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Fair Market and Insurance Value for Works of Art

The value of art has been debated for hundreds, if not thousands, of years now. Philosophy aside, for those who create art and collect art, value is a practical, everyday concern. This is especially true when it comes to finding the right insurance coverage–too little and you’re left high and dry in the event of a loss. But if you’re paying more to insure a piece than you would to replace it, that doesn’t make much sense either. Here’s what you need to know.

Appraisal vs. Valuation

Art appraisers undergo extensive training and their expert opinions are based on experience and deep knowledge. They are an invaluable resource and credible authority when collectors or artists are looking for a solid number to inform their plans to sell, gift, or insure their artwork. That said, appraisal is not valuation–there are more factors at play. We’ll break these down by three main categories of valuation: auction value, fair market value (retail), and insurance value.

Auction Value for Artwork

Auctions create a very specific environment in which art and other collectibles are sold. A limited pool of buyers at no pressure to buy and auctions that only last for a short window of time could naturally produce the right setting for a relatively low value. For better known artwork that might draw a crowd of buyers who are somewhat committed to buying, auctions could create the ideal atmosphere for reaching a high price for more scarce or coveted pieces. So basing valuation on auction prices varies from one piece to another, and on countless variables surrounding any given auction.

Fair Market (Retail) Value for Artwork

When you wade into the waters of art insurance, you’ll hear a few terms get thrown around. Fair Market Value is one of them. The Internal Revenue Service (IRS) defines fair market value as being the price that property would fetch on the open market and would be agreed upon between two willing parties (buyer and seller) in which both individuals are aware of relevant facts of the transaction without being required to act.

Phew. That mouthful basically boils down to meaning that fair market value can’t be wildly more than what an average but informed buyer would be willing to pay. This form of valuation is essentially an opinion of a work’s value that is expressed in money from the buyer to the seller. Fair market value is often referred to as retail value since it can be based on how much an item would sell for at a gallery or in another retail setting. Not only is the market larger, but retailers typically mark up artwork also. For these and other reasons, fair market (retail) value is usually higher than it would be at auction.

Insurance Value for Artwork

Appraising artwork for insurance purposes takes a different perspective. There is a built-in assumption that when a policyholder files a claim and wants their artwork to be replaced, they want it done quickly. So instead of waiting for a comparable work to be available from an auction, an insurance company will typically search for a piece available through a retailer. Artwork found in a retail establishment is often naturally priced higher than it might be at an auction. Add to that likely shipping costs, taxes, commissions, and other fees, and the resulting insurance value could be a bit higher than a retail appraisal.

When Is Valuation Necessary?

For individuals who are creating art or buying art to enjoy in their daily lives, strict valuation can help to determine the amount of insurance they should carry to protect against damage or theft. Should the worst case happen and their artwork is actually damaged or stolen, then knowing its value is vital for an insurance company to compensate their client. Other reasons that valuation could be necessary include when art is included in taxable estates, when it is claimed as an income tax deduction, or if it is involved in a divorce or legal settlement. These situations might require different methods of valuation, but they will all need to produce a value at a specific point in time.

Profession or Collection – Protect Your Art

At Insurance for Artists by Zinc, you can find all the protection you seek, under one roof. Artists and creators know that securing their lifes’ work is a vital way to stabilize their businesses in the face of risk. And art collectors know that the potential for damage or theft is always present. Whether it’s through our niche artist insurance or collectibles policy, we have you covered, under the Zinc family of brands. Get in touch today to learn more and get your free quote.

This blog post does not provide insurance advice and is intended for information purposes only. It is not a substitute for professional insurance advice from a licensed representative. Never ignore professional insurance advice because of something you have read in this blog post. Contact your licensed representative if you have any questions about your insurance policy.

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