The indemnity is given to you, the lender, and the condition report decides any claim.

A museum asks to borrow a work and says the loan will be covered by the Government Indemnity Scheme. This is usually taken to mean the museum is insured. In fact the Secretary of State undertakes to indemnify the owner. The museum carries the first part of any claim, and exclusions apply that a commercial policy may not have.

Published by ArtisDomus, written by Polina Surina.

The scheme is set by law, in section 16 of the National Heritage Act 1980. In England, Arts Council England runs it with funding from the Department for Culture, Media and Sport. Cover is given as an undertaking, and there is no premium.

A lender needs to know five things: what the Act says, who is indemnified, what the borrower undertakes, what is excluded, and which two documents decide a claim.

Under section 16(1) of the National Heritage Act 1980, the Secretary of State may undertake to indemnify an owner. The cover is for loss of or damage to an object while it is on loan. The owner can be any institution, body or person. The borrower must fall within subsection (2). He decides in which cases and to what extent, subject to subsections (3) and (4). The power is discretionary throughout.

Section 16(2) lists who may borrow. First, a museum, art gallery or similar institution in the United Kingdom. Its purpose, or one of them, must be to preserve for the public benefit a collection of historic, artistic or scientific interest. It must be maintained wholly or mainly from money provided by Parliament or appropriated by Measure, or by a local authority or university in the United Kingdom. Second, a library maintained in the same way, or whose main function is to serve teaching and research at a university. Third, the National Trust for Places of Historic Interest or Natural Beauty, and the National Trust for Scotland for Places of Historic Interest or Natural Beauty. Last, any other body or person currently approved for the section by the Secretary of State with the consent of the Treasury.

Two conditions narrow the power. First, the Secretary of State may give an undertaking only if he considers that the loan will help public access to the object, or add materially to public understanding or appreciation of it (s. 16(3)). Second, he may give one only if the loan follows conditions approved by him and the Treasury, and he is satisfied that proper arrangements are in place for the object’s safety on loan (s. 16(4)).

Section 16(7) answers the question lenders ask most. Loss, damage and safety while on loan include the journeys to and from the place where the object is to be, or has been, kept. The cover runs from the lender’s wall and back to it.

The Department for Culture, Media and Sport issues indemnities to non-national museums, galleries and libraries in England, and in Northern Ireland for international loans. The devolved administrations issue them in Scotland and Wales. The Department funds Arts Council England to run the scheme, reports the total risk to Parliament every six months as the Act requires, and approves claim payments.

In law, the indemnity is in favour of the owner. The Secretary of State gives it to the owner who lends to the borrowing institution. In practice it is issued to owners through the borrower that applied, and the borrower must make sure owners receive their indemnity certificate.

The mechanism is simple. When an owner lends, the borrower takes on the risk of loss of or damage to the object. When the Secretary of State indemnifies the owner for that loan, the borrower’s risk is underwritten, and the loan can go ahead.

Cover still has limits. A section 16 undertaking shows the Government has covered the risk, but it does not guarantee automatic compensation. Investigating a claim may show the loss came from a cause excluded by the indemnity certificate.

Three practical points catch lenders. If the object changes owner during the loan, the current indemnity ends at once and a new one must be applied for. If the valuation should rise during the loan, a new indemnity must also be applied for, and indemnity cannot be based on a promised valuation. Indemnity cannot be backdated, so a late application cannot produce cover after the event.

Check which journeys are covered. The indemnity may cover the time needed to return objects to lenders, whether they live in the United Kingdom or abroad. It does not cover transit to foreign borrowers, who carry the risk while the object travels out of the United Kingdom.

The museum signs an undertaking to the Department, and the lender is not a party to it. It forms Annex B of the guidelines, and its numbered paragraphs set out what the borrower promises.

The minimum liability works as the borrower’s excess. Its purpose is to encourage proper and effective care, responsibility and stewardship, and to keep small claims away from the Secretary of State. A non-national institution with a Designated Collection may choose a minimum liability of £25,000 over its financial year instead.

Who pays matters to the owner, because it decides who sends the money. Claims within the minimum liability are paid by the borrower straight to the owner. For a claim above the minimum liability, the borrower pays the minimum liability to the Department, and the Department then pays the owner in full.

The guidelines give an example for the Designated Collection option. Ten claims of £2,500 each in one financial year would all be handled and paid by the institution. A single claim of £1 million would go to the Arts Council. If the Secretary of State decided to pay it, the institution would pay £25,000 to the Department, which would then pay the owner in full.

The exclusions are in clause 4 of the indemnity, and the borrower must write matching conditions into the loan agreement. A private lender should read these four before signing anything.

War. The borrower is not liable for loss or damage caused by war, hostilities or war-like operations. Acts of terrorism, riot, civil commotion, piracy and hijacking stay covered, whether or not the war exclusion is in place. The Secretary of State will not normally remove the war exclusion. A lender who asks must confirm they understand that terrorism is already covered, and say what war risk they have in mind. They must also confirm in writing that the loan would not go ahead without it.

The owner’s negligence. The borrower is not liable for loss or damage caused by negligence or another wrongful act of the owner, or of the owner’s servants or agents. This hits a private lender hardest, because the journey starts inside a private house. Removing the exclusion when the journey starts in a private individual’s care and supervision is regarded as an unacceptable exposure. Removal would be considered in three cases. The owner is an institution or body of recognised professional reputation and competence. Or the loan starts under the direct care and supervision of such a body. Or the object travels in a touring exhibition under such supervision.

The object’s condition. The borrower is not liable for loss or damage caused by the object’s condition when lent, including inherent vice or an existing flaw. That exclusion is why the condition report exists, and why a report made after the event is worth less than one made before.

Wear and tear. The indemnity never covers loss or damage from normal wear and tear. This matters most for musical instruments, clocks and watches, mechanical and scientific items, and vehicles, among others. Objects made to travel are covered on static display, but not while being driven, ridden, sailed or flown.

One more limit matters before a long-term loan is agreed. For long-term loans, the Secretary of State grants indemnity for three years at most, inclusive of days.

What counts is the specified value in the indemnity certificate. It must be a fair estimate of what the object might fetch on the open market at the time of the loan. The level of cover, and whether the valuation is acceptable at all, depend on the advice of experts consulted by the Arts Council. Once a provisional valuation is approved, a higher confirmed valuation needs strong evidence, and approval is not guaranteed.

The principle is worth remembering for anyone tempted by a generous figure. Indemnity should make good a loss, so that the party suffering it is not out of pocket. It should give them no chance to profit from it. The value of each object should be agreed before the loan is accepted.

The condition report does the other half of the work. Agreed, timed and dated condition reports are a crucial factor in proving a claim. What matters is the comparison between two reports. The first is made as the object passes into the borrower’s care and control. The last is made as it returns to the owner or the owner’s agent. Without condition reports, a claim has no evidence for the extent of damage or the loss in value.

Where a private lender cannot supervise and agree a report in person, qualified staff may prepare the first report and agree it with the owner or the owner’s appointed agent. The lender should insist on this step.

If an object is damaged beyond repair and the whole specified value is paid as a total loss, there are three options for what remains. The borrower keeps it, with full and unconditional title and the owner’s agreement. The owner buys it back for an agreed sum. Or it is destroyed. The loan agreement should settle this choice in advance.

The undertaking is between the museum and the Department. The Secretary of State issues the indemnity certificate to the owner. The only document the owner signs is the loan agreement with the museum. It settles the practical questions the statute leaves open: dates, venues, packing and carrier, and who supervises the first condition report. It also covers whether and by whom the work may be photographed, whether it may go on to a second venue, and what happens with repairable damage.

In this practice, two things are most often missing from a private lender’s file at signature. One is a condition report the lender has seen and agreed. The other is a written statement of the specified value, with the date it was set. Both are easy to get before the loan and close to impossible to rebuild afterwards.

Objects that contain a protected material need more. An indemnity certificate is not a permit. The Act and the guidelines leave in place the controls that decide whether such an object may move at all.

A summary of the law. It is not legal or tax advice.