Open Forum

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

I am a certified and USPAP qualified fine art appraiser.  I use Retail Value when I am doing insurance appraisals.  Retail Value and Fair Market Value can be different numbers.  Retail Value is the current gallery price for replacing your artwork. It is generally a higher price than Fair Market Value which is the price a willing buyer pays a willing seller if neither are forced to act. Retail Value is used as replacement value in insurance appraisals. Fair Market Value is used to determine the price an artwork is most likely to sell for, according to USPAP and the American Association of Appraisers.

------------------------------
Martha Henry
------------------------------

Original Message:
Sent: 05-24-2018 04:46 PM
From: Jonathan Piper
Subject: Seeking advice on insurance valuation

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

Hmmm?  Always an issue.  On one hand, the value of the instrument is much greater than the lender paid.  On the other hand, you are providing safe, climate controlled "storage" for this person's property.  Long term loans are never a good idea with collectables, because as soon as the lender needs money or dies and the heirs want money, it is out the door with no thanks for your having cared for it.  Just my two cents worth.  Although, I think the value of my opinion has increased in recent years, so maybe that is my four cents worth!

------------------------------
David Beard
Executive Director
USS KIDD Veterans Memorial Museum
Baton Rouge LA
------------------------------

Original Message:
Sent: 05-24-2018 04:46 PM
From: Jonathan Piper
Subject: Seeking advice on insurance valuation

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

I agree with David Beard's points regarding borrowed items. It is not unusual for items on long-term loan to cause problems eventually, regarding terms and conditions of the loan. Although it may not preclude such difficulties as raised insurance values or "heir raids", renewing the loan annually can at least help the borrower to keep a proper perspective on borrowed items.

I may have offered this point before on the Forum, but there is a golden rule regarding lending and borrowing: the one with the gold makes the rules. In other words, the lender has great power in the transaction, regarding such things as security, environment, display, and insurance value, to name but a few. While such conditions of the loan are often neither difficult nor contentious, they certainly can be. Negotiation can be critical to the success of the loan, but the borrower may have to simply deal with the tough conditions if the borrowed item is essential for its intended use. The borrower should never be in the position of establishing or even questioning the lender's stated insurance  value for an object; it can easily be seen as  a conflict of interest. Similarly, suggesting an appraiser to a lender is unwise, though if the borrower can offer a list of at least three good consultants, then the appearance of conflict of interest is greatly reduced, if not eliminated.

I once had to deal with a lender who valued a small group of paintings at about four times the market value -- it was immaterial how the value was established, because we had to either accept it or abandon the request for the art works, but I think the individual came up with the figure without professional assistance. Our staff knew that in the event of a claim on the insurance, the insurer would pay only the market value as researched by its own experts. That would have been entertaining, but it never happened. What did happen is that we agreed to insurance at the stated value. The cost to us was minimal, partly because the items were not great masterpieces, and they were in our hands and on exhibit for just a few months. 

As I have experienced it numerous times, lenders' requirements such as special display cases, specialized transport, and slightly (or extravagantly) elevated insurance values comprise the cost of borrowing some items. If the borrower sees any loan conditions as unreasonable, sometimes the best thing to do is to politely decline the transaction.

------------------------------
Bruce MacLeish
Curator Emeritus, Newport Restoration Foundation
Cooperstown NY
------------------------------

Original Message:
Sent: 05-25-2018 11:03 AM
From: David Beard
Subject: Seeking advice on insurance valuation

Hmmm?  Always an issue.  On one hand, the value of the instrument is much greater than the lender paid.  On the other hand, you are providing safe, climate controlled "storage" for this person's property.  Long term loans are never a good idea with collectables, because as soon as the lender needs money or dies and the heirs want money, it is out the door with no thanks for your having cared for it.  Just my two cents worth.  Although, I think the value of my opinion has increased in recent years, so maybe that is my four cents worth!

------------------------------
David Beard
Executive Director
USS KIDD Veterans Memorial Museum
Baton Rouge LA

Original Message:
Sent: 05-24-2018 04:46 PM
From: Jonathan Piper
Subject: Seeking advice on insurance valuation

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

In general, lenders assign  insurance values for their objects.   In cases where lenders have declined to set a value I usually have them specifically sign off on either "no value" set for the object (in which case there will be no insurance coverage) or agree to a value stipulated by my (borrowing) institution.  It is very common for lenders to re-assess the value of loaned objects if those loans continue for any period of time.   Unless you think the lender's valuation is wildly out of line with what the object is really worth, there seems to me to be no reason to do anything but accept the new value and increase the insurance coverage accordingly.

However...
An important rule to follow is that the insurance clause in your loan agreement should match your insurance coverage.

Fine arts insurance coverage is generally set either for "value at time of loss" or a "scheduled" value.   Value at time of loss is used primarily for large groups of objects over a long period of time (like an entire museum collection)  for which setting individual values would be both overwhelmingly time-consuming and require regular updates (again, time-consuming).  Loans most commonly use scheduled values, where a rider is added to the borrowing museum's fine arts insurance coverage for a set amount for a set period of time.    As Bruce indicated, the cost of these insurance riders for loans is fairly inexpensive.

If you are covering the value of the loaned object under your general policy that sets the value at time of loss, rather than a scheduled value, then you may be liable should there be a loss and your insurer determines that the value at the time of loss is less than the insured value.  Your institution will be responsible for paying the lender the difference.   Thus, the general principle that  loans should be insured using riders with specifically scheduled values and time periods (these can be extended as a loan is extended).


------------------------------
Janice Klein
Executive Director
Museum Association of Arizona
Tempe AZ
------------------------------

Original Message:
Sent: 05-28-2018 01:44 PM
From: Bruce MacLeish
Subject: Seeking advice on insurance valuation

I agree with David Beard's points regarding borrowed items. It is not unusual for items on long-term loan to cause problems eventually, regarding terms and conditions of the loan. Although it may not preclude such difficulties as raised insurance values or "heir raids", renewing the loan annually can at least help the borrower to keep a proper perspective on borrowed items.

I may have offered this point before on the Forum, but there is a golden rule regarding lending and borrowing: the one with the gold makes the rules. In other words, the lender has great power in the transaction, regarding such things as security, environment, display, and insurance value, to name but a few. While such conditions of the loan are often neither difficult nor contentious, they certainly can be. Negotiation can be critical to the success of the loan, but the borrower may have to simply deal with the tough conditions if the borrowed item is essential for its intended use. The borrower should never be in the position of establishing or even questioning the lender's stated insurance  value for an object; it can easily be seen as  a conflict of interest. Similarly, suggesting an appraiser to a lender is unwise, though if the borrower can offer a list of at least three good consultants, then the appearance of conflict of interest is greatly reduced, if not eliminated.

I once had to deal with a lender who valued a small group of paintings at about four times the market value -- it was immaterial how the value was established, because we had to either accept it or abandon the request for the art works, but I think the individual came up with the figure without professional assistance. Our staff knew that in the event of a claim on the insurance, the insurer would pay only the market value as researched by its own experts. That would have been entertaining, but it never happened. What did happen is that we agreed to insurance at the stated value. The cost to us was minimal, partly because the items were not great masterpieces, and they were in our hands and on exhibit for just a few months.

As I have experienced it numerous times, lenders' requirements such as special display cases, specialized transport, and slightly (or extravagantly) elevated insurance values comprise the cost of borrowing some items. If the borrower sees any loan conditions as unreasonable, sometimes the best thing to do is to politely decline the transaction.

------------------------------
Bruce MacLeish
Curator Emeritus, Newport Restoration Foundation
Cooperstown NY

Original Message:
Sent: 05-25-2018 11:03 AM
From: David Beard
Subject: Seeking advice on insurance valuation

Hmmm?  Always an issue.  On one hand, the value of the instrument is much greater than the lender paid.  On the other hand, you are providing safe, climate controlled "storage" for this person's property.  Long term loans are never a good idea with collectables, because as soon as the lender needs money or dies and the heirs want money, it is out the door with no thanks for your having cared for it.  Just my two cents worth.  Although, I think the value of my opinion has increased in recent years, so maybe that is my four cents worth!

------------------------------
David Beard
Executive Director
USS KIDD Veterans Memorial Museum
Baton Rouge LA

Original Message:
Sent: 05-24-2018 04:46 PM
From: Jonathan Piper
Subject: Seeking advice on insurance valuation

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

Thanks, everyone, for the input. This is all very helpful and clarifies our next steps. Much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------

Original Message:
Sent: 05-28-2018 06:27 PM
From: Janice Klein
Subject: Seeking advice on insurance valuation

In general, lenders assign  insurance values for their objects.   In cases where lenders have declined to set a value I usually have them specifically sign off on either "no value" set for the object (in which case there will be no insurance coverage) or agree to a value stipulated by my (borrowing) institution.  It is very common for lenders to re-assess the value of loaned objects if those loans continue for any period of time.   Unless you think the lender's valuation is wildly out of line with what the object is really worth, there seems to me to be no reason to do anything but accept the new value and increase the insurance coverage accordingly.

However...
An important rule to follow is that the insurance clause in your loan agreement should match your insurance coverage.

Fine arts insurance coverage is generally set either for "value at time of loss" or a "scheduled" value.   Value at time of loss is used primarily for large groups of objects over a long period of time (like an entire museum collection)  for which setting individual values would be both overwhelmingly time-consuming and require regular updates (again, time-consuming).  Loans most commonly use scheduled values, where a rider is added to the borrowing museum's fine arts insurance coverage for a set amount for a set period of time.    As Bruce indicated, the cost of these insurance riders for loans is fairly inexpensive.

If you are covering the value of the loaned object under your general policy that sets the value at time of loss, rather than a scheduled value, then you may be liable should there be a loss and your insurer determines that the value at the time of loss is less than the insured value.  Your institution will be responsible for paying the lender the difference.   Thus, the general principle that  loans should be insured using riders with specifically scheduled values and time periods (these can be extended as a loan is extended).


------------------------------
Janice Klein
Executive Director
Museum Association of Arizona
Tempe AZ

Original Message:
Sent: 05-28-2018 01:44 PM
From: Bruce MacLeish
Subject: Seeking advice on insurance valuation

I agree with David Beard's points regarding borrowed items. It is not unusual for items on long-term loan to cause problems eventually, regarding terms and conditions of the loan. Although it may not preclude such difficulties as raised insurance values or "heir raids", renewing the loan annually can at least help the borrower to keep a proper perspective on borrowed items.

I may have offered this point before on the Forum, but there is a golden rule regarding lending and borrowing: the one with the gold makes the rules. In other words, the lender has great power in the transaction, regarding such things as security, environment, display, and insurance value, to name but a few. While such conditions of the loan are often neither difficult nor contentious, they certainly can be. Negotiation can be critical to the success of the loan, but the borrower may have to simply deal with the tough conditions if the borrowed item is essential for its intended use. The borrower should never be in the position of establishing or even questioning the lender's stated insurance  value for an object; it can easily be seen as  a conflict of interest. Similarly, suggesting an appraiser to a lender is unwise, though if the borrower can offer a list of at least three good consultants, then the appearance of conflict of interest is greatly reduced, if not eliminated.

I once had to deal with a lender who valued a small group of paintings at about four times the market value -- it was immaterial how the value was established, because we had to either accept it or abandon the request for the art works, but I think the individual came up with the figure without professional assistance. Our staff knew that in the event of a claim on the insurance, the insurer would pay only the market value as researched by its own experts. That would have been entertaining, but it never happened. What did happen is that we agreed to insurance at the stated value. The cost to us was minimal, partly because the items were not great masterpieces, and they were in our hands and on exhibit for just a few months.

As I have experienced it numerous times, lenders' requirements such as special display cases, specialized transport, and slightly (or extravagantly) elevated insurance values comprise the cost of borrowing some items. If the borrower sees any loan conditions as unreasonable, sometimes the best thing to do is to politely decline the transaction.

------------------------------
Bruce MacLeish
Curator Emeritus, Newport Restoration Foundation
Cooperstown NY

Original Message:
Sent: 05-25-2018 11:03 AM
From: David Beard
Subject: Seeking advice on insurance valuation

Hmmm?  Always an issue.  On one hand, the value of the instrument is much greater than the lender paid.  On the other hand, you are providing safe, climate controlled "storage" for this person's property.  Long term loans are never a good idea with collectables, because as soon as the lender needs money or dies and the heirs want money, it is out the door with no thanks for your having cared for it.  Just my two cents worth.  Although, I think the value of my opinion has increased in recent years, so maybe that is my four cents worth!

------------------------------
David Beard
Executive Director
USS KIDD Veterans Memorial Museum
Baton Rouge LA

Original Message:
Sent: 05-24-2018 04:46 PM
From: Jonathan Piper
Subject: Seeking advice on insurance valuation

Hi all,

We find ourselves in a bit of an interesting situation. I'm trying to renew a loan for what is effectively a unique musical instrument, one of approximately 25 custom pieces made by a specific manufacturer. The lender has asked that we adjust the insured value of the instrument, on the basis that a small number of these 25 pieces have recently sold at auction for prices well above the current insured value (and far above any adjustment for inflation), which was set about 2005 when we first received the instrument.

The trouble that we're having is that the extremely small number of auction sales makes a reasonable market value very hard to determine. That's in addition to the fact that the instrument really is a one-of-a-kind, irreplaceable piece. The lender, though, has suggested that they might not renew the loan without a significant change in the insured value. Has anyone else faced a similar situation? Is a professional appraisal the best or even only real next step at this point? Is the museum obligated to provide the appraisal, or does that really come down to how insistent the lender is on having the valuation before renewing? It's perhaps worth noting that it'll be nearly impossible to locate a knowledgeable third-party who isn't in some way connected to the lender, as the owners of these pieces have tended to participate in communal activities.

Any advice would be very much appreciated!

------------------------------
Jonathan Piper PhD
Manager of Museum Collections and Exhibitions
Museum of Making Music
Carlsbad CA
------------------------------