This unusual story may not at first appear to be entirely relevant when considering the dark magic of insurance. Certainly many people need a cup of strong coffee before submitting themselves to an insurance analysis. But, other than that, what relevance is there between insurance and the art of coffee making…possibly, none.

(left):  An illustration of Edward Lloyd’s coffee house, 1798, which served as a headquarters for marine underwriters.  Fine Art Magazine

But consider this: coffee is pivotal to the story of how insurance came to be. Without coffee, and a place to drink it, the insurance industry may have taken a very different course. Lloyds of London, the original, official home of insurance, was first and foremost a coffee house, founded in 1688. At that time there were around 3,000 such coffee houses in London. So Lloyd’s must have been an entertaining and engaging-enough venue to have been frequented by ship owners, sailors and merchants – a rowdy bunch. Edward Lloyd’s coffee house provided a venue for weather reports, news from distant locales and discussion of business and, significantly, insurance agreements; all while slurping down cup after cup of coffee.

Lloyd’s moved, expanded and stopped selling coffee. It became the global center and catalyst for the modern insurance industry, as we know it today. There’s much more to Lloyd’s history, of course. Their coffee house origins are merely a prelude to how the company grew and consolidated into the fully-functioning industry it is today.

So how does it work, is it important and why should we have it? Most importantly, why should a collector of art or other fine things want to understand the workings of the insurance world?

The answer is simple: because it is an important part of your collection management strategy, protecting what you’ve spent years building. And, because your broker says so! Also, as with the English game of Cricket, it’s slightly more fun when you understand the rules.

Insurance works in its most basic form by pooling or transferring risk. A group of individuals, say art dealers, come together and all agree to pay a certain amount of money, premium, into a fund. Should one of the members suffer a loss or damage–like to a painting–they can then extract money from the fund for the amount of the loss. An individual taking a financial hit alone may very well bankrupt their business. When the loss is distributed among the members of the fund/group, not only can each individual afford to take on slightly larger risks, and therefore reap potential higher rewards, they also protect one another from financial ruin in the event of a large loss.

That is the core principal of insurance. Essentially, with some modifications, an insurance company extrapolates the principal to a much larger scale. Insurance loves the law of large numbers–the more people in the pool, the more predictable it becomes to measure likely losses and the more accurately annual premiums can be priced.

Insurance is everywhere and without it, very little could ever be done in the business world and art collecting, as you know, is often managed much like a business. I’m sure that if you’ve read this far, you have a story about insurance, perhaps involving an art fair, a shipping nightmare, or a consignment agreement gone wrong. All these are very direct examples of insurance at work, but what about the indirect examples? There is also workers’ compensation insurance so an art fair can be set up, a gallery staffed and art handlers hired; professional liability insurance for art advisors with overly litigious, “I’m-recording-this-for-my-lawyer” clients; and general liability insurance, in case a collector looses a toe to the unintentional and rapid descent of a large Kris Martin work!.

It is astonishing to consider how we are affected by insurance every day, in a wide variety of often invisible ways. In the coming articles, I will address exactly how important the role insurance is in our everyday lives, and particularly, how critical it is to the functioning of the art market. I also hope to offer some advice on how to handle your insurance proactively.

So at the very least, next time you’re making coffee for guests, you can talk about insurance in a most unusual and interesting way!

by Thomas Galbraith, Contributing Writer

Contact Thomas at tgalbraith@gendelman.com  if you have any questions you would like me to address in the coming articles.

Thomas Galbraith is Director of Fine Art for Bruce Gendelman Insurance Services. Galbraith has years of expertise in the art insurance marketplace. He previously worked as an art historian at the Art Loss Register, assisting in the recovery of stolen art, and as a collections specialist at Chartis Private Client Group. He most recently served as fine art expert for AXA Art Insurance in the U.S. and as part of the team that spearheaded the company’s Canadian operations. He currently serves on the board of APAA.