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Wallspace LLC Sues Insurance Company for Damages Sustained During Sandy

Hot on the heels of AXA Fine Art Insurance’s lawsuit against Christie’s Fine Art Storage Services filed last month, the Chelsea gallery Wallspace, LLC (“Wallspace”) filed an action in New York state court last week to recover for claims from Schmutter, Strull, Fleisch, Inc. (“Schmutter”), which sold the gallery a fine arts policy but refused to cover the extensive damage it sustained during Hurricane Sandy due to a clause in the policy excluding damage caused by floodwaters.

Partners at Wallspace Gallery surveying damage to their space after Sandy

Wallspace is located in one of the areas hit hardest by Sandy. Located on West 27th Street between 11th and 12th Avenues, the blockhouses four other contemporary art galleries—Foxy Production, Derek Eller, Jeff Bailey and Winkleman—all who sustained extensive damage during the storm. Wallspace lost 70% of the contents of its gallery. All five galleries reopened on January 12, 2013, nearly two and a half months following the damages sustain by the storm.

The facts alleged in the complaint reveal a common tale of woe for galleries, their insurers, and post-Sandy damage. The complaint states that that Wallspace entered into an insurance agreement with Schmutter in July 2012, by which the gallery would obtain “fine arts coverage fully insuring and protecting all of the very valuable works of art worth several million dollars.” The complaint also quotes language from the insurance company’s website, which states that, among other things, a typical commercial property insurance policy includes coverage for “lost inventory.”  Wallspace also alleges that it provided a full list of the works held and stored by the gallery, including an appraised valuation of each piece. When Wallspace tried to claim against its insurance policy, Schmutter stated that the specific policy that Wallspace purchased did not cover the damage to artworks at the gallery resulting from Sandy.

The complaint, filed on Monday, September 23, 2013 asserts two causes of action. First, Wallspace argues that Schmutter breached the duty of care it owed the gallery by “failing to obtain the coverage desired by Plaintiff to fully insure and protect all of the valuable works of art worth several million dollars.” Second, Wallspace argues that Schmutter breached its agreement by “failing to obtain for the plaintiff the desired and agreed coverage or any such coverage at all to fully insure and protect all of the very valuable works of art on the Gallery Premises worth several million dollars from risk of loss through a major insurance company or any insurance company at all.” Wallspace is seeking damages in excess of $3 million for the destruction of artworks it believes should be covered by its insurance policy.

Winkleman Gallery (on the same block as Wallspace) before and after Sandy cleanup

As a general rule, there are two broad categories of fine art insurance coverage—scheduled and blanket. Under scheduled fine art insurance policies, each artwork is individually listed on the policy for a stated insured amount and in particular categories of loss. Blanket fine art insurance policies do not require itemizing and appraisal of individual pieces, but cover damage up to a specified maximum amount for each artwork and for the entirety of the art holdings. However, neither type of insurance policy typically covers damage resulting from floodwaters causing damage to walls, flooring, fixtures, furnishings, or electrical wiring. For this type of damage, additional flood insurance would have to be purchased, which is often prohibitively expensive for galleries.

Based on the complaint, Wallspace appears to have obtained a scheduled policy. But if the gallery did not have coverage that extended beyond this standard agreement, a court may rule that damage sustained during Sandy was not within the scope of the policy it obtained from Schmutter.

Time will tell what will come of the lawsuit, as the court will undoubtedly weigh many factors, including the scope of the insurance policy and whether Wallspace took proper precautions. However, based on the current environment of fine art insurance outcomes in New York, Wallspace’s chances don’t seem great. Whatever Wallspace’s prospects, the recent litigation filings arising from Sandy damage show that art world players are still grappling with who should bear the astronomical loss caused by the superstorm. As New York continues to recover from the $50-60 million worth of damage to galleries, storage facilities, and studios, disputes will continue to proliferate.