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By STEVE YAHN, who has written for and edited national publications for more than 30 years

A lone masked thief jumped through a reinforced glass window at the Paris Museum of Modern Art on May 19 and made off with five masterpieces valued at $123 million.

"Museums differ enormously in their approach to insurance," said Robert Korzinek, fine art underwriter at Hiscox, the managing agent of Syndicate 33, one of the largest syndicates of Lloyd's of London. "Often museums will buy insurance to cover the costs of restoration in the event of damage to works of art or costs of recovery in the event of theft. Most major European museums do not buy cover for the market."

The collection in Paris' Museum of Modern Art, as are many collections in European countries, was not insured through the commercial insurance market, according to a leading London art broker. Governments themselves historically self-insure collections of large state museums in many parts of Europe, said experts.

Eschewing the commercial insurance market for coverage, however, comes as no surprise to many art world insurance observers, as no thief can ever hope to sell the stolen masterpieces by Picasso, Braque, Matisse, Leger and Modigliani on the open market. Potential buyers would instantly recognize the works as stolen. The works were discovered missing on the morning of May 20.

American museums, by contrast, "often view insurance somewhat differently," Korzinek added. "Trustees of U.S. museums often consider it their responsibility to protect the financial asset that the collection represents. As a result, a great many American museums purchase an 'All Risks' insurance policy covering works of art for their full market value against all major perils."

Diane Jackson, chief operating officer and director of finance at insurance brokerage Huntington T. Block in Washington, D.C., said U.S. museums buy a museum fine arts policy that covers owned and consigned items.

Writing museum insurance in the United States is more feasible compared to Europe because policies here are much broader, Jackson also said.

"As long as there's a contract involved indicating a museum is responsible for it, the policy will cover it, " Jackson said.

SECURITY MIX IN QUESTION

The other issue brought out by the brazen and stunningly easy robbery is how security should be handled by large museums with collections worth in the hundreds of millions, or even billions, of dollars.

What balance should museums have between electronic surveillance cameras and human guards patrolling the gallery floors? And does altering the balance between cameras and guards affect the terms of the policy?

"If a museum security system is not functioning and this is known to the museum, in certain insurance policies the museum many not be covered," said Gregory J. Smith, executive vice president at Berkley Asset Protection Underwriters in New York. "The museums are attesting that the level of protection will always be the same throughout the term of the policy."

"What is the safest risk?" Smith said. "An institution that relies on guards who patrol the site or an institution that relies on electronic security, both alarms and closed-circuit TV?"

Security cameras initially cost more to install. After a couple of years, however, the price of guards ends up being more expensive than a security system, Smith, a security expert in the art world, also said. Yet guards should not be the only form of security. The most effective security is a mix of electronic eyes and human guards to guarantee some form of redundancy in case one system fails.

"I also believe that there is a large benefit of having the alarm system ring to an outside central system," he said. "If the guards are overcome and the alarm rings internally only, no one will ever know about the burglary until the next morning."

In this most recent case, the Paris museum's security system had broken down in March and was out of order while contractors were awaiting parts, according to initial news reports, and security experts like Smith said they were amazed the museum's system was down for so long.

"In my mind the alarm system didn't fail, it was broken and nobody fixed it prior to the theft," he said. "The guards were present, but they did not realize the theft was occurring. I am unaware of what security protocols were in place in that museum, but you would have thought the guards would have to perform rounds throughout the entire museum, especially because they knew the alarm was broken and not functioning."

"I think the issue facing most museums is that, if you have a 50,000-square-foot museum, you cannot afford to alarm all 50,000 square feet, so you should at least alarm where your largest value is amassed. I would build out from there strategically," Smith added.

The drawback to human protection is that guards can go bad, Smith also said. "They can develop alcohol problems, gambling problems, girlfriend problems and who knows what else, and all of a sudden there's a money issue."

Those liabilities or vices often lead to temptation and the potential for moral hazards.

All alarm systems are subject to potential failure as well, of course, but moral hazards are not among the causes.

"If the system is tested and monitored by a central station, you should become aware of the failure more rapidly," Smith noted. "It's almost bizarre that the loss could happen the moment the system failed unless someone knew it failed, which would lead you to believe someone had inside knowledge."

Another way of creating yet more redundancy is by installing a second, separate alarm company at strategic, high-value areas in the building, Smith also noted.

Jackson said that in order for U.S. museums to gain accreditation, they need proper security, and that includes a central station that oversees all security, burglar alarms, fire alarms and guards.

"When a museum comes to us for a quote, that's what we check for," Jackson said. "We don't value the pieces we're providing insurance for because we're not really art specialists. We're insurance specialists. So we take the information provided to us by museums, and we take it to companies that then decide whether they want to write the risk or not."

Jackson, Korzinek, Smith and other experts all agree that a museum's main mission is to make as much of its collection as available to as many people as possible.

"Museums are not fortresses," Korzinek said. "Whilst the protection of the works in their care is considered vital, museums also have a mandate to make these works accessible to the public and academics."

Surely ... but not to the point of having paintings literally stolen off their walls.

June 1, 2010

Copyright 2010© LRP Publications