Art insurers on high alert for fraudulent claims
When the economy goes into recession, cases of insurance fraud shoot up. Industry specialists for the art world say they are watching contemporary dealers particularly closely
By Cristina Ruiz. Published online: 01 September 2009
The insurance industry is on red alert. The number of fraudulent claims is rising rapidly and experts predict they will continue to increase until the economic situation improves. According to the Association of British Insurers (ABI), in 2008 there was a 17% rise in fraudulent claims compared with the previous year. This amounted to 2,000 dishonest claims made in Britain every week. The total value of these in 2008 was Â£730m - 30% up on 2007.
While the ABI does not collect figures for art insurance fraud, a number of industry specialists interviewed byÂ The Art NewspaperÂ say they are expecting to see a rise in fraudulent cases. Some say they already have. All of them believe those selling contemporary art - the value of which has plummeted over the past year - should be watched particularly closely. "A loss for an art dealer is as good as a sale," says Charles Dupplin, chairman of the art and private client division at Hiscox. What is certain is that the number of overall art insurance claims has shot up in the past couple of years and establishing which are fraudulent and which are legitimate can be extremely difficult.
Lost or damaged art for cash
"Not since the early 90s have we seen so many suspect claims. Some appear distinctly recession driven," says Dupplin. "In the early 90s, a lot of naughty stuff happened within the dealership community. The market had collapsed and they had very high overheads. They were desperate. I think it's fair to say that some parts of the art market became morally flexible."
While Dupplin and others decline to discuss the details of current claims, Richard Nicholson, executive director of Willis Fine Art, Jewellery & Specie, tells the story of one gallery owner who was caught out. "One of our clients, an art dealer, claimed for most of his stock after there was a ram raid on his gallery. What he didn't realise was that the entire incident had been recorded on CCTV camera - the person who had rammed the gallery was in there for no more than three minutes and the CCTV footage showed the art dealer in question arriving on the scene with his own van after the raid had occurred and loading it up with his own stock. He was prosecuted and spent time in jail."
Most cases of art insurance fraud are not so straightforward and cases of fake theft and loss are relatively rare. The biggest challenge for art insurers in the current climate is simply the huge surge in claims. "The tendency over the past couple of years has been to claim for every little thing," says Annabel Fell-Clark, chief executive of Axa Art Insurance Ltd. "Whereas previously clients would say: â€˜I've lost my watch or my pair of glasses and I can't be bothered to make an insurance claim and I've got the cash to go out and buy a new one anyway', now people are much more conscious about what they are paying their premium for and, rightly or wrongly, they are claiming for those small things. Unfortunately for them it will increase the overall cost of insurance in the long run."
Another difficulty for the art insurance industry is that dealers and collectors are cutting costs dramatically. "The focus on risk management tends to be less onerous, which results in more claims," says Nicholson. One top contemporary art dealer in London is known to have purchased his own van and is cutting his operating expenses by delivering art to clients himself rather than paying for the services of specialised delivery firms. "He's even renting the van out to other dealers," says one colleague. Others are reportedly delivering art to clients in cabs. All of which leads to more damaged work and more claims. Whether any of these are fraudulent is hard to establish. Fell-Clark says she expects an increase in claims, not necessarily fraudulent, to come from "the lower to mid-end contemporary dealers where businesses may be struggling after the boom years".
Another common problem is the exaggeration of a work's value when it has been lost or damaged. Some insurers regard the discussions with clients over these claims as a "negotiation", others classify the claims as straightforward fraud. Clare Pardy of the firm Ecclesiastical, which insures most of the Anglican cathedrals in Britain as well as major historic homes such as Chatsworth and Blenheim, says "the exaggeration of a claim" is fraud. Insurers say the cumulative effect of inflated claims is "enormous", leading to higher premiums across the board. "We aim to make this more difficult by insuring everything on an agreed value basis," says Pardy. Most specialist insurers underwrite all art by agreeing a specific value for each work with their client. However, many non-specialist firms group several works together and insure them for a lump sum. This can lead to serious disagreements over an object's supposed value when a claim is made on a specific work within the group.
The "negotiations" between insurer and claimant are particularly fraught when dealing with contemporary works that have dropped significantly in value in the past 18 months; a collector may be seeking to claim insurance for a work based on a pre-recession value.
Daniel Smith, director at Aon Artscope & Specie, says the valuation of contemporary art is a "major challenge". "If a piece does get damaged and it's insured for $5m and that valuation was done a year ago, it's probably not worth that now." To avoid potential disagreements, insurers monitor the market closely and aim to revise policies to reflect the new economic realities. "You can't revisit a policy every five minutes," says Smith, but "we would want to do it every six months depending on the size of the collection, especially for contemporary art".
It's a Leonardo
One of the most ambitious types of art fraud involves attempts to secure insurance for minor works that are presented as masterpieces with huge valuations, usually in excess of Â£20m. According to Filippo Guerrini-Maraldi, a director with R.K. Harrison Insurance Brokers Ltd, "these types of requests often happen during the month of August when most heads of department are on holiday. The fraudsters hope that some young, keen executive will take their call and will want to try and impress his bosses on their return by achieving their budget targets for the year."
To the experienced insurer these frauds, known as "money for old rope" claims, are easy to spot: typically an individual will say he owns an old master painting, or several, by a famous artist such as Leonardo. The works are inevitably accompanied by voluminous documentation that includes authentication and valuations from obscure specialists. The aim is to insure the art for millions and then stage its theft or, using the insurance policy, obtain a bank loan with the art as collateral. "If the number of Leonardos presented to us were real, Leonardo would still be alive and painting today," says Nicholson.
Guerrini-Maraldi believes the recession will lead to more individuals seeking insurance for art to obtain additional credit. "We need to be extra careful in today's market where credit is hard to come by," he says.
Dupplin tells the story of a collector in Europe who claimed to own a 19th-century painting worth seven figures. This had been authenticated and valued by a South American expert. The work was rejected by several insurers but accepted as authentic by a European firm and duly insured. It was "stolen" shortly afterwards.
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