1) If a decision is made to insure works of art, it is wise to do this in consultation with a valuer, an Insurance Company or Broker, and a Professional Adviser, if appropriate.

2) Valuation of Fine Art

The Insurance Company normally stipulates that a written valuation containing descriptions and values is produced. A reputable valuer, who is acceptable to the insurers, should be approached and preliminary negotiations should cover the following areas:

1. The level of value, which may be the retail replacement value or a lower value reflecting the requirements of the owner.
   
   
2. The minimum threshold, below which the Insurer does not require a specific description and value.
   
   
3. The costs of the exercise, which would be determined in part by the above factors as well as by the size of the operations, the time-scale, and expenses involved.

3) Confidentiality

Many owners are reluctant to have a contents valuation for fear of this knowledge being misused. Certain Insurance Companies and Brokers do not require a valuation to be lodged with them, provided that the contents of that valuation have been agreed. In the event of a claim, the valuation will, of course, need to be referred to.

4) Types of Insurance Policy

The most common type of policy for ordinary household contents is a Comprehensive Household Policy. This covers everything in the home for specified risks, which are usually standard. If wider cover is required, an All Risks Policy may be more appropriate. Comprehensive policies do not usually include the risk of accidental damage on contents. Moveable items, such as jewellery, would normally require All Risk Cover as they may be removed from the house.

The insurance of works of art usually requires a specialised approach and a special policy can be written, both in terms of cover and cost. For example, an owner may wish:

1. Only to insure his furniture against fire, whilst his pictures are to have full cover.
2. To insure for an Agreed Value (see 7.2 below) on each work of art.
3. To insure on the First Loss basis (see 7.3 below).
4. To have an Excess on the policy (see 7.7 below).

All the above affects the level of premium and a combination of different elements enables sensible and adequate cover to be provided for a premium that meets a particular owner's budget.

5) The Insurance Company and the Insurance Broker

The majority of Insurance Companies offer a standard house policy which would include works of art. This may be suitable for the average small house, with perhaps only a few antiques and works of art. Where a reasonable proportion of an owner's contents are works of art, however, it is advisable to consult a Broker who specialises in Fine Art Insurance, as they will tend to be more flexible and are probably able to offer more competitive terms.

6) Capital Gains Tax (CGT) and Inheritance Tax (IHT)

For the purposes of CGT, the loss or destruction of an item is normally construed as a disposal and tax is payable on any insurance monies, unless they are reinvested in similar items within a reasonable period of time.

For the purposes of IHT, any insurance monies received should not be taxed, unless the item was previously granted conditional exemption and the loss or destruction was a breach of any undertaking given.

7) Explanation of Terms

Full Retail Replacement Value
7.1: This is the usual criterion used for insurance valuations, and is the cost price of replacing items from the retail market. For works of art, this is usually higher than the auction value because it takes into account the retailer's overheads and profit. This margin varies considerably according to the practice of the trade.

Agreed Value
7.2: The sum paid in respect of each work of art in the event of a total loss, irrespective of the true market value, which has been agreed in advance with the insurer. No average (see 7.4 below) applies to this type of arrangement. Obviously, a decision to insure at below market value gives savings in terms of premium.

First Loss
7.3: An owner may insure on a First Loss basis. This approach means taking the view that any loss or damage is unlikely to affect all the works of art in a collection, and so the owner agrees a limit to the underwriter's liability on any single claim to an agreed figure. This basis can apply to either a full replacement value policy or an agreed value policy. An example: if the works of art are valued at £500,000, and the value is not concentrated in one or two items but spread throughout the house, it may be considered unlikely that any damage would cause a claim greater than £100,000. The owner therefore negotiates on the basis of losses up to £100,000. This does mean that in the event of a catastrophe, whereby all works of art are lost, there will only be a payment of £100,000 for items worth £500,000. However, such an approach will reduce the premium.

Average
7.4: In the event of a claim, should the total value of the contents be more than the total sum insured, then the 'average' clause may be applied and any claim will be proportionately reduced.

Cost Price
7.5: This is the price at which items were bought. It is perhaps the most relevant with recently bought expensive items, where the cost is higher than re-sale or auction values. For these items, it is essential to be able to show receipts as proof of value.

Risk Management
7.6: This is the identification and evaluation of particular risks to items. This is particularly relevant for large or valuable collections where the premium on a standard policy could be very large. The principle is to insure items against the most likely risks, and exclude the more improbable. Most brokers and companies will consider this approach.

Excess
7.7: Given that a large number of claims are for comparatively small sums, an owner may be prepared to underwrite any small losses, while wanting to maintain full insurance against a catastrophe. It is possible to make savings in premium by this method.