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 struggle with deciding what type of appraisal to use for insurance purposes. Aggressive marketing by auction houses, which often offer free valuation services hoping collectors will decide to sell, has led many to believe auction estimates can be used for insurance purposes. However, relying on these estimates may not provide sufficient compensation to replace lost or damaged works.

The Risks of Auction House Estimates

Auction houses are in the business of valuing goods for sale, handling large volumes, and maintaining business relationships with both sellers and buyers. These factors can influence their estimates, which may not be suitable for insurance purposes.

Case Study: Guido Ravenna's Pieta

Consider the case of Guido Ravenna from Buenos Aires. In 1999, he accepted a $40,000 offer for a family heirloom, the Pieta, based on a quick valuation by Christie's. Later, the painting was identified as a significant work by Ludovico Carracci and sold for $5,227,500. Ravenna sued Christie's, but the court ruled that Christie's did not owe him a fiduciary duty since the advice was free and there was no formal relationship. This highlights the potential pitfalls of relying on free auction estimates.

Due Diligence and Accuracy

Auction houses often operate with quick turnarounds, which can lead to oversights. For example, William Foxley acquired a Mary Cassatt from Sotheby's, expecting a letter of authenticity that arrived years later and was based on photographs, not the original work. Such delays and inaccuracies can significantly impact the valuation and insurability of the item.

Divided Loyalties

Auction houses may have conflicting interests between sellers and buyers. Jane Koven’s experience with a Braque pastel illustrates this conflict. Despite Christie's experts believing in the painting's authenticity, they refunded the buyer due to a dispute, and Koven was sued to return the proceeds. Such cases underscore the potential for auction houses to prioritize business relationships over accurate valuations.

The Warhol Foundation Case

In 1991, Christie's 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 the New York County Surrogate Court later held that the assets were worth $509 million. The court found that Christie's had a conflict of interest, as they were negotiating sales on behalf of the Foundation while appraising its assets. This demonstrates the importance of independent, unbiased appraisals.

The Value of Proper Appraisals

Auction estimates often do not reflect the "retail replacement value" needed for insurance purposes. This value is what a collector would pay to replace a lost or damaged item immediately, often at a premium compared to auction prices. Auction values are typically lower and reflect what a seller might receive in an auction setting, not what a buyer would pay to replace the item.

Example: Levin v. Harned

In this case, the Levins were alleged to have overpaid for antiques because their appraisers used unrestored auction items as comparables, while the Levins' items were highly restored and sold by exclusive dealers. This disparity in valuation methods highlights the need for appropriate appraisal standards.

The Importance of USPAP Compliance

Proper appraisals should conform to the Uniform Standards of Professional Appraisal Practice (USPAP). A qualified appraiser provides a detailed report covering appropriate value, marketplace, comparable sales, title, authenticity, and condition. This thoroughness ensures that, in the event of a loss, the collector receives adequate compensation and can replace the item without financial loss.

Conclusion

While auction estimates may seem convenient and economical, they often do not provide the reliability needed for insurance purposes. A qualified, independent appraiser adhering to USPAP standards is essential to ensure that your valuable items are properly insured and that you receive fair compensation in case of loss.

Carpe Diem!

Lynn Magnusson, ASA, AAA

Co-Authors: Lynn Magnusson, ASA, AAA, and Becky Lipnick, Communications Coordinator