Why do I need ARIS ATPI?

The art market title risk is a low-frequency but high-severity risk that crosses all genres and periods and impacts all industry participants. The reason for this is that buyers and their advisors routinely cannot find out who owns the art or collectible offered for sale. Historically, the art market has always considered this information to be confidential, and the true owner is generally not the art dealer or gallery offering the work for sale. Because buyers often do not know who owns the work, buyers cannot begin to manage the ownership risks.

Even in the unusual case where a buyer learns the identity of the current owner (assuming the art is not being sold from the artist’s studio), each prior owner most likely did not know who owned the work before them making it very difficult to manage the legal title risks.

For example, when it is time to sell fine art or other important collectibles, all buyers and related intermediaries such as auction houses, galleries and dealers require sellers to guarantee in writing, for the benefit of the next buyer, that the seller has clear legal title to the object.

The same legal title guarantee is often imposed on donors gifting art to museums and other entities because donees are aware of their legal liability for the art market title risk and the potential personal exposures of museums’ officers and trustees.

Because sellers and donors most often do not have the facts to make this contractual guarantee with objective certainty, they unnecessarily assume an open-ended legal and financial liability for themselves and their family.

The non-transparent nature of the art and larger collectibles markets creates legal title risks not only for fine art but also for other important, valued objects, such as vintage automobiles, rare books and manuscripts, rare stringed instruments, and estate jewelry.

Isn’t provenance enough?

The answer is no. There are many misunderstandings about what a provenance investigation does and does not show from a risk management standpoint and how provenance differs from legal title.

Provenance is the history of physical possession of a work of art from the date the artist created it to the present day. Legal title is the past and present full right, interest and ownership of the work, which may or may not overlap with physical possession of the art.

Because there is no standard mechanism in the art industry to record and track both sides of a sale-purchase transaction, every provenance carries the inherent risk of being inaccurate or incomplete, including the provenance information stated in catalogues raisonnés and auction catalogues.

Provenance review initially arose in the art market to address connoisseurship and was not designed to, and does not, manage transactional risk. It later evolved to address the risk of theft in the context of World War II Nazi–era stolen art. The majority of the art industry’s legal title risks are unrelated to theft and ordinary burglaries.

Even under the best of circumstances, when it comes to managing the art industry title risks for fine art and collectibles, no provenance or chain of title is perfect.

What if I only collect post-war or contemporary art?

The risk of defective legal title impacts all periods of art, not just older or secondary-market fine art. The basis and type of the risk varies across different segments of the art and collectible market. But the existence and severity of title risks does not discriminate against only certain genres of art and collectibles.

With contemporary art, which includes primary-market works sold directly from the artist’s studio, the legal title risk has nothing to do with the risk that the art may have been “stolen” during World War II.

Financial liens and encumbrances often impair clear legal title to contemporary and primary-market fine art. Common scenarios include: a creditor claiming a security interest in the art because the seller used the art to secure financing but did not pay back their debt to the lender; the seller failed to disclose a right-of-first-refusal clause in the bill of sale between the first dealer and the first buyer, either intentionally or because the seller did not know that the clause existed; or, the seller entrusted the work of art to a dealer or gallery for sale and the dealer sold the consigned artwork without paying the seller the proceeds.

Collectors should consider the benefits of acquiring title insurance for primary-market works, especially at the point of the initial purchase, because not only are the risks relatively lower at that time, but the policy will continue to protect the artwork and pristine chain of title until the collector or his/her heirs are ready to sell or gift the work.

Contemporary and primary-market art as well as older or secondary-market art should be treated as an asset with risk management best practices.

How does ARIS ATPI cover authenticity?

Title insurance does not insure authenticity or attribution. However, because legal title and authenticity are regarded as closely related, the fact that a title insurer has guaranteed clear legal title to a work can add to a collector’s comfort about the authenticity of the insured work.

Collectors who seek out the professional advice of art advisors can identify, in most cases, outright fakes and forgeries before the acquisition. Works of art also can have a fake or forged provenance history. Because title insurance is fact-based and attribution is often a matter of divergent opinion, title insurance does not insure authenticity.

What if I only purchase from art auctions and reputable dealers?

The law imposes on auction houses, galleries and dealers the obligation to guarantee legal title of the objects they sell for a limited number of years. However, these intermediary sellers instead rely on the representations that their sellers or consignors (which might be another dealer) give about the legal title of the work of art. When a title problem arises with a work of art, the intermediary looks to their seller or consignor for recourse, therefore, placing the buying collector in a “downstream” or “upstream” fight with other parties against which the collector has little or no effective recourse. The seller or consignor might be judgment-proof for any number of reasons. For instance, they may be deceased, no longer in business, located in another country, or they have no money.

Auction houses also retain by contract the right to unwind or “rescind” an auction sale if, in their opinion, a real or potential title claim later arises without time or other limitations. This auction house right of rescinding is based on the auction house’s reliance on the consignor’s representation of clear legal title and its role of being only an intermediary.

Ultimately, traditional art transactions and art industry practices leave collectors at financial risk because no one, except a title insurer, is in the position to assume the risk of defective legal title. This means that collectors can lose their precious fine art or other collectibles long after buying them if they rely on the assumption that they have clear legal title. Their only recourse may be to secure reimbursement of the purchase price through costly and time-consuming litigation.   Additionally, collectors who have sold art may have to refund the proceeds from the sale long after the money has been spent or defend the clear legal title to their art.

Doesn’t my homeowner’s insurance policy cover the legal title risks of my art collection?

Title disputes in the art world are very complex. Only a licensed art title insurance company has the unique expertise to underwrite and assume legal title risks for art and other important collectible assets. Defending against these risks is expensive and complicated, and property insurers do not have the expertise to properly insure or defend against them.

Recently, several property insurers have recognized art title risks and collectors’ need for protection against the ownership risk by adding free-of-charge-endorsements to their policies which reimburses collectors for a small portion of the costs incurred in defending legal title to their fine art.

For a number of reasons, these insurance endorsements fall short of providing adequate protection. They provide minimal reimbursement dollars, the collector must incur the cost and then seek repayment, the value of the work is not covered when a work is surrendered, and there is no coverage if the insurer determines that the collector “should” or “could” have known about the title defect when the collector acquired the artwork.

These insurance endorsements are part of annually renewable homeowner policies. The collector must remain with the insurer in order for the endorsement to continue. The endorsements have not been tested, and they likely do not provide any protection if, and when, the homeowner consigns their art (for instance, to a dealer for sale).

The nature of these fine art floaters reflects the fact that homeowner insurers do not actually underwrite legal title risks in the art world, and they cannot, and do not, effectively insure against these risks.

Doesn’t an appraiser ensure that I have clear legal title to the object?

An appraisal of fine art or another important collectible does not address the legal title of the appraised work.

Appraisals should comply with the Uniform Standards of Professional Appraisal (USPAP) to meet industry standards and IRS requirements for donation and estate purposes. Generally, rendering an opinion on clear legal title is outside the scope of work of an appraiser under the appraiser’s professional liability policy and USPAP. An appraiser must specify in writing matters such as provenance, ownership interests and other restrictions or encumbrances that can affect the value of the object, and must specify the assumptions the appraiser has made in rendering an opinion, including assumptions about clear legal title.

In 99 percent of all tangible personal property appraisals, the appraiser does not comment on clear legal title but simply assumes without any investigation that clear legal title exists.

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