Welcome to “The Art of the Claim: An Interactive Seminar on the Issues and Challenges Presented to Underwriters by Art

1. Welcome to “The Art of the Claim: An Interactive Seminar on the Issues and Challenges Presented to Underwriters by Art Claims”Presented by: LANKLER & CARRAGHER, LLP and G. J. SMITH & ASSOCIATES On behalf of the International Underwriting Association of London Wednesday, June 14, 2006

3. June 14, 2006 • Overpriced Masters • From Now to Christmas Season • Gallery G. Smith • New York City • 1 • Willie Wonka’s “Chocolate Doodad” • 2.4 million Loan Agreement EXHIBITION INFORMATION Date: Title: Dates of Exhibit: LENDER INFORMATION Name: Address: WORK(s) OF ART ON LOAN Total number of works on loan List below (attach additional pages if needed): Condition/Comments (Please indicate special handling requirements): TOTAL VALUATION of all works in this loan $ _______________ TERMS AND CONDITIONS OF THE LOAN (expenses, transportation, etc.): The Carragher Museum of Pretentious Art will be responsible for the work of art on a “wall to wall” basis. The museum will have an all risk museum policy with the standard exclusions. AGREEMENT I have read and agree to the conditions stated above and certify that I have full authority to enter into this agreement. Signature of Authorized Museum Official Date Please sign both copies of this Loan Agreement. Keep one for your records and return the other.

4. Memorandum To: Freddie Forgetful Wing & A Prayer etc. From: “Big” Ooopes Re: Wonka’s Doodad Per our call, please arrange for the Wonka to be packed and shipped from Gallery S. Smith in New York. Hold at warehouse for about a month until direction to deliver at museum for exhibition. Please use proper care.

6. INSURANCE • Unless agreed between the parties in writing, it is the responsibility of the Customer to insure all goods during transportation and while in storage. • Insurance effected by WPFAMWR at Customer’s request will be in the usual form and will be subject to the usual expectations and conditions of which the Customer shall be deemed to have notice. • In the event of any claim being made by or any liability being established on WPFAMWR however arising, WPFAMWR shall in no case be liable for any sum in excess of the goods indicated to WPFAMWR by the Customer subject to a maximum liability in respect of any one contract of $1,000.0. • LOSS, DAMAGE OR MISDELIVERY • WPFAMWR shall use its best reasonable efforts at all times to carry out its obligations efficiently and in a timely manner but it shall not be liable for loss and damage of goods or delay or misdelivery in any circumstances whatsoever unless it shall be proved that the same occurred through the willful neglect or default of WPFAMWR or its agents or as a result of a criminal act of its servants. • In the event of non-delivery of the whole or any part of the goods the Customer shall give notice in writing to WPFAMWR within 10 days of the anticipated date of delivery. • 12. The Customer shall be deemed to inspect the goods immediately upon delivery. In the event of the goods or any portion thereof being damaged on delivery the Customer shall give written notice thereof to WPFAMWR within 3 days following delivery.

7. What Issues Did You Spot?

8. Issues 1. What effect does the loan agreement have? • What is the “value” of the painting? • When did the loss occur? • Was there a physical loss or damage? • Was the Wonka insured property? If so, what policy? • Was this a total or partial loss? • Are there potential defenses to coverage? • Should Goliath issue a reservation of rights letter? • Does Goliath have to defend the Carragher Museum? • Can G. J. Smith sue Goliath directly? • Can Goliath pursue subrogation against Wing & A Prayer? • What would happen if the painting was not authentic?

9. The Loan Agreement Generally, oral contracts will be enforced for all terms that were agreedto. Statute of frauds requires all contracts that cannot be performed within one year to be in writing. Necessary terms must be agreed upon: Identify object of the contract; Identify parties to contract; Identify consideration to Gallery; Signature of party to be charged; Reasonable terms may be inferred.

10. Parole evidence may be used to explain industry terms used by the parties. Ex. Wall to Wall

11. What Does Wall to Wall mean? Industry term, not a legal term. Sometimes “nail to nail” is used instead. Refers to the duration of time when a consignee is on risk. If incorporated into a policy it can define the period of insurance for a piece.

12. Vagueness vs. Ambiguous “Vagueness” refers to a situation where an essential term of a contract is so undefined that no meeting of the minds can be said to have been reached. Ex: I will pay you some money in the future for that painting. Ambiguous refers to the situation where a term of a contract is capable of more than one reasonable interpretation. A reasonable expectation standard applies and parole evidence may be introduced. The doctrine of contra proferentum may apply.

13. When did the loss occur? Whose policy should be primary? Very fact specific. Is there evidence of a prior problem? Nature of problem? Was it known to the Gallery? Was it disclosed? Did Museum assume the risk? Did Museum or Wing & A Prayer take necessary precautions? If there is no evidence of a prior condition: Condition report highly relevant but not entirely determinative. What were packing, shipping and storage standards? Museum is responsible for the carriers and warehousemen it hires. Other insurance clauses.

14. Is the painting insured property under the Museum policy? Key: Definition of insured property in policy. What are precise terms? Is there a trigger that there is cover only if Gallery asked Museum to insure? What happens if the loan agreement makes no mention of insurance? Does it matter if the loan or consignment agreement says The Museum takes the painting on all risks of loss basis?

15. Was there a physical loss or physical damage? Was there a physical loss or physical damage? Under “All Risks” policies the scope of coverage is extremely broad. Insureds aggressively pursuing coverage theories. Is there a physical manifestation of damage or loss to the property? Was it fortuitous? Look to exclusions.

16. What is the value of the Painting? The key is the language of the policy.

17. Museum Policies Most say the value will be that “agreed upon” by Museum and Gallery. Potential Source of conflict: Presumes good faith by assured and lender. What was their intent? Was Museum capable of making an informed agreement on value? Pressure on Museum to agree to high value? Are there legitimate reasons to put higher value?

18. Museum Policies (continued) If no value was agreed, many policies cap value at “current market value”. What is “current market value”? Is it replacement cost? Not always defined. Appraisal process is often set forth in the policy.

19. Gallery Policy Typically refer to cost basis. Some provide a cost plus basis which allows for lost profit and appreciation. Has the advantage of minimizing inflated “agreed” values.

20. When is it a total loss? How do you determine extent of partial losses? Appraisal process. Auctions. Total or Partial Loss

21. Potential Defenses To Coverage To Be Evaluated 1. Misrepresentation in the inducement – if cover was scheduled or valued. 2. Fraud in the claim if claim is presented for 2.4 million. 3. Breach of Packing Condition or Warranty. 4. Exclusion for wear and tear or inherent vice.

22. Misrepresentation in the Inducement • General Rule: An intentional or unintentional misrepresentation of fact will void coverage if “material”. • Generally, a misrepresentation is material if: • Underwriters would not have insured the risk if they had known the truth; or • Underwriters would have charged a different premium if they had known the truth; or • Underwriters would have required different terms or conditions if they had known the truth. • Unless there was a side agreement for a different price, this is probably not a viable defense.

23. Fraud in the Claim Policies typically contain a provision voiding cover for any concealment, misrepresentation, or fraud or false swearing in connection with the policy or claim. In a claims context, an unintentional false statement -- under oath or otherwise -- will not void coverage. Insurer must typically prove by clear and convincing evidence. Some jurisdictions require that the misrepresentations actually impact the Underwriters’ investigation.

24. Packing Conditions or Warranties Many fine art policies contain a version of a “condition” or “warranty” requiring the assured -- to the best of it’s ability -- to hire “competent packers” or packers “trained and skilled in utilizing procedures and materials necessary to protect the covered property.” In most jurisdictions it will not matter if provision is called a “condition” or a “warranty”. Any failure to comply must have materially affected risk. Significant issue in this case.

25. Packing Conditions or Warranties (continued) Best of their ability component: A due diligence issue. What efforts did they undertake to determine qualifications? What inquiries did they make? Any prior dealings? Did they check on insurance? Did they check references? Did they have any reason to doubt qualifications?

26. Competent or Trained and Skilled Packers Was the packing competent? What about the storage facility?

27. Exclusion for Inherent Defect • Many policies contain exclusions that apply to a variety of latent problems such as wear and tear or inherent vice. • Wording varies widely. • Most versions would not provide a defense to cover. • Some versions include “mold” in the list of excluded causes. • What about “ atmosphere conditions and/or change in temperature?”

28. Should a reservation of rights letter be issued? It is more important in some jurisdictions than others. In some jurisdictions defenses can be waived or barred. Particularly important in jurisdictions where policy might be treated as a liability policy. Generally, it is a best practice to issue a reservations of rights letter once it becomes clear that there are coverage issues. Caveat – jurisdictions vary as to how much specificity is required. Reservation of rights letters have a tendency to “educate” witnesses and sometimes make it more difficult to get candid information.

29. Does Goliath have a duty to defend the Carragher Museum in the lawsuit? Defense v. Indemnification distinction. Precise wording of policy and individual state statutes interact. Property insured often includes property for which the assured is “legally liable.” Generally intended to provide a form of indemnification. However, duty to defend is usually greater than duty to indemnify. Most fine arts policies contain a “Legal Liability” clause that typically requires Underwriters to defend only when the Assured is sued by a consignor who “instructed” the Assured “not to insure” the property. Third party settlement clauses sometimes give Underwriters the right to defend if they choose but not on obligation to defend. Generally, fine arts policies do not impose duty to defend.

30. Should Goliath voluntarily defend the Museum? Practical considerations control: 1. How much money is at issue? 2. How much will it cost to defend? 3. What is the risk that the assured will not pursue a vigorous defense on its own? Underwriters often voluntarily provide a defense. Coverage issues complicate matters.

31. Can Gallery G. J. Smith sue Goliath directly? Answer may vary by jurisdiction. Coverage for “legal liability” to third parties has often been construed to treat lenders/consignors as third party beneficiaries who have standing -- similar to loss payees -- to sue consignee’s insurers directly.

32. Subrogation against Wing & A Prayer Generally: Limitations of liability are generally enforceable. Limitations of liability cannot contract away liability for intentional, reckless, or grossly negligent conduct. However, waivers of subrogation clauses may preclude insurers from pursuing subrogation against tortfeasors even if the conduct was grossly negligent. New development in New York. Some fine arts policies give the assured the right to prevent subrogation actions by requiring their prior approval.

33. Is the limitation of liability enforceable? Probably not: Bill of lading not signed. No prior dealings between Museum and Wing & A Prayer. No evidence of notice to Museum. Language may not have been readable. Contracts of adhesion. But: Industry practices could be admissible into evidence. What about the notice requirement?

34. What would happen if the painting was not authentic? 1. Was there a valid loan agreement with an agreed value of $2.4 million for the painting? The contract between Museum and Gallery should be voidable under the Doctrine of Mutual Mistakes. Doctrine applies where: (i) mistake concerns a basic assumption on which the contract was made; (ii) mistake had a material effect on the agreed upon exchange; (iii) party seeking avoidance did not assume the risk. Cannot be based upon a doubtful assumption and mistake in value is generally not a defense.

35. What would happen if the painting was not authentic? (continued) 2. If there was no legal obligation to pay Gallery $2.4 million, there would be no trigger for Underwriters to owe indemnification. 3. If the painting had been a scheduled piece with a specified value, coverage would have been void ab initio.