Protect Your Collectibles

Most homeowner's insurance policies contain snares for the unwary. But coverage of any collection can be customized.
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A year ago a pair of ruby slippers worn by Judy Garland in The Wizard of Ozwas sold at auction for $13,200. Shoe collecting is about as far as offbeat investing has been carried, but active collectible markets have also arisen among such disparate items as uniforms, celestial-navigation instruments, wine, quilts, movie posters, and slot machines. Collections make for more stimulating decor and better cocktail conversation than stock certificates, but the problem is that, like any art, they are also subject to loss through theft or catastrophe -- often at considerable expense to the owners.

Research recently undertaken by Marsh & McLennan Inc., worldwide insurance brokers headquartered in New York, concludes that many individual holdings of fine art, antiques, and collectibles are poorly insured. The owners prefer to "leave it to their insurance guy," says Marsh & McLennan senior vice-president John Murphy, but the trouble is that the insurance guy tends to serve up a typical homeowner's policy that leaves too much at risk. One New York doctor, Murphy discovered, had $1 million worth of art in his home and office covered only by standard homeowner's clauses.

Standard policies often contain detrimental restrictions that the policyholder is unaware of but that can be modified at little or no extra cost. For example, most homeowner's policies require that in the event of the loss of a home, in order for the policyholder to collect, the replacement must be built on the same site. But, says Marsh & McLennan, certain policies with "verified value" endorsements waive such a requirement and simply pay out the full amount in cash. The cash can then be used for entirely unrelated purposes, should the ex-homeowner so choose.

Similarly, because homeowner's policies are formulated under the auspices of individual state boards, which do not always have the consumer's interest in mind (and often favor the insurance companies), they may limit coverage of specific items such as silverware, jewelry, cameras, and guns. Even when the price of silver reached $50 an ounce in 1980, for instance, policies written in New York State limited coverage to $1,000. Many homeowner's policies don't even go that far, putting the ceiling on protection of collectibles at a paltry $500. Another deficiency of standard coverage is that it usually won't pay for "mysterious disappearance" of jewelry -- jewelry's most frequent peril.

Marsh & McLennan has now undertaken a program of seminars aimed at persuading individuals with at least modest collections to itemize their inventory and insure it with customized, scheduled coverage. "Buying an off-the-shelf policy when you have substantial assets is the equivalent of going to a $20 income tax service for tax advice," says executive vice-president David Holbrook, one of the proselytizers for Marsh & McLennan. Scheduling allows owners to specify the amount of protection for each piece -- its actual current replacement value -- with all-risk protection. In effect, like corporations that "manuscript" their own coverage, individual claims for total loss are agreed upon even before they occur -- no ifs, ands, buts, or boilerplate. And despite increases recently in art theft and artnapping, the premiums have remained exceptionally low compared with other insurance. A negotiated price as low as 20 cents per $100 may be available for typical scheduled insurance for fine arts, Marsh & McLennan advises. Added to this is the cost of professional appraising, which is also modest.

A few companies do not require documentary proof of worth for items valued at less than $10,000. But for those that do, and for more valuable items, a professional appraisal will be required. Indeed, it ought to be repeated frequently, as trends and prices in collectibles can change drastically overnight. For exam ple, a painting by American artist Robert Blum that Christie's, an international auction house, had estimated at $50,000 to $75,000 last June actually sold for $473,000. At the instant the auctioneer's gavel fell, every Blum collector had to reevaluate his collection upward.

The hazard of not frequently reevaluating a collection, says David Bathurst, president of Christie's in America, is that, unlike securities and their concomitant Dow Jones averages, there is "no such thing as an 'art market' that goes up or down." (The closest thing to art "averages" are those devised in November 1981 by Christie's competitor Sotheby Parke Bernet Inc. Published weekly in Barron's, the Sotheby Index monitors 12 areas of fine art and antiques plus one aggregate, basing its calculations on auction results.) Further coloring the rapidly changing picture, the 1983 personal federal tax law substantially raises the uninsured-loss deduction floor to 10% of adjusted gross income plus $100.

Although not always so instantaneous as in the Blum case, other examples of dramatic change underscore the art market's volatility and the need for reappraisal. Some recent Christie's examples:

* In June, a pair of French silver tureens sold for $429,000; the same pair sold for $1,200 in 1928 and for $3,000 in 1934.

* A Queen Anne bureau bookcase that sold for $4,300 in 1957 fetched $946,000 at auction in October 1981.

* The same sale that saw a Blum painting exceed its estimate by nearly 10 times, in spirited bidding, saw another Blum fail to reach its estimate of $4,000 to $6,000. Quality of the work, as well as demand, can make a huge difference.

Compounding insurance problems even more, not all trends and fashions in art and collectibles have been upward. Two years ago, an Ansel Adams photograph sold for $17,600. If auctioned today, Christie's Bathurst calculates, it would probably go for about one-third of that amount. (In such a situation, the insuree contemplating a new appraisal would do best to leave well enough alone.) Old Masters English portraits peaked in 1929, Bathurst says, and until recently could have been bought for less than they cost 50 years ago. Chinese ceramics dipped last year when two important collections were brought to market. Art nouveau, too, has been tumbling of late, the result of oversupply as its popularity has shaken out pieces previously consigned to attics.

As the nature of collections strays from the mainstream -- to antique steam engines, for example -- an ordinary insurance company may be unwilling to touch them. In that case the collector may enter what is known as the "excess and surplus" market, where an underwriting syndicate will quote on unique risks. The applicant for such coverage must have been rejected formally by five insurance companies before becoming eligible for this market, and an affidavit showing the names of the turners-down must be filed with the state's insurance department.

In any event, Marsh & McLennan advises, to make sure no questions arise as to ownership and value, bills of sale for collectibles should be retained in safekeeping. And many sophisticated collectors of old objets d'art employ modern methods to document their possessions beyond contention: They videotape the whole kit and caboodle, room by room.

Last updated: Jan 1, 1983




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