Chairman And President
With collecting art, including historic documents and sports memorabilia hotter than ever, Elite Traveler Editor-in-Chief Douglas Gollan recently sat down with Lawrence M. Shindell, Chairman and CEO of ARIS Corporation and Judith L. Pearson, President of ARIS Corporation to discuss the critical issue of art title insurance.
ET: Why is Art Title Insurance so important?
ARIS: It all comes down to asset liquidity and value. If one considers real estate as an analogy, the notion of real estate as an asset and an investment would never have evolved without the advent of title insurance, because certainty of legal ownership is the necessary ingredient to asset value and liquidity. In the case of the art world, which is essentially an unregulated, non-transparent industry with more than $50B in worldwide annual sales, title insurance enables individuals to protect their investment when acquiring, selling, or gifting their art. Title insurance for art enables people to employ the same kinds of risk management tools that most individuals and advisors incorporate into every other kind of significant dollar transaction. Although most people think of title risks in the art world in terms of theft (risk of reclamation by historical owners of works stolen during WWII or by victims of contemporary theft), 75% of disputes relate to the very broad category of liens, encumbrances, authority to sell, consignment issues, fractional ownership disputes, and so forth.
ET: What is it ARIS actually insures, and how does the process work?
ARIS: As with title insurance for real estate, ARIS art title insurance (called ATPI®) guarantees that the owner of the art (the insured) has clear legal title to the work during the life of ownership of the work and that of their legal heirs. This is based on a one-time premium at the time the policy is issued, so there is no annual renewable cost; and the premium is based on the value of the work at that time. The coverage limit can be increased in the future if the work appreciates in value, at the insured’s option, and for what often will be a limited additional premium based on the percentage rate of the insurance when the policy was first issued. There is no deductible under the policy, and as an important service to the client, the policy provides for full defense in addition to the indemnity. Defending title disputes in the art world is very expensive (regardless of the value of the work) and involves very complex legal issues with, in some instances, inconsistencies between different areas of the law. The ARIS legal defense coverage is not only “outside-the-limits” (not deducted from the amount of the pay-out under a claim) but it ensures that the foremost legal specialists in each of the relevant fields of law are employed in a given title defense case.
The application process is quite simple: through the application documents we simply ask the insured to tell us what they know about the work gathered for connoisseurship and valuation purposes. ARIS takes the underwriting from there.
ET: What happens if there is a challenge to title?
ARIS: ARIS immediately steps in to assist the client¸ first by fully investigating any information which is presented and which was not known when we underwrote the policy. Based on our assessment of the facts after full reinvestigation, we will either defend the claim or, in the unlikely event that we missed something in the underwriting which makes the title claim clearly valid, we will settle the claim by paying the insured the insured limits (the value of the work as insured) and assure that the work is returned to the rightful owner. It is important to remember that individuals may face public relations issues around art title disputes. Consider the recent situation involving Steven Spielberg and his stolen Norman Rockwell painting. We offer an endorsement for public relations expense coverage. The use of title insurance enables our insured to say in the unfortunate event that a title issue arises that: “I did the very best that I could do to be a good faith buyer or seller. I fully investigated the work, I utilized the best advisors, and I went the final and important best practices step of securing an independent investigation guaranteed through title insurance. The matter is now in the insurance company’s hands.”
ET: Before starting ARIS, can you give us a bit of background on what you were doing?
Lawrence M. Shindell: I was a trial attorney for nineteen years handling complex litigation for and against Fortune 500 companies, much of the work being insurance related. As I often say to clients, Henri Matisse was a lawyer before he became an artist. Later in my practice, in the context of transactional consulting around art (dealing with the risk management issues surrounding important art transactions), I recognized that there was no third-party risk management tool in the market for what is an insidious risk in the market, and that private guarantees or warranties (often called indemnification) from sellers do not offer real protection for buyers. That is true for the whole range of art transactions: purchases, sales, charitable gifts, 1031 exchanges, borrowing against art as collateral – generally, considering art as an asset in the same way clients consider other investments and possessions as assets.
Judith L. Pearson: I was a senior executive with AON, the global insurance brokerage firm, dealing with complex management liability insurance which included Directors and Officers Liability, Representation and Warranty in the context of M & A transactions and Intellectual Property Risks for large corporations globally, and often dealt with new product development as the complexity of the risks I needed to address were often unaddressed by standard coverage in the market. Many of the fundamental risk management issues which I addressed at AON are exactly the same as the kinds of issues we address through ARIS’ art title insurance. At the time Larry was doing more and more transactional consulting in the art world, we believed that together we could create the solution the art world had been seeking for a good twenty years, – but only by stepping outside the property and casualty insurance box which, itself, was the only point of convergence between art and insurance in the industry. To solve the art title risk in the art world required a true title insurance solution.
ET: I understand there were quite a few regulatory hurdles and it took seven years to get all the necessary approvals. Were there any points you thought about giving up?
ARIS: Of course there were momentary points. But in reality we were both successful in careers where our successes required believing in and executing strategies that essentially meant that “no” or “it can’t be done” were not acceptable answers. So we persevered in the belief that we were brining to a global market a real solution for a real market need, involving a fundamentally new approach.
ET: What would be your advice for others who are having the same challenges in their businesses?
ARIS: It sounds trite, but Abraham Lincoln once said, “Right is might.” Do your best to analyze the merits of your proposition and once you are confident to the core of its correctness, don’t give up. Stay the course.
ET: Judith, you’re based in Denver. Larry, you are in Milwaukee, and you have a main office in New York. Tell a bit on how your management structure is set up, how you divide roles and the positives and negatives of having the top two executives split between three offices?
ARIS: At the end of the day, we are an information services company, with a global market, and we soon expect to have an office in London. It is also no secret that we are brother and sister, so, although the company has from its inception had a focus of institutionalizing its operations, that bond has helped the company stay very nimble in its operations. Denver serves as the hub of our sales and marketing operations as well as the base for a very sophisticated company-wide information technology platform, which clients are able to access with full security to manage their portfolio of insurance with ARIS. Milwaukee serves as the hub for our underwriting (art historians and title plant personnel) and internal financial and operations management. New York serves as the top level of our underwriting function – where our Chief Underwriting Counsel and Director of Underwriting is located and where we will continue to expand our legal staff to combine the factual (art historical) and legal (as with any title insurer) facets to our underwriting. And, we are a New York company. Judy, as president, focuses on overall management of these operations, with the additional focus on sales and marketing. Larry, as CEO, focuses on general company growth and strategic initiatives, with the additional focus on underwriting and marketing.
ET: Now that ARIS is up and running, how is it going?
ARIS: It is going great. In two short years (we entered the market in June 2006 after the many years of research and development, the world recognizes ARIS as the standard in the industry and the world leader in art title insurance. Early adopters have commented that the art industry will never be the same, and that the market should be very happy for what ARIS has done. We are growing at 300%-400% increments and expect that to accelerate. Because we are a regulated insurer, we can serve as a neutral safe-harbor to gain access to transaction information which sellers will not disclose to buyers (as when galleries or auction houses keep confidential the identity of the consigning-owner) but which enables us to underwrite more cost-effectively to protect the buyer. We are having great success during our underwriting in gaining this information from dealers, sellers and auction houses, who know that ARIS will keep the information confidential, not even divulging it to the buyer. In effect, we are creating critical transactional transparency without disrupting the tradition of confidentiality between transaction principals.
ET: What do you find the biggest challenges having a new product in a very old market?
ARIS: Change is difficult. On one level, old habits die hard. On another, a number of people in the art market have vested economic interests in maintaining its non-transparency. When it comes to asset protection and value, no one disputes the merits of title insurance and the need for transactional transparency that it brings. Some individuals continue to think that self-insuring around the art title risk is ok; however, once they are fully informed about the depth, breath and insidious nature of the title risk in the art world, and the cascading effects it can have on their family once assets are transferred to the next generation, they recognize the value of this risk management tool. So our focus is educational. We focus the market on the issues and our solution. We present to all types of professionals in the art world. Once we have had an opportunity to do so, we have a very high conversion rate.
ET: What are the typical questions potential customers have about Title Insurance?
ARIS: The usual questions center on cost, but we have yet to have a transaction not proceed for that reason. The fact is, the cost as a one-time premium is very effective when one compares the cost, for example, to annually renewable property damage insurance for art, to sales tax on the art, to the buyer’s and seller’s premiums on works transacted at auction, and depending on the circumstances of the client and the transaction, to the after-tax cost of the premium (deductible expense or going to cost basis in the art) or estate administration expense when thinking about estate succession. We have seen that the premiums on our policies to date have generally ranged from 1.5% of value to 6.5% of value, with most works falling in the 2-3% range. Again, this is a one-time premium for life of ownership, with no deductible and with full defense coverage.
ET: Aside from work, what hobbies do you have?
Lawrence M. Shindell: I enjoy golf, tennis, scuba diving and travel, which includes visiting my son who lives in Israel.
Judith L. Pearson: I have three children, the youngest still at home, and one grandchild and we spend our time skiing, hiking, golfing, and scuba diving.
ET: Do you like to travel for pleasure, and if so tell us about two or three of your favorite places to go?
Lawrence M. Shindell: For warm-weather I actually prefer the more quaint upscale resorts on the Pacific Coast of Mexico. For more traditional travel, I enjoy Eastern Europe. Hope to take that great African safari sometime soon.
Judith L. Pearson: Our current focus is experiential. We want to provide our children with a sense of age appropriate adventure balanced with relaxation. We also want our family to understand different cultures. Since we live in Colorado we tend to focus on Mexico, the Caribbean and the rich history of Europe.
ET: Do you have any favorite hotels or resorts? For business? For pleasure?
Lawrence M. Shindell: American Express Platinum Finest Hotels in the World program is a good list. I prefer smaller, off-the-beaten path hotels, regardless of location.
Judith L. Pearson: For business I like the boutique focused hotels and for pleasure the service oriented hotels with access to local culture.
ET: Do you ever travel by private jet, and if so, what is your impression of the experience?
ARIS: As a company, ARIS is beginning to look at various programs because of the increasing inefficiency of general commercial travel. We think it is the wave of the future given the challenges the airline industry is facing.
Judith L. Pearson: I have enjoyed the pleasure of private jet service. The convenience and service is appealing.
ET: You both had previous experience at much bigger companies, what are the plusses and minuses of being in a smaller, albeit fast growing company?
ARIS: ARIS is in a unique position where we can take all of the lessons and observations of the past and hopefully do more things more correctly from the beginning without the burden of legacy systems and cultures. That is a huge plus and one we embrace in all of the decisions we make as we grow and build the right kind of culture. We always say that we are the smallest company in the world, in relative terms, that must act and compete with the largest and most sophisticated companies in the world Thus far we have succeeded at that. The minuses all center on maintaining that delicate balance of being lean and efficient yet being best-in-class in service delivery.
ET: Are there any new products you have in mind?
ARIS: All of our initiatives to service the market will remain centered on title insurance outside the context of real property. Although we are a title insurance company, we have no interest in writing title insurance for real property, because that field is well-served by many extraordinary companies. We are a complement to that industry and we hope that industry views us the same way in reverse. We are also a complement to the great property insurers which insure the property risks associated with art and other similar collectibles.
ET: Where do you see ARIS five to 10 years from now?
ARIS: With a little bit of luck and a lot of hard work ARIS-wide, our goal is that ARIS will remain the definitive authority globally on insuring title risks on property outside of real property. What we do is very complex and requires an enormous amount of intellectual property to do responsibly. We believe that there is a right way to do things and a wrong way to do things, and the right answer lies in more things than simply price. We also receive many of inquiries to broaden our platform to include advisory services to the art market and so forth. We do one thing very well, title insurance for tangible personal property which is very complex, and we intend to keep that ARIS’ focus.