BY REBECCA WOAN

This post is courtesy of Chicago-based Chartwell Insurance. Please visit www.chartwellins.com for more information about your art insurance needs. 

Art consignment can be generally described as a work of art being delivered by its owner —the consignor— to a specialist art vendor —the consignee— for the purpose of being sold at some time in the future. Vendors include art dealers and auction houses. Owners might prefer that the vendor actually purchases the work outright, but the consignment system provides owners with the professional services of the vendor, who should have an extensive client list of possible customers as well as a much better publicity and distribution system than owners could typically achieve unaided. Vendors usually do not charge owners for accepting works on consignment, making their money from a commission in the event of a sale.

Cautionary tales from consignment:

When it works as planned —and it typically does— consignment is a convenient way for owners of art works to have the works sold in an efficient and effective manner, and a low-cost method of providing art vendors with inventory. However, things can go horribly wrong. 

Art works can be sold by unscrupulous vendors without notifying the owner. When this is discovered the vendor may apologize profusely and remit the proceeds, but in the meantime has had access to those funds. Worse, the artwork may have been sold, the money spent, and the vendor is unable to pay the owner. This may constitute fraud and result in criminal prosecution, but that will be of little comfort to an owner who has lost both the art and the money.

The artwork can be lost, damaged or even destroyed while under consignment. When that happens, a close reading of the consignment agreement —hitherto probably ignored by the owner— might reveal that the vendor no responsibility or limited responsibility for insurance. To make matters worse, the owner’s insurance policy might (and probably will) exclude losses arising while the work is on consignment. 

Practical considerations for consignment:

• Art consignment is a common practice for the good reason that it benefits both parties to the agreement. However, artwork is frequently consigned and then ignored by the owners. Here are some basic considerations for owners contemplating consignment:

• Before consigning artwork a seller should determine the most appropriate venue for sale, whether it should be a gallery, a private dealer or an auction house. Art consultants can assist with this decision, and Chartwell Insurance Services would be pleased to provide a list of consultants, from whom Chartwell receives no payment.

• Consign with a reputable vendor. Find out if the dealer has any liens, lawsuits or pending judgments.

• Demand a strongly written consignment agreement which includes your right to sell, a description of the work, the term of the agreement (typically no more than one year, and preferably for six months) an agreed upon sales price, the agreed commission split, when and how payment is to be remitted, and when the seller is to be notified of a sale.

• Notify your insurer prior to the consignment.

• Arrange for an inspection of the art every six months to ensure that the artwork has not been sold or damaged. In some instances consignors learned of sales of their art works years after the sale. If an actual inspection is not practical consider a “face-time” call to view the art.

• Perfect your consignment rights by filing UCC (Uniform Commercial Code) financing statements. (A right is perfected by registering it with appropriate statutory authority so that it is made legally enforceable and any subsequent claim on that asset is given a junior status.) A UCC filing may not provide recourse when proceeds of a sale are not remitted but they will help prevent the seizure of artwork by creditors of a gallery. To protect privacy sellers may want to consider the use of an LLC when filing a UCC statement. The help of an attorney experienced in the art world is recommended.

• Explore whether there is a possibility of an escrow account for a sale. An escrow account helps ensure that valid payment has been made and immediately distributes the sales proceeds to a seller. This is not customary, but some banks may agree.

Chartwell Bulletins are produced by Chartwell Insurance Services an independent insurance broker specializing in the personal asset protection of high net worth individuals. Chartwell Bulletins address issues of general interest and since coverages vary by company and by state should not be taken as an interpretation of a particular policy or advice on any individual situation.

To discuss this issue or others related to insurance, please contact Rebecca Korach Woan: 312-645-1200 or rwoan@chartwellins.com