Interview: Legal Aspects of Art Transactions and Risk Factors in Art
Nov 5, 2018
Mary Buschman, President of ARIS Title Insurance Corporation and course instructor of our Art Wealth Management Program explains what title risk in art transactions mean, the four categories of risk and how art title insurance works.
Can you explain what title risk in art transactions means and why it is so much more complex than for example, in real estate?
The art market title risk crosses all genres and periods and impacts all industry participants. 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. A licensed art title insurance company has the unique expertise to underwrite and assume legal title risks for art and collectibles.
Risks generally fall into four categories:
- Contemporary and Historical Theft
- Import and Export Defects
- Liens and Encumbrances
- Illegal or Unauthorized Sales
In the real estate market, legal title must be transferred by a deed and recorded at the County Recorders or Recorder of Deeds office where the real estate is located. Abstracts of title are created which include the condensed history of the title for a particular parcel of land, including a summary of the original grant, all subsequent conveyances, encumbrances affecting the property and a certification by the abstractor that the history is complete and accurate. In the United States, the abstract of title furnishes the raw data for the preparation of a policy of title insurance.
Are there categories in the art market that are more susceptible to title risk than others (i.e. Contemporary vs. Old Masters)?
The art market affects all periods of the art and collectibles market in various ways. Objects created prior to the end of WWII can be affected by all of the risks noted above. The Post-War market can be affected by all risks except historical theft. The historical theft risk not only includes WWI and WWII but also Russian Revolution, African colonization and Spanish colonization just to name a few.
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.
How does art title insurance work?
The ARIS Art Title Insurance policy has a one-time premium for lifetime of ownership until the insured object is sold or donated. The policy automatically extends to heirs-at-law. Coverage includes indemnity plus defense costs. That means that if a party came forward with a claim of ownership on the insured object, the insured would be covered for all legal defense costs. If the claimant won, then the insured would be paid the full value of the limit of liability. So, for example, if the insured lost in court and was required to relinquish their $1 million art object, ARIS would pay out their $1 million. The insured’s legal costs and full investment in their artwork are covered.
The ARIS Art Title Insurance policy not only covers fine art but also rare books and manuscripts; rare stringed instruments; music, sports and movie memorabilia; museum quality jewellery; ancient objects and vintage automobiles.
Learn more about Legal Aspects of Art Transactions and Risk Factors in Art. Enroll in our online Art Wealth Management Program today!
Mary Buschman is the president of ARIS Title Insurance Corporation, a division of NYSE-traded Argo Group (ARGO), an international insurance company.
Ms. Buschman’s professional experience sits at the intersection of fine art, law and finance including asset management. She has been a member of the New York City Bar Association Art Law Committee since 2013. Prior to ARIS, she was Senior...