By Lauren Berenbaum
In today’s art market, collectors are presented with numerous avenues to sell pieces – whether through a broker, auction house, gallery, or online – the options seem endless. Regardless of the preferred method, collectors traditionally enter contracts to ensure their art is sold in the manner of their choosing. In conjunction with such agreements, art collectors routinely obtain “all risk” insurance coverage to protect their art until it is officially sold.
“All risk” policies are attractive because they generally cover “all risk of physical loss to valuable articles unless stated otherwise or an exclusion applies.” But, what happens if, rather than the work becoming physically damaged, the dealer sells the art below the set contractual price? Or worse, what happens if the dealer simply pockets the profit?
Collectors often think their “all risk” policies cover that type of loss. Yet, the reality is: “all risk” policies often do not extend beyond the classical definition of “physical loss”.
Collectors often think their “all risk” policies cover [all] type[s] of loss. Yet, the reality is: “all risk” policies often do not extend beyond the classical definition of “physical loss”.
The confusion in the market no doubt results from a Frigon case. Specifically, in Frigon v. Pacific Indem. Co., 2007 WL 756384 (N.D. Ill. 2007), art collectors decided to sell various paintings through a gallery pursuant to a consignment agreement. In addition to the standard terms and conditions, the agreement provided the gallery owner would sell the paintings at an amount equal to or greater than the consignment price. After some time, the collectors learned the gallery sold their paintings for less than the minimum agreed prices. While the gallery owner was required to pay the proceeds of sale to the collectors under the consignment agreement, the gallery owner instead retained the profit. In turn, the collectors demanded the gallery return the paintings. To their dismay, they soon learned their paintings were gone, and the gallery spent all the money it received from the sales. Frustrated, the collectors submitted the claim to their insurance carrier under their “all risk” policy claiming the paintings were “lost” to them.
When the insurance claim went into litigation, the Court ruled the unauthorized sale of the paintings deprived the collectors of their property. See id. Accordingly, the court ruled the “all risk” insurance policy covered this type of loss. When the decision came in, it seemed like big news (and a big win) for collectors.
But twelve years later, the Court’s ruling in Frigon remains an outlier. Although art related insurance claims are rarely litigated, only one other case has explicitly cited the Court’s holding in Frigon. See Ovitz v. Chartis Prop. Cas. Co., 2015 WL 12746209, at *5 (C.D. Cal. 2015). While the holding in Frigon is still good law, the modern trend indicates “all risk” insurance policies only afford coverage for real physical loss or damage. Significantly, last year, the Supreme Court, Appellate Division of the First Department in New York, analyzed whether an “all risk” policy provided coverage for an art gallery’s contractual liability to purchasers of stolen artwork that was ultimately returned to its rightful owner. See Dae Assoc., LLC v. AXA Art Ins. Co., 158 A.D.3d 493, 493 (N.Y. App. Div. 2018). While the “all risk” policy provided coverage for “all loss or damage to insured property”, the Court held the purchasers’ defective title in the art did not constitute “physical loss or damage” as required by the insurance policy. Id. In making this determination, the Court held it was “not reasonable to interpret a policy so broadly that it becomes another type of policy altogether.” Id. Similarly, in Flaum v. Great Northern Ins. Co., the Court determined that an insurer properly disclaimed coverage under an “all risks” policy where the insured unknowingly purchased a forgery of a Renoir painting. See 904 N.Y.S.2d 647, 650 (Sup. Ct. 2010). In denying coverage, the Court held that, even assuming the forgery resulted in a “physical loss”, the loss occurred when the insured purchased the painting, not when the forgery was discovered during the policy period. Id.
The moral of the story is to be careful when you enter into any contract – not least of all a contract for a sale of art. Read the fine print, ask questions and make sure the dealer is reputable. Because you must understand, if you do not, your “all risk” policy may not actually cover your particular risk.
About the Author
Lauren is an attorney in Wade Clark Mulcahy LLP, Philadelphia office (wcmlaw.com).