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Fine Art Storage Services v. Insurance Companies: A Cautionary Tale

July 6, 2016

By Scotti Hill.

Hindsight is 20/20, however, art storage facilities are supposed to be forward looking to make sure that property entrusted to them for safekeeping remains protected and unaltered while in their custody. Elements such as temperature, humidity and pest control are vital to preserve artworks from any damage or total loss. Certain mediums like paper, canvas, plaster, metal, and clay are of course particularly vulnerable to temperature and humidity fluctuations.

Christie’s Fine Art Storage Services (CFASS), an owned subsidiary of Christie’s auction house, has been named a defendant in multiple lawsuits for damage, incurred during 2012’s hurricane Sandy, to artworks housed at its Brooklyn facility. In late October 2013, three insurance companies: XL Specialty, Axa and Starnet, mounted suits against CFASS, for gross negligence, breach of bailment, negligence, breach of contract, negligent misrepresentation, and fraudulent misrepresentation stemming from CFASS failure to prepare for the storm’s onslaught.

The Storm of the Century

In the fall of 2012, weather prognostic reportswarned of a superstorm headed for New York. Ultimately, artworks in many studios, galleries and storage facilities were severely damaged when Sandy, a tropical storm that was updated to a hurricane, hit the tri-state area on October 29, 2012.

The Red Hook area of Brooklyn, where CFASS’ storage facility is located, was labeled a high-risk flood area, securing the New York City Office of Emergency Management’s rating of a “Zone A evacuated flood zone.” With media reports circulating about the impending storm, CFASS, as alleged in the complaints, began reassuring clients that appropriate measures were being taken to protect their property from damage.

Unfortunately, certain works of art stored at CFASS were damaged during the hurricane. In the aftermath of the storm, some pieces were unsalvageable, others resulted in complete loss, while others still were sent to conservators for restoration. In such cases, damaged artwork claims require owners to report losses to insurance companies, who would seek compensation from the entity responsible for the damage.

The damages incurred to such an enormous concentration of wealth in one space resulted in significant losses for insurers. In a few instances when the insurance companies reviewed the circumstances that resulted in such unprecedented level of claims and sought to mitigate their expenses by refusing to pay claims resulting from gross negligence. After all, with 27,000 people per square mile, New York is the most densely populated city in the United States, with damage or full compensation for losses to multimillion-dollar property having the potential to increase premiums or drive out many of the insurance carriers.

The Waiver of Subrogation and Limitation of Liability Clause

In lawsuits resulting from damages to art stored at CFASS, the point of contention is the manner by which liability is allocated in CFASS’ storage contracts. Some contracts between the storage facility and its clients required clients to obtain an art insurance policy.  In other instances there may have been waivers of subrogation or a limitation of liability clause.

A waiver of subrogation relinquishes an insurer’s right to assert claims against the company responsible for the damage. Alternatively, a limitation clause generally limits the companies liability based on the weight of the goods.

According to U.C.C. § 7-204(2), a warehouse is bound by a reasonable duty of care when storing property in its space, however such clause cannot negate the elementary duty of care required. In the case of New York State law,  NY UCC § 7-204 (2014) (a), “a warehouse is liable for damages for loss of or injury  to  the  goods  caused  by  its failure to exercise care with regard to the goods   that  a  reasonably  careful  person  would   exercise   under   similar  circumstances.  Unless otherwise agreed, the warehouse is not liable for  damages that could not have been avoided by the exercise of that care.

Does Gross Negligence Alter Waivers of Subrogation and LLC’s?

In XL Speciality Ins. Co. v. CFASS, filed on October 29, 2013, petitioners sought reimbursement for a $700,000 payment to the damaged gallery, Chowaiki & Co. In this case, the New York supreme court granted CFASS’ motion to dismiss the complaint due to the adequate consideration provided by both XL Specialty Insurance Corporation and their client Chowalki. Similarly, in Starnet Ins. Co. v CFASS, filed on October 28, 2013, the estate of LeRoy Neiman brought suit to recover damages resulting from harm to 277 artworks. Plaintiffs in AXA insurance sued on behalf of Jacqueline Piatigorsky’s trust seeking $1.5 million, in which case the trust alleges that CFASS failed to alert them to a lack of safety measures and personnel in place to protect their art from damage.

Petitioners’ claims of gross negligence were based on evidence that art was left in staging areas on the warehouse’s ground floor and that despite a reassuring email stating otherwise, no action was taken to protect this property from imminent danger. In its March 17, 2016 decision to reverse the lower court’s dismissal of petitioner’s complaint, the court in XL Specialty noted that in 2011, CFASS took extra precautions, such as moving art above the ground floor and hiring extra personnel, to prepare for the arrival of hurricane Irene, a storm that largely avoided the city.

In all suits, Petitioners argue that CFASS’s gross negligence arose when, despite assurance that they would do so, they failed to raise artworks from the ground floor of the warehouse, leaving them in the direct path of flooding. Such failure to act, therefore constituted a material breach to the storage contract, as both the parties and their respective insurance companies reasonably relied on CFASS to safely house the art and provide accurate and reliable status updates about its condition. So far, CFASS points to the liability waivers and labels Sandy an ‘Act of God’ in rebuffing claims of negligence.   

While the plaintiffs in each case allege gross negligence, breach of contract and bailment, and fraudulent and negligent misrepresentation, the lower courts have maintained that subrogation waivers often negate claims for gross negligence. In response, the plaintiffs in each suit argue that the subrogation provision unfairly excuses CFASS gross negligence. Judge Saliann Scarpulla, who presided over each of the three cases, refuted this claim, arguing that instead of exempting CFASS from liability, the provision simply requires “one of the parties to the contract to provide insurance for all the parties.” Board of Educ., Union Free School Dist. No. 3, Town of Brookhaven v. Valden Assocs., 46 N.Y.2d 653, 657, 389 N.E.2d 798, 416 N.Y.S.2d 202 (1979); Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 18 N.Y.3d 675, 684, 967 N.E.2d 666, 944 N.Y.S.2d 443 (2012).

In all three cases, the New York Supreme Court, New York County, initially upheld the validity of such provisions in judgments in favor of CFASS. On appeal, however CFASS’ motion to dismiss XL Specialty’s complaint was reversed. Holding that the contract’s waiver of subrogation was unenforceable, the New York Supreme Court, Appellate Division, held “provisions purporting to exempt the bailee from liability for damage to stored goods from perils against which the bailor had secured insurance, even when caused by the bailee’s negligence have been held to run afoul of the statutory scheme of UCC Article 7.”XL Specialty Ins. Co. v. Christie’s Fine Art Storage Servs., Inc., 137 A.D.3d 563, 566, 27 N.Y.S.3d 528, 530 (N.Y. App. Div. 2016).

With the relief of knowing that one of their main grievances has been acknowledged Axa and Starnet are hoping that appeals will generate similar reversals in their cases.

Conclusion

The immeasurable cultural significance of art renders its destruction not only economic, but also sentimental. The unfortunate events surrounding the CFASS lawsuits provide stark lessons about the costs of collecting, which extends far beyond purchase and insurance premiums to include storage, shipping and when necessary-conservation. While there is a strong drive to preserve artifacts as assets, all artworks have inherent vices and are vulnerable to the elements, incentivizing collectors to perform due diligence when acquiring items and finding spaces to house them.

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About the Author: Scotti Hill is a J.D. Candidate, 2018 from the S.J. Quinney College of Law at the University of Utah. She serves as a summer 2016 intern for the Center for Art Law, and works as an art critic and curator. Prior to law school, she received a Master’s Degree in art history and visual studies. She can be reached at scottiaustinhill@gmail.com

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

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