by Jamie K. Baker and Lindsey Shine Lawrence
While stories of art heists often conjure images of thieves absconding from museums, artworks in storage are also at risk of theft. One Southern California woman placed paintings she inherited into a Public Storage unit for years, only to later discover that her paintings, which included works by Picasso, Degas, and Modigliani, had vanished. In 2013, a Norman Rockwell painting disappeared from storage shortly after it was purchased for over $1 million at auction.
Storing art and other collectibles requires careful consideration of the storage facility, including physical risks relating to security, location, and climate and pest control. Understanding the storage facility’s contract terms is just as important. Contract terms may define the storage facility’s role as a lessor or bailee, impact liability, impose all insurance obligations on the unit occupant, and, depending on the type of facility, may even state that the premises are not suitable for the storage of heirlooms or irreplaceable property like art. Of special concern to art insurers are contract terms that attempt to limit or release the storage facility from loss or damage liability.
A recent Southern District of Texas case involving paintings stolen from a Houston storage unit highlights the potential impact of contract terms on art insurers’ subrogation rights. In AXA Art Americas Corporation v. Public Storage, CV H-15-3609, 2016 WL 5372530 (S.D. Tex. Sept. 26, 2016), stolen paintings, valued at over $800,000, were insured by AXA Art Americas Corporation (AXA). After the theft, AXA brought a subrogation suit against Public Storage for breach of contract and tort duties. The Court dismissed AXA’s suit without leave to amend, finding that the storage unit lease terms shielded Public Storage from liability for the stolen artwork. AXA’s right to sue as the insureds’ subrogee had been extinguished in light of the insureds’ waiver of their own recovery rights.
It is axiomatic that a subrogation claim allows an insurer to stand in the shoes of the injured insured; however the insurer is not entitled to any greater rights than those possessed by the insured. As the Court noted, Texas law is clear that an insurer may assert only those rights that the insured could assert, whereas Texas law remains unclear regarding whether an insured may unilaterally waive an insurer’s subrogation rights separately from waiving his or her own right of recovery.
In this case, the Court found that AXA’s claims against Public Storage could not proceed, regardless of whether the contractual subrogation waiver was effective, because its tort claim was barred by the economic-loss doctrine and its contractual claims were barred by the terms of the unambiguous storage lease agreement, in which the parties disclaimed Public Storage’s liability for lost or damaged property in express, specific terms. The moral of the story: if an insured contractually releases a storage facility lessor from liability for damage to, or loss of, property such as artwork stored on the premises, the insurer’s subrogation rights may be extinguished under Texas law.
In contrast, a New York court recently held that a loss/damage waiver was unenforceable to waive a fine art storage company’s liability for Superstorm Sandy damages to an insured gallery’s stored works. In XL Specialty Insurance Company v. Christie's Fine Art Storage Services, Inc., 137 A.D.3d 563, 27 N.Y.S.3d 528 (N.Y. App. Div. 2016), the court found that the contract created a bailor/bailee relationship under UCC Article 7 rather than a lessor/lessee relationship, and the insurer’s ability to pursue its subrogation claim survived despite the loss/damage waiver signed by the insured. While liability could be limited, the loss/damage waiver was found unenforceable because it purported to exempt the storage facility from all liability in contravention of UCC Article 7.
The AXA v. Public Storage case is a cautionary tale for art insurers managing the risk of insuring art and other valuable items housed in storage in Texas, putting insurers on notice of the need to protect their subrogation rights before a loss occurs. Carriers may seek to add policy language excluding coverage for certain storage losses. They may also require insureds to obtain prior written approval when attempting to limit or release a storage facility lessor from liability. The insured’s waiver of his or her own rights may have a significant effect on insurers’ ability to recover through subrogation, which in turn may impact the coverage offered by insurers for art and other valuables in storage.