Art for art's sake

Fine-art auctions in this country are a lot more lively, less elitist affairs than they once were. Not so long ago it would only have been a handful of dealers picking over what were mainly the remnants of deceased estates. But times have changed; auctions have become a public spectacle, almost part of show business, encouraged by the mass appeal of television programmes such as Antiques Roadshow.

The two London-based auction houses Sotheby's and Christie's are household names and continue to dominate the market, each with annual sales in excess of £1bn in the UK, but there is also considerable activity outside of the capital.

This is evidenced by a brief scan of the Invaluable website for the week commencing 4 April. It highlights a plethora of high-quality auctions from Carlisle to Cornwall, including Huntington in Cambridgeshire, Manchester and Bath.

Most of the auctions revolve around a single specific fine-art category - silver, jewellery, antique musical instruments and Victorian furniture are among the categories being promoted over the seven-day period.

The power of the regional auction houses is represented by the third-largest auctioneer, Bonham's, which maintains a string of salesrooms around the country in addition to the one in London.

More significantly, perhaps, The Fine Art Auction Group - now the UK's fourth-largest auction house - is continuing to expand at speed through acquisitions in the regions. In January this year, two months after acquiring Neales of Nottingham, it bought Hamptons, which has salesrooms in Surrey and Wiltshire. All of TFAAG's salesrooms in southern England eventually come under the banner of Newbury-based Dreweatt Neate, which was established in 1759.

Axa Art has been insuring private collectors, dealers, museums and exhibitions in the UK since 1982 and internationally, through its London market operation, since 1991.

According to its development director, Clare Pardy: "The market is characterised by consolidation and pretty tough trading conditions. Many of the smaller auction houses have disappeared but the ones that have survived, such as Dreweatt Neate among others, are doing well. These local companies are increasingly market-led and are making it their priority to be innovative, flexible and service-oriented, such as by offering more weekend openings." She points to external competition from internet-based auctions - most notably Ebay - as one of the driving forces behind this transformation.

"From an art-buyer's perspective, there seems to be tremendous enthusiasm for the contemporary-art market," continues Ms Pardy. "At the very high-end of this range, you might see a Lucien Freud painting sold for a truly vast sum, and that is quite normal. From the art-dealer's side, they are currently experiencing demand for top quality and their aim is to make the sales a 'sexier' event. The challenge is when selling antique furniture, for example, to display it in such a way that it can be seen to fit into a contemporary setting."

For the time being, Axa is concentrating more on servicing auctioneers based in London, although it has varied accounts with regional players.

For the London players with their global connections, the underwriting focus is on providing worldwide all-risks cover with the auctioneers carrying large deductibles and the London insurance market very much at the forefront.

Goods in transit

For the regional players, however, the most pressing requirement from a client's point of view is to have comprehensive cover for the risks associated with goods in transit, bearing in mind the local transportation of large volumes of goods in and out of the auction houses' premises and those of their service partners, such as antique restorers.

Risks covered include those for theft and damage and the consensus is that underwriters need to be flexible here because the valuables - by necessity - are being moved around so much. Cover also should be available if requested for pre-auction viewings, where the potential for damage is heightened by handling from the buying public.

In order to mitigate against such claims, a large part of the service offering provided by all specialist art insurers is taken up with risk management - for example, making clients aware where they might be vulnerable to breakage or a break-in and recommending specialist packers for particular items.

In terms of regional auction houses, Ms Pardy reports that insurers are seeing a substantial demand and are quoting "record prices". According to market estimates, insurance for regional players can represent 20% of overall costs per annum but this proportion has not increased significantly over the past four to five years.

Andrew Cheney comes from a third-generation family of auctioneers and has worked as assistant vice-president and auctioneer with Sotheby's and recently joined Hiscox, from Rowley Fine Art Valuers, as a senior risk management surveyor.

He is of the same opinion that, while there is a tremendous offering of modern and contemporary art on the UK market, traditional objects are generally less in demand. But, he says, there is still the option of going to a smaller auction house and finding something of real value and interest.

Hiscox insures many of the 'upper tier' UK regional auction houses, and on a bespoke basis rather than as off-the-shelf packages. Mr Cheney explains that the company encourages its clients to consider professional indemnity insurance under which cover can be provided for a range of risks, including protection in case of unwittingly selling a fraudulent work or stolen art.

"Risk management is the driving principle here; the art insurers' buzzword if you like. It is becoming more and more important to make clients aware about where their exposure as art dealers lies and how best to cover themselves." For example, he explains, this could mean ensuring they have the most appropriate storage facilities for precious goods. "The words that you really don't ever want to hear if you are an auctioneer are: that an object has survived in my family for 200 years, I take it to the auction house and it doesn't last five minutes."

Mr Cheney adds that it is imperative to strike a sensible balance in these situations. "Although you must allow for the security of the goods during an auction, and however priceless the merchandise might be, you must not compromise the safety of the bidders, such as by blocking fire-exit routes or by omitting to have these routes clearly signposted."

Underwriting Risk Services is a specialist in the fine-art insurance world and a subsidiary of Talbot Underwriting Holdings. Its fine-art coverage provides for all risks of physical loss or damage for, but not limited to, paintings, sculptures, antique furniture, porcelain and personal jewellery, with a capacity to insure up to $20m (£10.6m) in any one location. Kevin McCarthy, Talbot's underwriter of fine art, highlights the important issue of ownership with reference to works of art stolen during the Second World War that are often reported in the media.

"As the size of the problem reveals itself, museums and collectors spend increasing amounts of time and energy in researching provenance. While many items were restored to owners after the War, it has been estimated that in the region of 300,000 works remain unaccounted for, with the art market exposed to an estimated $1bn worth of looted art."

However, Mr McCarthy adds that the majority of smaller auction houses - if not all - will take great care in carrying out due diligence on works that are accepted for sale. "As well as checking records and databases for stolen goods, they will usually require a signed form from the seller declaring that the seller has appropriate title. In addition to wishing to protect their reputations, the auction houses will be aware of the increasing regulations with regard to money-laundering and will appreciate the crucial aspect of appropriate checks."

Art Loss Register

One of the most important organisations within this context is the Art Loss Register, which has 160,000 stolen items registered on its database, the average value of which is between £3500 and £4000. The ALR's art historians register over 10,000 losses from insurers, owners and law-enforcement agencies on its database each year and missing items are searched for by the same art historians against over 300,000 items each year.

The process of recovery and returning the item to the owner can often be long and complex, exacerbated by the length of time since the theft and the complexity of title law. Therefore, the ALR works closely with insurers to facilitate recovery.

Factors such as the frequency of art theft, the international nature of the art trade, the desire for confidentiality, the complexities of and national variations in title law and the value and emotion attached to particular items, create complex issues for the art dealers. However, the market is under mounting pressure from clients and governments to demonstrate due diligence in the acquisition of art.

The ALR is contracted to the main players - including Sotheby's and Christie's - and Julian Radcliffe, chairman, confirms that the larger auction houses always check the database before sale. "The smaller houses, on the other hand, are not contracted to ALR and tend to check only the higher-value items on the database." He explains that checking each item against the database, when they come up for auction, is a very time-intensive and expensive process, meaning that: "Provincial auction houses tend to only use the search option for 30 items a year, which is more cost-effective but far less thorough."

However, he points out that the legal framework for provincial auction houses has changed considerably: "The UK's signatory to the Unesco Convention to tackle illicit trade in art and antiquities says that, if an article is bought in good faith, it must be compensated for. This has pushed provincial auction houses into the limelight."

As Mr Radcliffe describes it, the fine-art supply chain of deceit from thief to dealer comprises several components. If there is a stolen item and a professional burglar needs to offload it, he will sell it on to an intermediary. For example, a £50,000 picture is stolen, and the burglar sells it on to an intermediary or 'fence', for which the burglar receives a fraction of the value. The intermediary then sells it on to a disreputable dealer who sells it on to a respectable dealer or auction house, who then sells it on to a 'good-faith purchaser', meaning unsuspecting art buyers.

There have been incidents of the police turning up at the auction house and confiscating stolen items just prior to a sale.

If subsequent issues arise after the sale, the buyer will usually have to take recourse against the seller as opposed to the auction house. But this person may well have disappeared, or gone bankrupt, so the auction house may look to compensate the buyer and get the money back from the insurer.

"But insurers are getting fed up with having to pay in these sorts of circumstances because it means that auction houses have not done their due diligence," says Mr Radcliffe. "Insurers are looking at applying tougher standards if auction houses are applying for defective cover for a product that they sold. At the very least they need to prove that they performed a search on a database of stolen art."

Applying rigorous risk-management procedures and owner checks to fine art that is in an auction house's care obviously makes sound financial sense. But regional auction houses have another reason to listen to their insurers and the ALR. As Mr Cheney makes clear: "At the end of the day, the auction house's main value lies with its core client base and the goodwill and good reputation it has with those clients. This it has to protect at all costs."