By Rebecca A. Buck

This article was published in Museum News July/August 2003.

This article is excerpted from On the Road Again: Developing and Managing Traveling Exhibitions, co-authored by Rebecca A. Buck and Jean Allman Gilmore and published by AAM in May 2003.

Insurance policies are shaped by time and place. The insurance market is global, and there is a finite amount of money invested in the world’s insurance pool. When disaster strikes, as it did on Sept. 11, 2001, profits go down, money becomes tight, rates go up, and insurers become more reluctant to take risks.

Like other businesses and the economy itself, the insurance industry moves in cycles. When premiums are high, the market is “hard,” and when rates are low, the market is “soft.” For much of the 1990s, the insurance market was soft and there was an abundance of money available to cover risks. Brokers offered low rates, rewards, and incentives to customers shopping for the best insurance products. In policies covering museum collections, foreign and domestic transit coverage often was offered without additional premiums, coverage was available for deductibles incurred in the indemnification process, and prices in general were low. The museum field’s solid track record of documenting and protecting its collections and keeping losses to a minimum made the prospect of insuring collections attractive.

Fine arts (collections) policies, which grew from the “inland marine” policies used to cover goods shipped on boats, have several standard exclusions. They do not cover wear and tear, gradual deterioration, vermin, inherent vice (a problem in the workmanship or materials of an object that can lead to damage), shipments by mail or “on deck”; they do not cover war, insurrection, rebellion, revolution, civil war, usurped power, governmental action against such events, or nuclear incidents and accidents. Since terrorism was not on the standard list of exclusions in most U.S. fine arts policies, it was covered by most insurance policies on Sept. 11, 2001.

In Europe, where terrorism has been more prevalent in recent decades, many countries have developed terrorism insurance pools, a form of state indemnification. Before the Sept. 11 attacks, terrorism loss had never been a major factor in the United States. In fact, most American insurance companies considered terrorism coverage a good investment because for so long a terrorist attack on U.S. soil seemed unlikely. Then on Sept. 11, 2001, in addition to the devastating losses of life and property, more than $100 million in public art was lost in the World Trade Center and the Pentagon. Furthermore, several artist’s studios were lost in New York, as well countless works in corporate and private collections.

The soft insurance market, already weakened by the stock market’s decline throughout 2001, came to an end in the wake of the Sept. 11 tragedy and the economic difficulties that followed. In addition, the tragedy and its aftermath almost ended terrorism coverage. The total pay out for the Sept. 11 loss was estimated at $60-70 billion. Although artworks represented a minor part of that loss, AXA Art Insurance Company alone paid out $17.2 million for losses in three corporate collections.¹ The pool of money for insurance coverage against acts of terrorism dried up shortly after the attacks.

The impact on museums was immediate. The Newark Museum, for example, had been expecting a large shipment of artworks from the Netherlands, accompanied by several couriers, on Sept. 12, 2001. The shipment was part of the exhibition “Art and Home: Dutch Interiors in the Age of Rembrandt,” developed in partnership with the Denver Art Museum and scheduled to open on Sept. 25. After the attacks, the opening was delayed for several weeks, and works arrived slowly as airlines resumed schedules and couriers regained the courage to travel. Several Dutch lenders decided not to accept the original insurance coverage; they formed a consortium and bought their own policy. Even though both the original and the new policies covered terrorism, the lenders felt more comfortable with their own policy. The exhibition eventually opened, missing only two works, one from England and one from Russia.

In the months following the attacks, some museums found that their coverage for terrorism on-site had been dropped from their policies in mid-cycle.² Others received a “terrorism-exclusion endorsement” when their policies were up for renewal. The endorsement made it clear that terrorism was no longer automatically covered, usually in language similar to the following:

Notwithstanding any provision to the contrary within this insurance or any endorsement thereto it is agreed that this insurance excludes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any act of terrorism regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

The scant amount of terrorism coverage that could be found, if any, was at exorbitant rates. Even the rates of policies without terrorism insurance rose dramatically or even doubled. Museums with long-term policies fared best.

The great fear among museums was that loans vital to exhibitions might be denied. To counter this, the Association of Art Museum Directors (AAMD) took early action for its approximately 200 members. On Feb. 9, 2002, AAMD passed the following motion: “Be it resolved that no museum in the Association of Art Museum Directors will require any other AAMD member museum to procure terrorism insurance for the loan of any single works or for exhibitions in their entirety.” According to the AAMD, after a discussion, “it was agreed that the cost of this new insurance requirement has, since Sept. 11, become prohibitive, and if required of museums, would effectively prevent the staging of major exhibitions. While a real risk of terrorist attacks on art museums may exist, the committee members felt that the risk was exaggerated in the immediate aftermath of the attack on the World Trade Center last September, and that current rates were therefore excessive.”³

While this eased the immediate problem for loans between AAMD members originating in the United States, it did not address the larger issues. Terrorism insurance was needed for all types of museum loans, as well as other property, at less than prohibitive rates, and the most logical way to support that was through government action. A major lobbying consortium was formed, and AAM also lobbied for legislative help.

The resulting Coalition to Insure Against Terrorism (or CIAT) represents a wide range of businesses and associations, from AAMD to the American Bankers Association to the National Football League to the Hilton Hotels Corporation. It lobbied the federal government to pass what came to be known as the Terrorism Risk Insurance Act of 2002 (TRIA), signed into law by President George W. Bush on Nov. 26, 2002. As the act states, Congress found that “the ability of businesses and individuals to obtain property and casualty insurance at reasonable and predictable prices, in order to spread the risk of both routine and catastrophic loss, is critical to economic growth, urban development, and the construction and maintenance of public and private housing, as well as the promotion of United States exports and foreign trade in an increasingly interconnected world.”

TRIA gives the secretary of the treasury, in concurrence with the secretary of state and the attorney general, the power to certify acts of terrorism and to initiate partial insurance coverage by the U.S. government for damage caused by those acts. Terrorist acts certified for coverage must cause at least $5 million in damage and loss, and they may be covered up to $100 billion dollars. To qualify, an event must be certified by the secretary of the treasury:

It is important to note that TRIA does not cover acts of domestic terrorism or terrorist activities overseas unless they target a U.S. embassy, base, or mission. It does not cover any act that hasn’t been certified by the treasury secretary. TRIA sets up a system that combines public and private funds to insure against loss from terrorism. There is a formula for determining how much coverage will be public, i.e., from the federal government, and how much will be private, i.e., from insurance clients, charged through a “policy surcharge for terrorism loss. . . .” The formula will change slightly each year through 2005, when the act either will terminate or be renewed. The U.S. government pays 90 percent of terrorism losses minus an established deductible. This deductible is based on a percentage of an insurance company’s direct and earned premiums for the preceding calendar year (7 percent in 2003, 10 percent in 2004, and 15 percent in 2005). Therefore, the larger the insurance company, the higher the deductible and the greater its share of risk, which could translate into higher terrorism premiums.

Insurers must notify their clients that they have the right to purchase coverage against acts of terrorism. Insurance policies now are being written in compliance with TRIA. Clients are asked to sign rejections if they do not wish to include terrorism coverage in their policies. It is advisable to establish a good relationship with your broker and read your policies very carefully. Some policies covering “terrorism” do not, in fact, cover all aspects of an act of terror. In other cases, state laws may supercede the insurer’s ability to restrict coverage. In New York, for example, it is illegal to restrict fire coverage regardless of cause; thus, although you may not have terrorism coverage, you may be covered for fires started by terrorist acts.

What does the Terrorism Risk Insurance Act of 2002 actually mean for museums? Let's look  at a couple of examples. A fine arts policy for $75,000,000 has a premium of approximately $56,000. To cover acts of terrorism, as defined under TRIA, the museum would be charged an additional $112,000 (at 2003 rates). A $50-million dollar exhibit, first estimated for an $80,000 premium, now costs $239,000. In practical terms, this means that coverage for terrorism may now be available, but that it is beyond the budgets of most museums and might, in fact, make many loans and exhibitions impossible to cover. The situation is extremely fluid; it is likely to change many times before it settles.

The AAMD motion was the first step of the most proactive action museums can take concerning terrorism insurance. If museums do not require terrorism insurance for their own loans, they can ask that museums lending to them not require it either. Whether this action can extend to the international community is questionable, but it is a point for negotiation. It could make a major difference in the way museums do business in the future.

Many current exhibitions have been in the works for years. As new projects get underway, time will tell whether collegiality and reciprocity between museums and the lure of excitement for private collectors will allow institutions to continue their programs with little disruption. Those museums that do not depend on large numbers of international loans will suffer less than those that do, and museums in major urban areas, especially those cities that have been targeted by terrorists in the past, will face the greatest problems. Risk for the relatively small world of exhibitions is probably exaggerated, but coverage for that risk is tied to the greater market and as such will not be readily available until the entire insurance market stabilizes. The face of major loan and traveling exhibitions may change drastically in the next few years.

References

1. Dietrich von Frank, President and CEO of AXA Art Insurance Company, speaking at the International Foundation for Art Research Symposium on the Art Lost on Sept. 11, 2001 (in February 2002), said: “I have been asked many times how much art was destroyed on Sept. 11 in total, and I have always said, ‘I don’t know!’ We still don’t know, and we probably will never know unless accurate record keeping of all perished pieces exits, which I very much doubt. AXA Art’s three clients kept accurate records, and checks to the insured will go out soon.”

2. Some reinsurers are continuing terrorism coverage for transit. Check your renewal carefully, as wording for transit is sometimes very confusing. You may find that a “termination of transit clause” takes away and then later gives back transit coverage.

3. AAMD Press Release, Feb. 9,2002.

Rebecca A. Buck is chief registrar, The Newark Museum, Newark, N.J.