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Understanding Insurance Appraisals and How Not to Use Them

Insurance appraisals are researched and developed for the sole purpose of helping to provide sufficient insurance funds should a collector suffer a loss. When qualified appraisers perform an insurance appraisal, our reports generally estimate the cost of replacing individual works of art at premium retail art galleries. Appraisers and the insurance industry call the value contained in insurance appraising “Estimated (Retail) Replacement Cost”. There are several reasons why it should be understood that insurance appraisals rarely reflect the price a private person should expect to receive when offering their works on the market.

What Accounts For The Difference Between The Insurance Appraisal

And The Price I Should Expect to Realize When I Sell My Artwork?

When an item is sold outside of a traditional retail environment, a buyer almost always expects to pay significantly less. This is true for the reselling of valuables like antique sterling silver flatware, antique furniture, and fine jewelry. This is even more true when selling artwork because the qualifications of the seller to evaluate the artistic merit and authenticity of artwork are vital to buyers. Unlike professional art dealers with a cultivated list of collectors, private sellers do not generally have access to retail buyers. Even when a private sale is accomplished between private collectors, the buyer generally expects a significant discount from the price they would expect to pay to an experienced art dealer with a retail establishment and a reputation for connoisseurship and accountability to uphold.

How Can I Determine A Reasonable Asking Price For My Artwork?

The dollar amount a collector can reasonably expect when selling is not the same as replacement cost for insurance. In developing an estimation of Market Value for a Sales Estimation Appraisal, a qualified appraiser will research and analyze recent sales on markets commonly available to their client. The most common markets for private sellers are art dealers, gallery owners and auction houses. The price you are likely to receive in this sale is referred to as "Market Value". A Market Value appraisal will give a collector an appropriate idea of a realistic selling price, as opposed to a figure they would receive from an Insurance Appraisal.

Marc Chagall's Lithograph (left) “Les Coquelicots” (1949) sold for $16,378. at public auction in the Spring of 2013. Impressions from this edition have been found on the retail gallery in the $35,000-$50,000 range.

The condition of the impression, integrity of the original colors, the dealer's cost basis and market demand will help to determine gallery pricing. The differential between the auction price and retail asking price for this work is relatively high, reflecting several market factors including, inventory risk under current economic conditions and the value of dealer connoisseurship related to authenticity concerns for Chagall multiples.

Is There A “Rule Of Thumb” On The Dollar Amount Difference Between

Estimated Insurance Cost and Market Value?

The short answer is no. There is a misconception that retail galleries set their asking price at double the price they paid. In fact, there is more nuance to pricing than simply multiplying a number. The differential from wholesale purchase price to gallery listing price can vary greatly depending on the current market conditions and the marketable aspects of the particular work.

Inventory Risk Is A Significant Pricing Factor

In general, a dealer or gallery will weigh the inventory risk when purchasing a work for resale, and when setting the retail price. This risk entails not selling the work and having to reoffer it on the wholesale market at a loss. The memory of the art market is long. An identifiable work that is placed back on the open market is considered “over exposed” as this raises questions as to the work’s salability, and may even raise authenticity questions. At the higher end of the market, the potential buyer for a particular work thins, and these buyers generally follow the market closely.

Assessing A Particular Market

Appraisers weigh a variety of comparable marketable characteristics in determining the desirability of a work as it compares to recent sales records for similar works. These factors include: Authenticity, rarity, condition, medium, dimension, subject, the quality and complexity of the composition, palette, and provenance, as well as an analysis of the particular artist’s market.

In the analysis of an artist’s market, appraisers research the most sought after qualities of that artist’s body of work in order to evaluate the desirability of a particular work. For instance, a vivid well-executed Bucks County winter landscape by Edward Redfield, all other marketable aspects being equal, would command a higher price than a work by Redfield of similar dimension and quality depicting a European spring scene. Collectors of Redfield generally favor dramatic local winter scenes and will pay a premium for fine examples. Such a work’s estimated retail replacement cost (insurance) to market value differential would be relatively close, as the gallery's inventory risk is relatively small. Similarly, the differential on Redfield’s European painting might be much greater as a dealer may have to buy several such paintings to sell one, and may even have to resell to the market at a loss.

In short, the market value and the estimated retail replacement cost for each work of art must be considered individually according to current market conditions. A qualified appraiser can provide an estimation of either figure, by conducting a Sales Estimation Appraisal or an Insurance Appraisal.

How Does A Gallery Owner Decide How Much To Pay?

Most collectors are aware of the tangible costs associated with purchasing a work of art from a gallery or dealer, such as rent, staff salaries and benefits, advertising and insurance. The intangible costs not considered by many buyers include the considerable inventory risk taken by dealers, particularly under current economic conditions.

Additionally, as with most professionals, experienced reputable art dealers are compensated for the years of education and experience which contribute to their connoisseurship and reputation, allowing a collector to feel confident about the authenticity and quality of their purchases.

There are no set formulas for adjusting for these factors. They vary dramatically and are weighed independently by the dealer or gallery for each work of art when purchased and again when offered for resale.

Thanks for reading.