by Léone Meyer in U.S. District Court for the Southern District of New York against the University of Oklahoma and its leadership, for accepting the allegedly Nazi-looted painting Shepherdess Bringing in Sheep by Camille Pissarro as a gift in 2000 without reasonable investigation into its legal title. When directors and officers are the subject of a lawsuit in their individual capacity, their existing D&O insurance policy may provide no or limited coverage.

How do you deal with cases in which clear legal title cannot be established?

There is always unknowable information. We have a team of art historians and lawyers to investigate the provenance of an artwork and identify the gaps. Based on the available information and risk elimination underwriting we then make a risk assessment to decide whether we insure the artwork and how and at what premium.

What is your role in case of an art title dispute?

Our policy requires that we take over the defence as we want to make sure that we appoint the best available lawyers. Depending on the merits of a claim, we defend, settle or return the artwork to the claimant and indemnify the policyholder.

What coverage do you provide? What is typically excluded from coverage?

Our policy covers the value of the painting at the time of the purchase plus defence costs. If the artwork increases in value over time the insured can apply to increase the Limit of Liability. It’s important to highlight that art title insurance does not provide coverage for either traditional physical loss and damage or authenticity.

Can you provide some guidance on how the premium is determined?

Generally, the premium for art title insurance is between 1.5% and 2.5% of the value of the artwork at the time of the purchase. It can be lower if the artwork is right out of the artist’s studio and higher if there is a challenging gap. The premium is structured as a one-time premium and remains in force for the life of ownership including the buyer’s legal heirs.

What difference do you see in the market for art title insurance between the US and Europe?

With the globalisation of the art market, the issues are pretty similar around the globe. Two main areas where the US and Europe differ are the following: In the US, the majority of the artworks are sold on consignment and one of the major challenges is to establish who actually is the seller. In Europe, we often observe lacking documentation since many artworks have been owned by families for generations. This can make it very difficult to prove ownership.

To conclude, how would you summarise the importance of art title insurance?

“Ownership is the keystone for art to move from a passion purchase to an asset class. Without clear legal title, one cannot sell, gift or donate the art or borrow against the asset.”