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Bailee Risks: Different Operations, Common Exposures

Bailee Risks: Different Operations, Common Exposures Advisory: Property-Casualty | Comments

What do a jeweler, a dry cleaner, a warehousing firm, a trucking company and an IT services operation have in common? They routinely assume responsibility for the property of other people or entities.

What else do these diverse businesses have in common? Many will have to rely on their own operating capital to compensate customers for damaged, lost, stolen or otherwise destroyed property despite efforts to limit liability by contractual agreement or insurance protection.

How can businesses avoid such unpleasant and potentially devastating surprises? First, businesses need to understand the risk exposures created by their operations; then they need to know the proper options for transferring such risks and limiting their liabilities.

Businesses taking possession of other people’s property in the standard course of operations are defined as bailees; customers entrusting property to others are “bailors”. Bailees are required to exercise the same care with the property of others as they would with their own property.

Unfortunately, many bailees incorrectly assume their standard business insurance coverages extend protection to such property; however, most general liability policies specifically exclude “property of others in your care, custody and control” and property insurance is intended to cover your own property, not property of your customers. While some property policies include limited coverage for “property of others”, protection for bailees is specifically limited or excluded by policy definitions.

Many businesses attempt to protect themselves from liability for the property of others by having customers sign hold harmless agreements, waiver of subrogation contracts, and other disclaimers of liability. Unfortunately, there are distinct differences between contract and bailment law and the aforementioned contracts have been overturned by the courts based on the fact that a bailee cannot contract away his/her legal liabilities. In general, contract law does not apply to bailment situations thereby rendering these types of contracts invalid.

If your business could face financial loss due to bailment situations, consider purchasing special insurance to protect against this risk exposure. Be aware there are two types of insurance for this situation. In our port city, many storage related businesses may have warehouseman’s legal liability coverage which provides coverage, including legal defense, when negligence results in damage or loss to the depositor’s goods. However, this coverage does not protect the customers’ goods unless the insured is at fault. Legal liability is frequently absent in situations such as windstorm, hail, lightning, hurricane and flood therefore damage to customers’ property would not be covered.

A broader form of protection for bailment scenarios, including warehousing operations, is bailee legal liability insurance. This coverage provides protection for damage or destruction of the bailor’s property while under the bailee’s temporary care, custody, and control regardless of legal liability. Most policy forms also extend protection to customers’ property in transit to and from the bailee’s premises. One of the intangible benefits of this form of coverage is the preservation of customers’ goodwill.

Although bailee legal liability policies cost more than warehouseman’s legal liability due to the broader protection, the additional cost is usually nominal compared to the potential loss of business due to a disgruntled key customer or a tarnished reputation.

Think about your operations and the risks it creates. If you are responsible for the property of others, you need to take extra precautions to protect their goods, as well as your own assets and reputation. Discuss your operations with a knowledgeable insurance broker to develop proper risk transfer strategies and a prosperous future.

This notice is provided as information only and should not be considered a legal opinion. If you have questions about this Client Advisory, please contact Seacrest Partners at 912-544-1900.


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