Beware! Of Auction House Appraisals

Victor Wiener was my very first-ever appraisal instructor (USPAP) and my inspiration for pursuing an advanced appraisal education. This article was on Chubb Insurance’s website today.

Why Auction Estimates Are Not Insurance Appraisals

by Victor Wiener, LLC and Charles Wong, LL.M
Collectors often have difficulty in deciding what type of appraisal to use for insurance purposes. Aggressive marketing by auction houses (in which valuation services are offered, often for free, in the hope that a collector will decide to sell) has led many to believe that auction estimates can be used. However, it may not always be prudent to rely on these, as insurance compensation based on auction estimates may prove insufficient to purchase replacements for lost or damaged works.

There are many reasons for this. Auction houses are in the business of valuing goods for regular sale. They deal in large volumes and have business relationships and obligations to both sellers and buyers, not to mention their own interests. This can affect an estimate. Note, however, that the litigation cases discussed in this article relate to situations auction houses may find themselves in when providing estimates in their usual business; it is conceivable that they may encounter similar challenges when giving estimates for insurance purposes.

Is there such a thing as a free lunch? Auction houses may not have time to conduct proper research.

Consider the case of Guido Ravenna of Buenos Aires. In 1999 he received an offer from a South American dealer for a family heirloom known as the Pieta, conditional on immediate acceptance. Coincidentally, his wife was in New York and showed photographs of the painting to Christie’s Old Masters expert who thought the Pieta was by Nuvolone, a minor 17th century Italian artist, and worth between $10,000 to $15,000. Ravenna then accepted an offer of approximately $40,000 for the picture and some items of furniture. Six months later, the Pieta was consigned to the same branch of Christie’s by the dealer who had purchased the painting from Ravenna. After a thorough physical examination, Christie’s determined it to be a “highly important” painting by the Italian Baroque painter Ludovico Caracci and, in 2000, sold it at auction for $5,227,500 to the Metropolitan Museum of Art, where it now hangs as The Lamentation.

Ludovico Carracci, ca. 1582; A faithful photographic reproduction of an original two-dimensional work of art. The work of art itself is {{PD-US}}: public domain – copyright has expired.

Ravenna sued Christie’s. The federal district court acknowledged that Christie’s was aware Ravenna would be relying on their estimate, but found that Christie’s did not owe Ravenna a fiduciary duty as the advice was free and there was no previous or other relationship between Ravenna and Christie’s. This is an important consideration when relying on a free appraisal. Always consider the legal implications of free advice; if in doubt, obtain reliable legal counsel.

Is this what I think it is? Due diligence

Sometimes less than three months transpire between consignment to an auction and final sale. In an atmosphere of quick turnaround, omissions sometimes can occur.

The collector William Foxley acquired a Mary Cassatt from Sotheby’s in December 1987. Sotheby’s had indicated that there would be a letter from an expert ‘discussing’ the work. That letter arrived nearly six years later, and was based on an examination of color transparencies rather than an actual view of the original. Foxley later sent the painting for auction by Sotheby’s; they informed him that the Cassatt Committee had determined that the work might not be authentic.

Torn between two lovers: Auction houses may have divided loyalties

On any item sold, auction houses have two possibly conflicting relationships: with the seller, and with the buyer.

In 1946 the collector, Jane Koven paid $1,400 for a Braque pastel. In 1990 Christie’s auctioned it on her behalf to Barbaralee Diamonstein for $600,000. Immediately afterwards, however, Diamonstein questioned the Braque’s authenticity. Although Christie’s experts were convinced that it was genuine, they felt compelled to refund the purchase price, but Koven declined to return the proceeds. Christie’s underwriters paid Diamonstein, and sued Koven. The federal district court found in favor of Christie’s, noting that Christie’s had a ‘dual loyalty’: a fiduciary duty of loyalty to Koven, but which was superseded by their statement to Diamonstein that the work would be genuine.

In another instance, Christie’s, in 1991, was asked to value the works held by the Andy Warhol Foundation for the Visual Arts. Christie’s appraised the collection at $95 million, but following related litigation, the New York County Surrogate Court held that the assets were worth $509 million. Surrogate Preminger’s judgment noted that, at the same time as conducting the valuation, Christie’s was also negotiating to sell Warhol works on the Foundation’s behalf – conflict of interest that should have been disclosed in their appraisal.

The court also observed that in appraising the Warhol works, Christie’s had had a limited focus which was unacceptable. They had not sought evidence of Warhol’s marketability, nor evidence of his importance as an artist. Nor did they consider comparable sales: they did refer to some Christie’s sales figures, but not those of other auction houses. The judge held that sales by dealers, private treaties and auctions should all have been considered.

A change is as good as a holiday: Revisions of estimates

Auctions houses are known to revise their estimates. This, not unnaturally, raises questions as to the reliability of the initial estimate.
In the Ravenna case an estimate of $10,000 to $15,000 on an initial view rocketed to a far higher figure when re-examined, admittedly physically rather than from photographs, which disclosed physical clues that led to its final attribution.

Another case involved a Faberge egg described by Christie’s as an Imperial Easter egg. It was bought, sight unseen, in 1977 for $250,000. On viewing it, the buyer thought it was not authentic and tried to withdraw, but paid when Christie’s provided a written opinion from an outside expert that the egg was genuine. When the buyer consigned it to Christie’s some years later, the same expert declared that it was not an Imperial Easter egg, but something lesser, and of lower value.

How much is that Dufy in the window? Type of value used

Apart from considerations affecting estimates, there may be a more fundamental issue. Under most insurance policies, collections should be valued according to their retail replacement value, that is, what a buyer or collector would have to pay to replace a lost or damaged work in as short as time as possible. This value is calculated from the point of view of the owner who wishes to maintain a collection.

On the other hand, auction estimates are calculated from the perspective of an owner who wishes to sell, namely: the fair market value, or how much the seller would receive at auction. This can dictate where replacements may be obtained. Dealers generally have stocks of specialized items at most times. However they charge a premium to cover their rental and storage costs, and consequently one usually pays more for the convenience of immediate replacement: in fine arts, dealers’ prices can frequently be twice as much as prices realized at auction; in decorative arts, they can sometimes be as high as three to four times auction prices.

While auction prices can be lower, buyers must wait – sometimes years – for an appropriate piece to come up at auction, and items are frequently sold in an unrestored state, whereas dealer offerings are almost always restored. In another case, Levin v. Harned, appraisers alleged that the Levins had overpaid for certain antiques. However, the appraisers used as comparables unrestored pieces from the auction marketplace, whereas the Levins’ pieces were all highly restored, sold by exclusive dealers. Generally, “retail replacement value” means that a collector would be compensated enough to obtain an appropriate replacement immediately rather than waiting for a similar item to appear at auction.

As a protection against rising market prices, collectors frequently select an insurance policy that compensates for the higher of two values: the retail replacement value, and the current market value, a term which is undefined in most policies. Be aware that when settling a claim, market value will most likely be interpreted as being analogous to fair market value. Accordingly, compensation will be based upon the price the work would have obtained if it were to have been sold as at the date of loss, and not what the insured would have to pay to purchase a similar work on the same date.

Objectivity of Appraiser: USPAP considerations

Though reduced or no fee auction estimates may appear economical, as we have seen, auction estimates may be predicated upon inappropriate values and marketplaces. In contrast, a properly qualified appraiser who is not involved in the commercial aspects of the auction room should provide an appraisal report written in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP), in which factors such as appropriate value, appropriate market place, appropriate comparable sales, title, authenticity and condition are covered and explained thoroughly.

This may prove more labor intensive and perhaps costlier than obtaining auction estimates. But should there be a loss, one should receive adequate compensation, and be able to move on.

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