                                                                  February 9, 1978


78-8       MEMORANDUM FOR THE GENERAL
           COUNSEL, NATIONAL ENDOWMENT FOR
           THE HUMANITIES

           Arts and Artifacts Indemnity Act (20 U.S.C.
            § 972)— Statutory Limits— Dresden Exhibit


   This responds to your request for our opinion concerning a disputed
interpretation o f the Arts and Artifacts Indemnity Act, 20 U .S.C . §§ 971-977
(1975 Supp.).
   The Act provides for indemnification by the United States against loss or
damage to certain works o f art, artifacts, printed materials, and audio and video
recorded materials made available for exhibit in the United States. Indemnifica­
tion agreements under the Act are negotiated and entered into by the Federal
Council on the Arts and Humanities on behalf of.the United States. 20 U .S.C .
§ 972. Limits on the amounts of indemnity are set forth in 20 U .S.C.
§ 974(b)-(d), which reads as follows:
       (b) The aggregate o f loss or damage covered by indemnity
     agreements made under this chapter shall not exceed $250,000,000 at
     any one time.
        (c) No indemnity agreement for a single exhibition shall cover loss
     or damage in excess o f $50,000,000.
        (d) Coverage under this chapter shall only extend to loss or
     damage in excess o f the first $15,000 of loss or damage resulting
     from a single exhibition.
   The Council proposes to indemnify a planned East German exhibit called
“ The Splendor o f D resden” as follows: the first $50 million of loss or damage
to the objects in the exhibit is to be covered by indemnification; however, only
one-third of the total value of the porcelains and one-fourth o f the total value of
the panel paintings in the exhibit are to be included. The total value o f the
porcelains and the panel paintings is well below the $50 million statutory limit.
The Council intends that the applicants, the National Gallery of Art and others,
supplement the indemnification agreement with commercial insurance that
would cover:

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         a. Claims for loss or damage over and above $50 million, to a
      limit o f $18 million;
         b. Claims for loss or damage to porcelains in excess of one-third
      of the aggregate value thereof; and
        c. Claims for loss or damage to panel paintings in excess of
      one-fourth o f the aggregate value thereof.
   As we understand it, you believe that the Council lacks the statutory
authority to enter into the agreement as it now stands. You state that the
porcelains and the panel paintings, if indemnified, must be covered for their
full values.1 In explaining the proposed agreement to illustrate your contention,
you argue that if the porcelains had a value of $3 million and all were
destroyed, the indemnity to be paid by the United States would be limited to $1
million. In challenging the C ouncil’s authority, you assert that Congress
intended that the agreements, within the range of statutory indemnification
limits, must cover the full value of the items indemnified. Therefore, if the
Council should adhere to its current offer to indemnify the porcelains for only
$1 million, it could only include porcelains valued at $1 million. The result
would be that the applicants for indemnity would be obligated to secure
insurance on the remaining $2 million. Premiums on such a policy would be
substantially higher than under the Council’s proposal because the commercial
insurance carrier would be responsible for the full value o f the unindemnified
porcelains, whereas in the Council’s proposal the insurer would only be liable
for damages in excess of $1 million. Thus, the insurer would have a $1 million
buffer before its liability for loss attached.
   The language o f the Act does not expressly deal with this problem, and as we
understand it, you do not contend otherwise. However, an argument can be
made that 20 U .S.C . § 974(a) (1975 Supp.) supports your position. The
provision states that:
        Upon receipt of an application meeting the requirements of
     subsections (a) and (b) of section 973 of this title, the Council shall
     review the estimated value of the items for which coverage by an
     indemnity agreement is sought. I f the Council agrees with such
     estimated value, fo r the purposes o f this chapter, the Council shall,
     after approval of the application as provided in subsection (c) of
     section 973 o f this title, make an indemnity agreement. [Emphasis
     added.]
   Arguably, based on the above language, when the Council agrees with the
estimated value of particular items, the indemnification must be in the amount
of that value. However, in our opinion, a fair reading o f the provision indicates
that its purpose was merely to specify the procedures required before an
agreement could be made. The emphasized language only provides that the



   'Since these two classes o f item s are together valued at approxim ately $5 m illion, there is no
problem with the statutory $50 m illion limit per exhibition.

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Council and the applicant, among other things, must agree on the value of the
covered items before the Council can enter into an indemnity agreement.
   You find support for your view in the A ct’s legislative history. The specific
language upon which you rely appears in S. Rept. No. 94-289, 94th C ong., 1st
sess. 4 (1975), which reads as follows:
        The amount o f the indemnity agreement is set by the Federal
     Council on the Arts and the Humanities after reviewing the value of
     the items as set by the owner thereof. If the Council disagrees with
     the value set by the ow ner, and the owner disagrees with the value set
     by the Council, no indemnity agreement shall be issued. It is
     contemplated that the Council shall make liberal use of consultants,
     both with regard to the valuation and estimation of the article to be
     covered, and with regard to the packaging, transportation, and
     exhibition of that article.
       Nowhere in the legislation is there found a definition o f loss. It is
     understood that a loss under the indemnity agreement covers partial
     damage to covered articles as well as loss or complete destruction.
       Should a claim of loss be filed under the indemnity agreement
     where there is a complete loss— where the item has been totally
     destroyed— the total amount shall be paid.
Almost identical language was used in H. Rept. No. 94-680, 94th C ong., 1st
sess. 8 (1975).
   The Department o f State and the National Gallery of Art both disagree with
your position. They are o f the opinion that the Council does have the authority
to enter into the proposed agreement. The Department of State’s argument,
referring to the excerpt from the committee reports, is as follows:
        We note your reliance on certain language appearing in the
    Committee Reports on this legislation as a basis for a different
    conclusion. This language, we believe, just as it does not debar
    insuring, say, an 80 million dollar exhibit but limiting the amount of
    recovery to 50 million dollars, likewise does not, in our view, debar
    insuring three million dollars in value of porcelain objects but
    limiting the amount o f recovery funder the indemnity agreement] to
    one million dollars. We consider that the language in the Reports is to
    be read along the lines put forward by Mr. Amory, General Counsel
    o f the National Gallery o f Art, nam ely, that if the Council agrees to
    cover the full value of objects, then o f course if the objects are
    completely lost or destroyed, the total value should be paid. On the
    other hand, if the Council agrees to cover a three million dollar group
    o f objects but limits itself to one million dollars in payments if the
    objects are completely lost or destroyed, the one million dollars
    would be the limit o f liability. In our view Congress, by the wording
    of the Reports, did not mean to preclude this result. (January 25,
    1978)


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We concur. The excerpt, as we see it, does not suggest that when the
Government enters into an indemnification agreement it must do so for the full
value of the covered items. Its last paragraph states that:
       Should a claim o f loss be file d under the indemnity agreement
     where there is a complete loss— where the item has been totally
     destroyed— the total amount shall be paid . . . . [Emphasis added.]
  This statement assumes that full payment for any total loss would be made
pursuant to the terms of the agreement when it so provided. It cannot be
reasonably inferred from this that the amount of indemnification must always
equal the value of the covered items.
  The Department of State and the National Gallery, in asserting that the
Council is empowered to enter into the proposed agreement, cite 20 U .S.C.
§ 971(a)(2) (1975 Supp.) as authority. That section provides that the Council is
authorized to make indemnification agreements
      on such terms and conditions as the Council shall prescribe, by
      regulation, in order to achieve the purposes of this chapter and,
      consistent with such purposes, to protect the financial interest of the
      United States.
  Pursuant to this provision the Council may set the terms and conditions of
indemnification agreements. In the hearing on the Act, Senator Pell, one of its
sponsors, stated:
      As I see this legislation functioning, the Federal Government would,
      for this purpose, become an agency under the Federal Government,
      with the authority to hire personnel. I would expect that the staff itself
      would be a very small one, whose initial function would simply be to
      issue the regulations necessary for implementation of the program.
      The legislation has been broadly drafted to give the agency as wide a
      scope as possible within which to issue those regulations.2 [Emphasis
      added.]
   It would appear that, pursuant to § 971(a)(2), the Council could, in the face
of an unacceptable risk, refuse any indemnity coverage o f certain items. Such a
precaution would seem to be warranted in light of the Council’s statutory duty
“ to protect the financial interest o f the United States.” Since the Council may
refuse indemnification, or indemnify for the full value of covered items, it
follows that its evaluation o f the risks of a particular situation can justify an
intermediate position under a limited indemnification agreement. Section
971(a)(2) provides that the Council is authorized to set such terms and
conditions in indemnification agreements so as to achieve the purposes o f the
Act. The Council’s proposal would result in substantially lower insurance
premiums than under your interpretation. The Senate and House Reports’


   2A rts and A rtifacts Indem nity A ct: Joint H earing on S. 1800 Before the Special Subcom m ittee on
A rts and H um anities o f the Senate Com m ittee on L abor and Public W elfare, and the Select
Subcom m ittee on Education o f the H ouse Com m ittee on Education a n d Labor, 94th C o n g ., 1st
sess. 36 (1975).

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primary theme is that the high cost o f insurance unduly impedes the desirable
practice o f loaning and receiving artistic treasures. The Act was intended to
meet this problem. Thus, the Council’s proposal would further the A ct’s policy
o f alleviating the problems caused by high insurance rates. In addition, as the
Department of State indicates, the Council’s approach of indemnifying in
certain cases for less than the value o f the covered items
       . . . protects the 250 million dollar limitation on the obligational
       authority from depletion and permits the stretching o f the 250 million
       dollar limitation to cover more foreign exhibits.
   For these reasons we believe that the Council’s authority to make the
disputed agreement is included in its broad powers under the Act.
   Finally, we think it noteworthy that the proposed agreement entails no
realistic possibility o f loss to any concerned party. The lender of the covered
items receives the same degree o f protection as it would under your proposal.
The Council and the applicants would actually benefit. The Council can
encourage the exhibition o f valuable items, while limiting the exposure of the
United States to an amount less than the item s’ full value; and, the applicants’
insurance costs would be reduced, thus enhancing the possibility that further
exhibitions would result. M oreover, the public would also benefit by such a
result.
   For the foregoing reasons it is our opinion that the Council is empowered to
enter into the proposed indemnification agreement.

                                                 L eon U lm an
                                      Deputy Assistant Attorney General
                                                    Office o f Legal Counsel




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