Editor’s Note
This is the first issue of Spencer’s Art Law Journal which will appear three times a year on Artnet. This issue contains four essays, which will become available, one essay each month, April through July 2010.

It’s been said that art market custom and practice remain much as they were in the 19th century. The legal structure we call art law (an amalgam of personal property law, contract, estate, tax and intellectual property law) supporting the acquisition, retention and disposition of fine art, often fits uneasily with archaic custom and practice. The result is that 21st century art market participants are frequently unsure of their legal rights and obligations.

This Journal proposes to promote discussion of art law legal issues for lawyers and nonlawyers alike, with the goal of providing greater transparency, stability and predictability.

The first four essays in our series deal with two core issues for the ownership of visual art -- authenticity and title -- who created it and who owns it? The first essay addresses a typical but often overlooked provision of an auction house consignment agreement allowing the auction house to rescind a sale over authenticity concerns. The second essay deals with ownership disputes with insurance companies over art stolen and recovered years later. A third essay raises the fraught question of changes in the attribution of visual art. The final essay of this issue of the Journal addresses the process of determining who owns art stolen between 1933 and 1945.

Three times a year future issues of the Journal will address legal issues of practical significance to collectors, dealers, scholars and the general art-minded public, such as (1) appropriate due diligence on the part of the buyer when provenance is incomplete or unclear, (2) the relevance of catalogues raisonné for due diligence, and (3) what to do if one suspects a piece in a collection of visual art is incorrectly attributed, or, indeed, an outright forgery.

INSURED V. INSURER:
WHEN STOLEN ART IS RECOVERED, WHO OWNS IT?

Kenneth S. Levine

This essay is about the word "subrogation," which frequently appears in insurance policies. An insured painting is stolen and the insurance company pays the owner’s claim for the value of the painting. Many years later, when the painting is recovered, its value is many times what it was when the insurance claim was paid. The insurance company takes the position that it owns the painting, while the owner says I own the painting, less the value of the insurance proceeds received. The resolution of this dispute depends on the meaning of the word "subrogation" in the insurance policy.

KENNETH S. LEVINE practices litigation and art law at Carter Ledyard & Milburn LLP in New York City.

A thief breaks into a home and makes off with a beautiful and valuable painting. Duly insured, the owner submits a claim to the insurance company and receives an insurance claim payment, based on the most recent appraised value for the piece. The owner also reports the painting to the Art Loss Register, hoping for a recovery some day and for the culprit to be caught. While the owner is happy to have the insurance payment, the painting probably would have sold for more, and the painting had sentimental value.

Thirty years later, the owner has passed away, and the painting is recovered in good condition, and is now worth an estimated $1 million. The owners’ heirs are thrilled with this windfall, and excitedly consult with auction houses about when to sell it off, and how much they can expect. But the insurance company has other plans: "When we paid your father the insurance proceeds, we obtained full rights to the piece if it were ever to be recovered. Therefore, the painting and any proceeds from its sale belong to the insurer," it tells the heirs.

Who has the rights to the painting, the insurer or the insurer? The answer requires an analysis of the legal concept, common in the insurance world, known as "subrogation."

Insurance Companies and Subrogation
The doctrine of "subrogation" allows an insurance company to stand in the place of the insured once it has paid proceeds to the insured.(FN 1) Subrogation arises most often in the run-of-the mill insurance cases, such as when an insured’s car is damaged in an accident due to the negligent driving of the other driver. Once the insurance company fully pays the insured for the car repairs, the insured has no incentive to sue the wrongdoer -- she is happy to have her car back in working order and to move on with her life (assuming there are no injuries). But the insurance company, now out of pocket the costs of car repairs, has the incentive to sue the negligent driver, and can do so as the assignee of the insured’s rights (often, literally, although it would seem, technically improperly, bringing a suit in the insured’s actual name).(FN 2) As "subrogee," theinsurance company retains all of the rights to which the insured "subrogor" is entitled.(FN 3) Insurance agreements usually include specific clauses setting forth the subrogation rights of the insurance company after paying proceeds to the insured.

The doctrine of subrogation can also limit the insured’s recovery, since the insured cannot double-recover from both the insurance company and the wrongdoer. If the insured is not fully compensated for his loss from the insurance company, he can sue the wrongdoer, but can recover no more than he has lost, including the insurance proceeds he received. If, for example, the automobile repairs from the collision cost $10,000, and after a deductible insurance company only paid the insured $6,000 in proceeds, then the insured could sue the wrongdoer for the full $10,000, but could only keep $4,000. The remaining $6,000 would go back to the insurer.

The two competing principles -- that the insurance company is entitled to "stand in the place" of the insured upon payment of proceeds to the insured, and the insured is entitled to be made "whole" but cannot double recover -- can clash when stolen art is recovered after a long period of time. Both insured and insurer keenly want to claim the art itself, since it has appreciated in value far beyond what was paid in insurance proceeds years earlier.

Any specific dispute between insured and insurer would involve a close examination of the actual insurance agreement in question, as well as an analysis of the applicable state law. But generally, in the case of recovered art, the insurer would argue that the insured was "made whole" at the time of the theft when the insurance proceeds were paid, and that the insured agreed to release interest in the piece and allow the insurer to step into its shoes once it received those proceeds. The insured, in turn, would argue that the insurance proceeds did not fully compensate for the loss of the painting either then or now, and, in fact, no amount of money could ever replace the unique painting. The insured therefore seeks the painting itself as the only way to be "made whole," and will happily pay back the insurance company the proceeds received years ago to the extent the insured is double recovering.

Because of the high potential for profit, insurance companies follow the reports from the Art Loss Register, looking for recovery of pieces upon which they paid insurance claims in the distant past, and surely hoping that the insureds cannot also be found.(FN 4)  

The clash between insured and insurer arose squarely in two recent New England cases. In both cases, the insured prevailed.

Two Cases Favor the Insured
In Apthorp v. OneBeacon Ins. Co.(FN 5), a painting was stolen from a home in 1976, and the insurance company paid the owner $25,000 for his loss, based on a recent appraisal of the painting. On receipt of the insurance proceeds, the insured signed a subrogation agreement with the insurer, which stated: "[i]n consideration of the payment to be made hereunder, the [insured] does hereby subrogate to said insurer the right, title and interest in and to the property for which claim is being made hereunder. . . ." In March 2007, the painting was recovered, and estimated to be worth between $400,000 and $800,000. OneBeacon Insurance Company, the successor in interest to the original insurance company, and the executors of the estate of the insured, both claimed right to the painting. The court ruled that the executors of the estate, and not the insurance company, were entitled to the painting, and the executors were required to repay the insurer the $25,000 in proceeds (without interest), reasoning that to do otherwise would grant the insurance company an unfair "windfall" profit. The court also noted that "subrogating" one’s right to property is not the same thing as transferring title, since subrogation only allows the insurer to step into the shoes of the insured for the limited purpose of a suit against the wrongdoer, and does not amount to a transfer of title to the insurer.

OneBeacon also raised a similar claim in Rhode Island last year.(FN 6) In this case, three paintings were stolen from the owner’s home and the insurance company paid the owner $45,000. Thirty years later, the paintings were discovered when an alleged innocent purchaser of the pieces offered them as collateral for a loan, and the lender requested an art dealer to authenticate them. The dealer checked the Art Loss Register and discovered that the works were stolen, and alerted the FBI. The recovered paintings were worth far more than the $45,000 in the insurance proceeds paid to the now deceased owner, and the estate of the owner, the insurer, and the person who currently held the works all claimed title to the works. In the end, the parties reached a settlement, agreeing that the "true and rightful owner" of the paintings was the estate of the original owner from whom the works were stolen.

Subrogation Under New York Law
Under New York law, it also appears that the insured would have the right to recover the art, although no reported cases have addressed the issue directly. While the insurer, upon payment to the insured, has
subrogation rights and can sue a third party to recover an amount up to its payment of proceeds(FN 7), the insured, as a matter of law, also maintains independent legal rights to pursue a recovery for his or her loss and to be "made whole."(FN 8) Since a work of art is unique, money could never fully compensate for the painting itself. In these situations, the only way to make the owner of such a work "whole" is to return the art to the owner.

Upon recovery of the stolen art work, the insured would be obligated to repay the insurance company the insurance proceeds received, minus whatever expenses were incurred in the recovery of the art, so that the insured has not "double recovered."(FN 9) If the restoration of title proceedings cause the insured to undertake considerable expense to recover the work, it is possible that the insurance company is not entitled to any payment, since the insured would be entitled to re-imbursement of expenses incurred recovering the lost art.

Because so much art has been stolen over the years, and because art often appreciates over time, we expect to see more clashes between insured and insurance companies in the coming years.

New York, New York
January 2010

Kenneth S. Levine
Carter Ledyard & Milburn LLPTwo Wall Street
New York, NY 10005
email: levine@clm.com
website: www.clm.com

NOTES
(1) See COUCH ON INSURANCE, §222:5 ("Accordingly, on paying a loss, an insurer is subrogated in a corresponding amount to the insured’s right of action against any other person responsible for the loss, such that the insurer is entitled to bring an action against this third party whose negligent or other tortious or wrongful conduct caused the loss, regardless of whether the insurer would have been entitled to bring such an action in its own right.").

(2) Thereby exposing the insured to counterclaims and the jurisdiction of the court in which the insurer has chosen to sue.

(3) Id. (" ‘Subrogation’ is the substitution of another person in place of the creditor to whose rights he or she succeeds in relation to the debt, and gives to the substitute all the rights, priorities, remedies, liens, and securities of the person for whom he or she is substituted.").

(4) See https://www.artloss.com/content/services.

(5) 2009 WL 874539 (Mass. Super. Jan. 13, 2009). The appeal of the decision is pending.

(6) United States v. OneBeacon Ins. Grp., C.A. No. 08-58ML (D. R.I. 2008).

(7) See COUCH ON INSURANCE §223:85 ("A subrogated insurer cannot recover from a wrongdoer. . .  amounts the insurer did not pay to the insured.").

(8) See Winkelmann v. Excelsior Ins. Co., 85 N.Y.2d 577, 650 N.E. 2d 841, 626 N.Y.S.2d 994 (1995) ("The claims of the insurer for amounts paid by it and the insured’s claim for uninsured losses are divisible and independent, and ‘[p]ermitting the insurer to sue. . . as equitable subrogee does not affect the insured’s right to sue for the amount of the loss remaining unreimbursed.’") (citations omitted).

(9) See, e.g., Fasso v. Doerr, 12 N.Y.3d 80, 87 (2009) ("The injured party should not recover twice for the same harm-once from its insurer and again from the wrong doer."); COUCH ON INSURANCE §223:152 ("[W]ith some exceptions, subrogation against an insured is allowed if the insured has been made whole and has been fully compensated, which compensation includes costs and attorneys’ fees.").

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