Buying Art Like A Grown-Up

Buying art in the secondary market (art that has been owned by someone before you, other than the artist/creator) introduces a collector to an all-new set of potentially messy legal complications. Playing in the bigger sandbox requires new kinds of protections. Insurance and legal agreements are far less sexy than museum receptions and gallery openings, but it’s all a lot less fun when somebody (you) gets hurt. Being sued, losing art, losing money, is not sexy.

One of the risks you’ll face is “clear title”. Put simply, that is the risk of buying something from someone who may not actually own the thing being sold. If you do that, even unknowingly, the actual owner or some person/entity with a rightful legal claim will be along to haunt you eventually. Art market title risk impacts all industry participants. Sellers sometime like to remain anonymous, so transactions go through brokers. Buyers and their advisors often won’t know who owns the art or collectible offered for sale. In the art world, this anonymity is always respected. Since buyers don’t know who owns the work, they can’t manage the ownership risks. Art Title Insurance serves that need. A licensed art title insurance company has the expertise to underwrite and assume legal title risks for art and collectibles.

The risks fall into four categories:

  • Contemporary and Historical Theft

  • Import and Export Defects

  • Liens and Encumbrances

  • Illegal or Unauthorized Sales

With real estate, 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, blah, blah, blah. The Art world equivalent of this history of ownership is Provenance. Gaps, mistakes, untruths in the provenance are just legal challenges waiting to happen.

Financial liens and encumbrances can impair clear legal title to secondary-market and primary-market fine art. There could be a creditor claiming a security interest in the art because the seller used the art to secure financing but did not pay back the debt to the lender. There could be failure to disclose a right-of-first-refusal clause in the bill of sale from a previous transaction, either intentionally or because the seller did not know that the clause existed. Maybe 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. All bad scenarios that you don’t want to be caught in.

How does Art Title Insurance work?

An 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, the insurer would pay out their $1 million. The insured’s legal costs and full investment in their artwork are covered. The insurer protects themselves by doing the due diligence to make sure that provenance, ownership, and title are clear and defensible. If they make a mistake, they pay for the mistake. Insurance companies rarely make mistakes. If an insurer refuses to cover a purchase you’re considering, take that as a sign that the risks to you are high.

An Art Title Insurance policy can cover fine art, rare books and manuscripts, rare stringed instruments, music, sports and movie memorabilia, museum quality jewelry, ancient objects, and vintage automobiles.

Fakes, Fakers and Fakery…

If you acquire a fake, you have recourse to sue the dealer for breach of the warranty of authenticity under the Uniform Commercial Code or the New York Art and Cultural Affairs law. However, the four year statute of limitations begins to run at the time of the sale. Discovery of fakes often occurs years later, so that remedy is not always available.

If there were representations made under a purchase agreement, the collector can sue for breach of that agreement, where the statute of limitations is often longer.

If the collector and dealer were both mistaken about the work’s attribution, the collector can sue for “mutual mistake,” and ask a court to rescind the purchase agreement, requiring the collector to return the work and the dealer to refund the purchase price.

If the collector has reason to believe that the dealer knew he was selling a fake, the collector may sue for fraud, among other claims. Art purchase agreements and contracts are generally standard fare, but take nothing for granted. God made lawyers for a reason.

The ‘must have’ items in any agreement to purchase art include:

  • A representation and warranty by the seller that he has clear title to the work and that the work is free of any liens or encumbrances;

  • A representation and warranty that the work is “authentic”; and

  • An agreement by the seller to indemnify the purchaser for any claims made by a third party relating to any of the seller’s representations and warranties, but particularly the two listed above.

Get it right, from the beginning

The two main areas of risk are ownership of the work and authorship of the work. Fine art is only as valuable as it is authentic. The true identity of the artist is essential to its value. It’s hard to be 100% sure you are buying an authentic work of art unless the artist is still alive. With a deceased artist there are things a collector/investor can do. First, ask for a full provenance history of the work and make sure that the provenance makes sense.

Second, have an expert inspect the art and comment on its authenticity. This isn’t cheap, and many experts are hesitant to offer these opinions formally. They may do so informally. The most important and easiest thing a collector/investor can do is to work with a reputable art dealer with a track record for honest dealing, who will be around and is motivated to assist if something goes wrong down the line, even if they are not legally obligated to do so.

Like any other fun, sexy undertaking, you’ll want to be aggressive and play rough but have protection.


W Skeet Jiggetts

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