Remember when some Beanie Babies were fetching nearly $1 million a pop? Then they fizzled, and most are now selling for a quarter at yard sales.
Still, experts caution collectors not to ditch their seeming has-beens, as events or TV shows can propel items back into the limelight. CBS’ Big Bang Theory made comic book collecting cool again, and Star Wars memorabilia surged after Disney bought Lucasfilm last year.
Specialty insurance exists for many types of collections, backed by differing methods of authentication or “agreed value” coverage. Experts advise collectors on how to best protect items, when to restore damaged items — and when to just cut their losses.
And for those who have inherited a house full of knickknacks from their grandmother, experts recommend local experts over estate sales to spot — and sell — newly hot items.
Today’s valuables include vinyl records, rare books and pre- and post-WWII gun collections, said Orlando Morales, underwriting manager at American Collectors Insurance in Cherry Hill, N.J. Figurines, stamps, coins and sports memorabilia never go out of style.
The next hot items could be vintage Atari 2600, Nintendo and Sega consoles, but collectors should also hold on to their Christmas ornaments, Longaberger baskets and other faded items, Morales said.
“All you need is for media to put a spotlight on it or one gets sold in an auction house for a ton of money, and boom, it becomes a hot item,” he said.
American Collectors has a collectibles policy for many items, including Barbie dolls, G.I. Joe and Star Wars action figures, Coca-Cola advertising memorabilia and collector quilts. Rates range from $4 per $1,000 for some collections such as books and stamps, to $7.50 per $1,000 on fragile items like Hummel dolls and porcelain. The minimum annual policy premium is $65.
The insurer doesn’t require appraisals or certificates of authenticity to secure coverage on most items, but the company might require a bill of sale for higher-end items. Upfront underwriting is really the key to protecting against fraud.
“We’ve been doing this for a long time, so we know the telltale signs of possible fraud, such as overvalued collections, applicants who are new to the hobby, or the lack of any documentation,” Morales said. “Fortunately, this particular product performs very well from a loss standpoint, and we don’t see a lot of fraud.”
American Collectors recommends that collectors inventory and photograph items, and store those documents offsite in a bank vault or a relative’s house, to be accessed in the event of a loss.
The Operation Bullpen sting operation in 1999 by the Federal Bureau of Investigation and the Internal Revenue Service seized over $500,000 in cash and roughly $10 million in forged memorabilia, from 60 individuals and businesses across five states.
Baseball memorabilia is especially hot, said Keith McConnell, vice president, business development at MiniCo Insurance Agency LLC in Phoenix.
A Honus Wagner baseball card, for example, sold for $2.3 million and Mark McGwire’s 70th home run ball sold for $3 million.
MiniCo offers annual blanket coverage starting at $75 for a no-deductible, all-risk policy that also covers losses during transportation, accidental breakage and “mysterious disappearances,” McConnell said.
If there is a claim, the insurer works with the collector to determine the current value, typically relying on appraisers or purchase receipts. However, for older or unappraised collections, MiniCo may research recent transaction prices on the secondary market for similar items.
McConnell recommends appraisals for higher-priced items every three to five years, “as sometimes items such as fine art can double or triple in value within a year.”
Collectors should minimize handling of their items, as just touching with bare hands can lower their value, he said.
Put pictures or cards in hermetically sealed protective plastic cases to avoid creasing or wrinkling, and use tinted glass for display cases to keep direct sunlight from damaging items.
Storage room temperatures should not be too hot, cold or damp. Some collectors have alarms that indicate temperature changes.
Kenny Davis, co-owner of Worthridge Inc., an online auction and retail company in Kernersville, N.C., said that his company works with “well-respected companies” to authenticate sports memorabilia, as forgeries are on the rise — even after the 1999 Operation Bullpen sting operation by the Federal Bureau of Investigation and the Internal Revenue Service, which seized over $500,000 in cash and roughly $10 million in forged memorabilia, from 60 individuals and businesses across five states.
Worthridge hosted its first sports memorabilia online auction this summer. The offerings included San Antonio Spurs NBA Championship rings from 1999 and 2003, an unused ticket from Babe Ruth’s first World Series in 1915 and an oversized boxing glove signed by Muhammad Ali.
Some jewelry and stamp collections have appreciated more than 100 percent in the last several years, said Julie Sherlock, fine arts practice leader at ACE Private Risk Services in New York City. Certain genres of art, such as Chinese, Eastern and contemporary art, have significantly appreciated, and in those cases collectors should reappraise even more frequently, “as records are being broken in auction houses.”
Such appreciation might catch collectors off guard. ACE recently conducted research that found many wealthy homeowners are under-insured for their personal property by an average of $415,000. The carrier reported that wealthy individuals tend to have a “blind spot” in managing their valuable collections.
ACE will schedule items for full cover in an “all perils policy” that does not have a deductible, and also has blanket coverage, Sherlock said. The insurer provides coverage for market value appreciation, and will pay the market value of an item just prior to loss up to 150 percent of the scheduled amount. ACE also provides coverage for similar items that have been newly acquired but not yet scheduled.
The insurer also offers risk management consulting, and recommends that artwork not be placed over fireplaces close to soot, smoke and other damaging debris, she said.
Mid-century furniture is especially hot right now, said Laura Murphy, eastern territory fine art and collectibles specialist at Chubb Personal Insurance in New York City. Sofas or chairs bought for $1,000 in the 1950s might be selling for more than $100,000 today, if they are true design pieces by a mid-century modern designer, such as Arne Jacobsen or George Nakashima.
“A lot of museums are also now collecting mid-century design, which really validates these pieces as artwork,” Murphy said.
Chubb provides valuable articles coverage with agreed value, but the insurer requires appraisals for fine and decorative art items valued over $250,000 and for jewelry valued over $100,000,
For certain items, such as jewelry with three or more carats of diamonds, appraisals may be needed every two to three years to keep up with market fluctuations, she said. For many collections such as stamps, wine or porcelain, Chubb offers blanket coverage.
Rick Drewry, collector car claims specialist at American Modern Insurance Group in Cincinnati, said his unit specializes in insuring collector cars and motorcycles, especially those made before the 1980s.
Some car values are exploding: an early 1970s Camaro Z28 that sold for $5,000 or $10,000 a decade ago, might be selling for more than $50,000 now.
Video: The original Batmobile from the 1960s TV show sold for $4.62 million in January 2013.
“We have weekend warriors who have one or two cars, mainly for fun, and many of their cars are not that high in value because of their condition or because they lack originality,” Drewry said. “Then we have investors who are collecting and maintaining cars as an investment. In fact, a lot of people started investing in cars when the stock market crashed.”
American Modern gives discounts for collections valued at over $250,000, as well as mileage discounts for driving less than 3,000 miles a year, and a larger discount for driving less than 1,000 miles.
When acquiring a collector vehicle, buyers should document that the car is either in its original state or has been restored back to its original specs, he said. Some older cars have build sheets under the rear seat that list the options that came with the car when it was built.
American Modern provides agreed value coverage, and when claims arise, determines book value using numerous sources, including auction houses and private sales. “Having the original engine, transmission and rear end, and having documentation like the build sheet makes a car a lot more valuable,” Drewry said. “If a person doesn’t have the original drivetrain, then that’s probably a 40- percent hit.”
The insurer recommends climate-controlled garages and for vehicles to be driven periodically.
If collections are damaged, insurers may pay third parties to restore items at a lesser value, said Tracy Bachtell, senior vice president, business development at Paul Davis Restoration Inc. in Jacksonville, Fla. Policyholders either keep the restored items and receive a check making up for the lesser value, or insurers pay them full value and then take ownership of the items for salvage. For items that may not be restorable, such as baseball cards recovered from a flood, insurers typically pay policyholders full value and salvage the items.
“The challenge to the property owner is proving what they had and their condition as the time of loss,” Bachtell said. “Appraisals, photographs, purchase receipts and videos are always a good idea.”
Terry Kovel of Kovels.com, a publisher of collection price guides and other collector information, said that people who inherit older furnishings may want to think twice about having an estate sale. They might have a hot item like mid- century furniture on their hands and not know it.
Other household items that are trendy include Hot Wheels and reverse-painted glass advertising signs, as the average sign is currently fetching $3,000 to $4,000.
“It’s better to get an expert who knows about specific items to advise on the value or sell themselves,” she said. “Find a local dealer who has been in business for a long time, rather than someone who sets up a show in a hotel, so you can find them six months later if there is a problem.”
Top Five Uninsurable Risks
Whether it’s a Sriracha hot sauce maker being threatened with closure by city council or General Motors fighting for its reputation after recalling more cars than it made in the past three years, companies face a world of complex risks.
And some of those risks cannot be transferred via insurance products.
How well are companies protected, for example, when new regulations get passed — such as the EPA’s proposed restrictions on coal burning plants that may drive some in the energy industry out of business, or the current political drumbeat against tax inversion practices?
What insurance covers a company whose rogue employee sells trade secrets to an outside company? How about when a pandemic shuts down operations?
Risk managers identify their organizational exposures as best they can and then work to manage or eliminate those risks. Sometimes, commercial insurance can be used to remove the bulk of that risk, but we’ve isolated five risks which many experts believe are uninsurable in many respects: For the time being anyway.
“For the most part, the insurance industry rises to the occasion and creates products for emerging risks that evolve over time,” said Carol Laufer, executive vice president, ACE Excess Casualty.
“For insureds, the purchase of products such as employment practices and cyber insurance eventually evolves from a discretionary spend to standard insurance coverage,” she said.
For sure there are other challenging risks — such as weak economic conditions or skilled talent shortages — that also are uninsurable, but we have selected those for which risk managers are able to play an effective role in mitigating the risk.
Part of the problem in transferring such risks is the complexity involved in the exposures. Look at tax inversion — where a U.S. company merges with a foreign company to change their tax jurisdiction and lower their tax burden.
Is that a political risk? A regulatory risk? A reputational risk? It could be any one of them, or all three of them.
“I think it’s almost uncountable the ways that a loss could occur where that loss could be tied back to reputational risk or regulatory risk,” said David White, a national actuarial leader at KPMG.
At the same time, calling a risk uninsurable has nuances to it. Coverage for criminal fines and penalties, for example, are truly uninsurable. The law forbids such coverage, said Patrick Donnelly, chief broking officer, Aon Risk Solutions.
But for other types of risks, there may be various products offered by brokers and underwriters to address some, but not all of the specific exposures faced by a company, he said. Such coverage, however, may be rare or expensive, or corporations may find risk transfer to be an ineffective way of hedging the risk.
“I’m very careful about branding something as truly uninsurable,” Donnelly said.
“It’s not black and white.”
General Motors might be the quintessential example of a company undergoing a reputational hit. It recalled nearly 30 million cars, and faces numerous lawsuits and investigations related to a delayed recall of 2.6 million cars — some manufactured more than a decade ago — with a faulty ignition switch that has been linked to 13 deaths and more than 50 accidents.
Video: As this report from the New York Times indicates, automakers have a long history of trying to maintain their reputations in the face of major recalls.
But every day brings another contender for the throne. One day, it’s American Apparel’s founder being suspended, and possibly eventually fired, for alleged sexual misconduct. Another day, it’s a viral video of a Comcast customer service representative who refuses to let a customer cancel his account.
Or it could be yet another cyber theft of customer information or a celebrity spokesman tweeting out an offensive comment.
While there are insurance products that provide coverage for crisis management/public relations costs and product recall expenses, only a limited market exists for loss of income or net profit for reputational harm, said Emily Freeman, global technology and privacy practice specialist at Lockton.
“You need to be able to wrap your arms around the risk and the value of risk before you can insure it,” said Tom Srail, senior vice president, Willis. “What a company name is worth has long been a risk to the industry.”
Freeman said Lockton has been involved in creating customized solutions for large clients that address specific threats of reputational harm. The client and underwriter negotiate the period of indemnity and loss adjustment, she said.
“The perils are not on an ‘all risk’ basis, but rather categories listed that are relevant to the client, such as disgrace of key persons or breach of sensitive data,” Freeman said.
“In my mind,” said KPMG’s White, “you can’t find policies that cover all types of reputational risk from whatever event that occurred.”
When you think of regulatory risk, many risk managers keep an eye on the rules of the Health Information Portability and Accountability Act (HIPAA), the Dodd-Frank Act or a regulatory agency such as the Food & Drug Administration.
But the threat of regulation is immense and often unpredictable. In just one year, 2012, there were 17,763 changes to laws, rules and regulations affecting the banking and financial sectors alone, according to The Network, a training and compliance company.
“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them.” — David White, national actuarial leader, KPMG
Plus, risks can emanate from all sectors of government. One recent example is Huy Fong Foods, the manufacturer of Sriracha hot sauce, which was temporarily shut down by a judge following a lawsuit by the city council of Irwindale, Calif., after four families (one of which was related to a city councilman) complained about odors.
Eventually, the city dropped its lawsuit and its declaration that the factory was a “public nuisance,” but it took months for the situation to resolve itself.
“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them,” White said. “Regulatory risk is handled through risk mitigation, not risk transfer.”
“Even in the United States,” Srail said, “a government or state can put an industry or a company, if they want to, out of business or severely restrict their ability to operate.”
Certainly, the energy industry has been facing that threat since 2008 when President Obama noted that coal-powered plants can still be built, but at a steep regulatory cost.
“It’s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted,” Obama said.
While a final rule has not yet been issued by the Environmental Protection Agency, the president has recently called on it to enact new emissions regulations. The U.S. Chamber of Commerce estimated the regulations will cost the economy about $50 billion annually.
“There are some creative products underwriters have tried over the years … but there is definitely nothing off the shelf or run of the mill,” Srail said of regulatory risk.
“There’s nothing easy to do.”
Trade Secret Risk
“I find trade secrets to be one of the most dangerous areas,” said attorney Rudy Telscher, a partner at Harness Dickey & Pierce, who recently won a patent infringement case at the U.S. Supreme Court.
“There are no boundaries. It’s such a nebulous area.”
It can include anything from a disgruntled employee taking customer lists or R&D information to his next job, a foreign government stealing trade secrets or a hacker burrowing into a computer system to steal a company’s version of its special sauce.
Globalization and the expanded use of supply chain partners increase the potential exposure. Plus, even when a company is able to pursue trade secret litigation, courts consider whether reasonable precautions had been taken to secure the proprietary information.
“The violation,” said Bob Fletcher, president, Intellectual Property Insurance Services Corp., which offers insurance to litigate intellectual property cases, “is not the use [of a trade secret]. The violation is, ‘How did you get the information?’ ”
In any event, said Aon’s Donnelly, “an organization would have a very difficult time obtaining an insurance policy that adequately protects them against the theft or wrongful disclosure of their trade secrets and the potential damage that could do to the company if that trade secret got out.”
More common than industrial espionage, however, are the run-of-the-mill business discussions that revolve around synergies and potential partnerships between enterprises. Often, the nondisclosure agreements (NDAs) covering such discussions are not specific enough to protect the parties, Telscher said.
It is the party receiving the information that is most at risk, he said. If the discussions dissolve, that party may find itself accused of acting upon trade secrets because the NDA did not specify the information that was to be disclosed and held confidential.
“The more information you receive, the greater the risk there will be a lawsuit if you don’t end up doing a deal and you move forward on your own,” Telscher said.
In this era of globalization, companies establish operations all over the world, and the world is not a stable place.
Upheaval — or the increasing threat of it — is prevalent on just about every continent of the globe. Certainly, the possibilities in the Middle East, Eastern Europe, Asia and Latin America are concerning to risk managers.
While political violence and trade credit coverage is available in the majority of cases, companies continue to face uninsurable exposures.
“It’s definitely tricky,” said Mark Garbowski, a shareholder at Anderson Kill.
“Based on the policies I have seen, there will always be some aspects of it that will be fully outside the scope of what can be covered.”
And only “a minority” of companies actually buy the cover, said John Hegeman, AIG senior vice president, specialty lines-political risk.
“I think the principal reason is most risk managers view it as a self-insured business risk,” he said.
“Pretty much anything an insured thinks is really essential to their operations can be covered, but you have to identify it and understand what it is.”
Often, said Richard Maxwell, chief underwriting officer and global head of political risk and trade credit insurance for XL Group, corporations wait too long in the face of deteriorating conditions and insurers will not accept the risk.
“Buy the cover before the barn is on fire,” he said.
Generally, policies cover a host of risks, including government expropriation of an asset, destruction of an asset due to war or political violence, credit default of trade receivables, and when foreign governments block transfer and convertibility of currency.
Some countries, such as Iran, Iraq, Afghanistan and the like, are not insurable, said Jochen Duemler, CEO and head of Euler Hermes Americas Region, which offers risk coverage in nearly 200 countries.
Argentina is a recurring problem, and as for Venezuela, it’s not uninsurable, he said, “but we would say we pretty much have no exposure there and are very, very reluctant” to offer coverage.
Overall, policies exclude losses that occur when currency is devalued, losses that occur as a result of a nuclear incident and non-payment of premium, or any losses to suppliers or partners as a result of political violence, except for trade receivables.
Policies also require insureds to make certain warranties and representations that are included in the insurance contract.
Policy disputes can arise when property is expropriated or licenses are cancelled due to what a foreign government says are reasonable or legally justified regulatory actions, according to an article on political risk coverage by Robert C. Leventhal, an attorney with Foley and Lardner.
Another area of dispute emerges when assets are jeopardized by “creeping expropriations,” such as a series of actions by the government as opposed to a single act, he said.
Many risk managers aren’t too worried about the Ebola pandemic in West Africa that has already killed more than 900 people. And they probably aren’t all that worried — if they even know — about the four cases of pneumonic plague in Colorado that are life-threatening.
But who among them can forget the H1N1 pandemic influenza virus known as the swine flu, that in 2009 killed more than 250,000 people worldwide, including more than 3,600 in North America.
At one point, the U.S. Centers for Disease Control and Prevention estimated that as many as two in five workers might become infected or have to stay home to care for an ill family member.
Video: Researchers at the Massachusetts Institute of Technology studied the role airports play in spreading disease and pandemics, according to this report by Voice of America.
A pandemic flu is something all risk managers should worry about. And there’s no coverage for it.
“A pandemic is a very difficult exposure to insure in any meaningful way. You can do some work around it, but it’s a very, very difficult risk to insure and no one really insures it,” said John McLaughlin, managing director of the higher education practice at Arthur J. Gallagher & Co.
For schools or universities, his specialty, there may be some loss of tuition coverage available, but “it’s not very cost effective.”
For business, supply-chain insurance may offer some protection, but that coverage still has a limited take-up.
Companies may also be able to craft special wording for property or D&O policies, he said.
“You never say never. There’s always some solution that you can work up,” he said.
But, McLaughlin said, a healthier perspective for a risk manager is to analyze how the risk would impact the organization and to devise solutions that are not insurance-related.
A Renaissance In U.S. Energy
America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor.
Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter.
“As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe.
Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.
Aging Infrastructure, Aging Personnel
The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.
“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”
In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.
Increasing Frequency of Severity
Current financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.
Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.
“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.
“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”
On its own, the domestic energy bonanza presents complex risk management challenges.
However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.
A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.
In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.
Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.
“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.
Back to Basics
Has the time come for a reset?
Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.
He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.
It’s something the industry used to do and got away from, but needs to get back to.
“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”
As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.
According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.
After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.
Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.