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And John Wakefield, director of fine art insurers Connoisseur Underwriting, has also called on auction houses not to use insurance premiums for lots as ‘semi-concealed additional streams of income’.

The three areas he singles out for particular concern include the rates at which auctioneers charge insurance premiums; the bases of settlement for claims; and the policy of initially setting cover at the estimate price but then charging according to the hammer price.

Mr Wakefield has spoken out as his concerns have grown that many auctioneers may not realise that some of their activities may be in breach of the law. Since 2004, only businesses or individuals registered with and regulated by the Financial Services Authority are allowed to sell insurance and any activity outside this regulatory framework is unlawful, he says.

“The Financial Services Authority’s definition of providing insurance is wider than generally perceived; if a risk is transferred for a price (for example, a charge for a promise to make damages good), then it falls within the scope, so there is no loophole in that direction.”

Mr Wakefield further argued that if insurance is provided, then proper documentation has to be supplied within prescribed time limits and ‘contract certainty’ achieved. Also, insurance providers and intermediaries have to treat customers fairly.

“Now, although all this may seem a bit dry, it is crucial if auctioneers are to operate within the legal framework. My own opinion and experience is that most auctioneers fail to fulfil one or more of these criteria.” He is further concerned about the percentage rate sellers are charged – typically, one to two per cent – and that the basis of settlement of any claim is far from precise.

Looking at charging, Mr Wakefield notes that annual rates for antique and fine art dealers’ insurance vary from around 0.2 per cent for pictures to about 4.5 per cent for jewellery and watches: “So how a rate of even one per cent could be justified for perhaps six weeks in the possession of an auctioneer is a mystery to me.”

He has also conducted research via the internet and noted that various bases of settlement are proposed. “Some auctioneers will give mid-estimate (which, if estimates are pitched deliberately low, is unfair to the seller), others are unclear or will establish the monetary compensation themselves.”

However, he is perhaps most concerned with the currently accepted convention of setting premiums based on estimates, but charging according to hammer price.

“Surely, once the hammer falls, the ownership passes from the seller to the buyer and the seller has no further insurable interest? To charge the premium on an amount that is only momentarily extant, if at all, is unreasonable (at best). Any argument that default by the purchaser may occur and therefore cover for the seller must continue until re-auctioned must be illusory, because no sale has taken place and thus the basis of settlement presumably reverts to the nebulous mid-estimate basis.”

Mr Wakefield pointed out that a seller with an insurance policy that covers stock or possessions temporarily removed from their premises would be in a position to decline the auctioneers’ insurance. The sticking point is that, in most cases, consignors would be asked to agree to a ‘waiver’ in such circumstances.

“I have seen various examples of these [waivers] and they mostly attempt to contract the auctioneers out of their common law liability as bailees. Effectively, in some cases, the auctioneers could play football with sellers’ goods and still not be liable. We, as insurers, would not advise our customers to accept such forms and will only grant our own waiver. This puts the auctioneers back into their true legal position vis-à-vis the seller.”