CHAPTER NINE - BAILEE/BAILOR COVERAGES

 

INTRODUCTION

 

F  A Bailee is a person who has temporary rightful possession of another’s property.

 

This chapter will discuss the Inland Marine coverages that insure property while it is in the custody of another (bailee), and insurance that covers the property while it is in the custody of the other person, often the owner, and is the bailor.  While previous chapters have been involved with Inland Marine insurance on cargoes and property that is moveable, and equipment used by contractors, this area is different in many respects.

 

There are more than one bailee policy – for instance one form is a bailee liability policy that provides coverage only if the bailee is liable for the loss, while another form, bailee customer’s policy, covers the property regardless of the liability of the bailee.

 

Bailor policies on the other hand, are issued in the name of the bailor which can be a person or organization, that has lawful possession of the property prior to releasing it to the care and custody of the bailee.

 

One of the most common bailee policies is that used for a dry cleaning establishment or a watch repair store, etc.

 

The 1976 Nation-Wide Marine Definition provides that an Inland Marine policy may be written on any kind of property while in transit to or from, or in the custody of, a bailee.  The bailee must not be owned or operated or controlled by the bailor.

 

COMMON EXCLUSIONS

 

Personal property floaters (to be discussed later in this text) and several other types of Inland Marine insurance have exclusions in common.  Rather than continue to specify those exclusions, the following list of exclusions common in All-Risks policies are usually those listed within the policy as exclusions, with certain differences that can be discussed or expanded upon within the text pertaining to the coverage under study.

 

  1. Gradual deterioration, wear and tear;

 

  1. Insects, vermin, inherent vice;

 

  1. Hostile or warlike action in time of peace or war, including action taken in hindering, combating or defending against an actual, impending or expected attack; action by an agent of a government, power, authority or forces; any weapon of war employing atomic fission or radioactive force whether in time of peace or war;

 

  1. Nuclear reaction or nuclear radiation or radioactive contamination, whether such loss be direct or indirect, proximate or remote or is caused by, contributed to, or aggravated by the perils insured against.  (There is usually coverage for direct loss by fire resulting from such causes);

 

  1. Insurrection, rebellion, revolution, civil war, usurped power, or action taken by governmental authority in hindering, combating or defending against such occurrence.

 

LIABILITY OF BAILEES

 

A bailee has rightful temporary possession of another’s property.  Another legal definition is “the party to whom personal property is delivered under a contract of bailment.”  (Black’s Law Dictionary).  Volumes have been written on the subject of “bailment” and there have been many court cases.  Black’s defines Bailment as “A delivery of goods or personal property, by one person to another, in trust for the execution of a special object upon or in relation to such goods, beneficial either to the bailor or bailee or both, and upon a contract, express of implied, to perform the trust and carry out such object, and thereupon either to redeliver the good to the bailor or otherwise dispose of the same in conformity with the purpose of the trust.”

 

Bailment may be distinguished from a conditional sales contract in which property is turned over to another party with the intention that the title will pass to the other party upon the completion of stipulated conditions (since as payment of a balance due). 

 

Legally, while there are many types of bailment – common law lists 6 types of bailment, and other legal scholars have listed as many as 7 – there are the three types that are relevant to Inland Marine insurance. 

 

1.  Gratuitous bailment for the benefit of the bailor.  It has been legally defined as “another name for depositum or naked bailment, which is made only for the benefit of the bailor and is not a source of profit for the bailee.”  “Depositum” simply means to be kept for the use of the bailor.  An example would be when a neighbor takes care of your pet while you are away on a trip and for which there is no payment. 

 

2.  Gratuitous for the benefit of the bailee is the second type.  This simply means that there is no payment, but the benefit is that of the bailee.  Dagwood Bumstead’s neighbor who is always borrowing his tools is a good example.

 

3.  The third type is bailment for hire and for the mutual benefit of both bailee and bailor.  Legally, “a contract in which the bailor agrees to pay an adequate recompense for the safekeeping of the thing entrusted to the custody of the bailee, and the bailee agrees to keep it and restore it on the request of the bailor, in the same condition substantially as he received it, excepting injury or loss from causes for which he is not responsible.”  This may also be referred to as commercial bailments.

 

(And just in case one would arrive at the conclusion that legal scholars are ALL longwinded, an English Lord quoted frequently in common law, said that “bailment should be divided for all practical purposes as, First, those bailments which are for the benefit of the bailor, or some other person whom he represents; second, those for the benefit of the bailee, or some person represented by him; third, those which are for the benefit of both parties.”)

 

DEGREE OF CARE

 

What difference does it make as to which type of bailment is under consideration?  Basically, the bailee has certain responsibilities to the bailor for the safety of the property and these responsibilities depend greatly on the type of bailment in question.

 

Obviously, a bailee who is taking care of a neighbor’s pet, or is storing some furniture in their basement, and for which they will not be paid, would not be required to exercise as much care as a bailee for hire.  This does go a little further though, as for example, a bailee who stores expensive furs for profit would have to exercise greater care while serving as a bailee, than a bailee who fixes lawnmowers.  The bailee has to anticipate the hazards of the property of which they have in their custody, and must take appropriate action.  Using the same examples, a furrier who stores furs must be aware of the possibilities of theft and must have an elaborate alarm system and locked vaults for this property.  A repair shop that repairs lawnmowers, although there would be a theft problem also, if the mowers are locked inside a secure building when there is no one present at the shop, this should be considered as adequate. 

 

Still, the degree of care required is less than that of a carrier.  In contrast, the responsibility of a carrier to protect other’s property is almost that of an insurer.  A bailee must only use the care that an ordinarily prudent person would exercise, under the circumstances, in handling his/her own property.  To go a little further, a carrier is responsible for loss by fire (except when it is an act of God), but the bailee is liable for damages by fire only if the bailee has been negligent.

 

However, some courts have taken the stand that the bailor can make a prima facie case of negligence by showing that the property was not returned or that it was returned in damaged condition.  (This comes up frequently on televisions “Judge” shows – like Judge Judy, for instance).  This really just shifts the balance of proof to the bailee, as after all, the bailee is the only one who really knows what has happened to property in his/her custody.


 

CONSUMER APPLICATION

Sam’s expensive Sony video camera stopped working, so he took it to Electronic Al’s shop to be repaired.  Sam was notified that a special battery had to be ordered and it would take 3 days before Al could repair it.  Al kept it in a locked steel cabinet on a central alarm system.

The second day of custody, a fire broke out at night and before the security company could get the fire department out there, part of the building was destroyed including the cabinet in which the camera was stored.  The fire investigator determined that the fire was caused by squirrels who had chewed a wire in the attic.  Al was not aware of any squirrels in his building.

Sam maintained that it was Al’s job to keep good care of his camera.  Had he kept it in a “more” fireproof cabinet, it would not have been destroyed.

Al contended that the building was kept spotless (proven by photos), and he had an excellent alarm system.  Al was concerned about theft because such cameras and other equipment that he repaired, were known targets of many thieves.  The steel cabinet was made of heavy material but the problem was the heat, and not the fire itself.  The heat had melted the plastic in the camera, rendering it a useless pile of plastic.  The building was sturdy, in good repair, and had no history of fire.

The court would probably rule that Al was not responsible for the fire and was not negligent. 

 

F Where property is in the exclusive possession of a bailee for hire and is damaged in a way that ordinarily does not occur without negligence, the burden of proof is upon the bailee to show that the injury was not occasioned by his negligence.  Braman-Johnson Flying Service, Inc. v. Thompson, 167 Misc. 167, 3 NYS(2) 602(1938)

 

It should be noted that it is against public interest for a person to contract away their entire negligence liability, therefore the bailor may not waive their rights against the bailee for negligence.  However, the bailee may limit the amount of liability by limiting the valuation of the property, and in many cases, if the bailor insists the valuation is too low, for an added cost, it can be raised.

 

CONSUMER APPLICATION

Bruce parks his new BMW roadster in Jake’s garage while he attends a business meeting in a nearby office building.  The garage attendant asks Bruce how long he will be, and when he replied that he would be about 6 hours, the attendant parks the car with the keys in it near the entrance.  Normally, the car would be “buried” behind other cars that would be leaving earlier, and the keys would be kept in a cabinet in the office.  However, the attendant was planning on showing the car to his girl friend as she came by at lunch time, and he thought it would be “cool” to “rev-up” the motor.  However, when he went to get the car when she showed up, the car was gone.  Evidently the car had been stolen and had been driven out when the attendants were all busy.  The garage had a sign conspicuously posted, stating: “Not responsible for fire or theft.”

When taken to court, the parking garage was determined to be responsible as they were negligent in parking the car and leaving the keys in the ignition.  The garage cannot contract away its liability.

 

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BAILEE LIABILITY POLICY

 

Simply put, the Bailee Liability Policy will cover all sums that the insured has become legally obligated to pay because of a loss to customer’s property caused by an insured peril.  The liability policy would appear to be adequate to cover the goods that the customers leave with the Bailee.  There is also a secondary type of policy, the Bailees Customers Insurance, that will cover the customer’s property while in the possession of the Bailee, whether the Bailee is responsible legally for the loss or not. 

 

CONSUMER APPLICATION

Nathan takes all of his winter suits, jackets and coats to Jen’s Dry-cleaning Store, as he does every spring so that the clothes will be stored clean.  Next door to Jen’s is a former supermarket that is being now converted to a health club.  While remodeling the store, some wires are cut accidentally and some of the rubber flooring being installed catches on fire, causing a lot of dark, noxious smoke which permeated most of the shopping center. 

While Jen’s store was not damaged other than by smoke, it meant that all of the clothing in the store had to be re-cleaned in an effort to get rid of the smoke fumes.  Unfortunately, cleaning again did not work, and Nathan’s clothes were ruined.

Jen cannot be held liable as she was not responsible for the damage, however with a Bailees Customers Insurance policy, that policy would pay.  As a practical matter, however, if Jen had not covered her customer’s clothing damage, no one would want to do business with her again.

 

LAUNDRIES AND DRY CLEANERS INSURANCE

 

The laundries and dry cleaners bailee insurance is probably the best known of the bailee policies and may be written under either Named Perils or All-Risks. 

 

The bailees customers form (Named Perils) covers all lawful goods which are the property of others, and which are accepted by the insured bailee for the purpose of cleaning, laundering, pressing, dyeing, repairing or alteration.  It does not cover any property belonging to the insured whether for his own use or for sale.  There is also an “accrued charge” section that states that in addition to the coverage on the actual property of the customers, protection is given against the loss of unpaid charges for services which the insured cannot collect because of the destruction of or damages to the property on which he has performed such services.

 

It does not cover goods held for storage or goods for which there is no charge made. 

 

This form covers property while on the premises occupied by the insured, or in a branch store, or while in the custody of the insured’s collecting agents, or while being transported to and from customers, or between the insured’s premises and branch stores or agents.  Coverage may be automatically extended under some polices, to those newly acquired locations until reported (usually within 72 hours of acquisition).  The form covers property in transit within the U.S. and Canada and does not cover any property shipped in the mail (unless there is a special endorsement for this coverage).

 

COVERAGE

 

The Named Perils form covers the following hazards (while in buildings)

  1. Fire;
  2. Windstorm, hail, cyclone or tornado;
  3. Explosion, steam boiler or otherwise;
  4. Aircraft and falling objects therefrom;
  5. Motor vehicles (with exception of those owned/operated by/for the insured or other custodian of property);
  6. Smoke, excluding from industrial apparatus;
  7. Strikers, or labor disturbance;
  8. Sprinkler leakage;
  9. Earthquake;
  10. Flood – rising waters of rivers and streams;
  11. Theft, including burglary and holdup;
  12. Collision of the vehicle carrying the insured property;
  13. Confusion of goods (unable to identify property, etc., but only if arising from covered peril)

 

There is also coverage for goods in transit, usually stipulating that the goods must be carried in closed trucks with suitable locks and the goods are stolen by forcing the lock, or if the entire vehicle is stolen.  For goods left overnight, usually coverage only applies to those vehicles locked in the insured’s private garage or building occupied by the insured.

EXCLUSIONS

 

In addition to those normally found in this type of policy (see COMMON EXCLUSIONS discussed earlier), the policy does not insure against losses due to dishonest acts of any employee, the insured, or bailees.  Unless it is specifically endorsed, the policy does not cover loss while the goods are in the custody of another bailee.

 

CONSUMER APPLICATION

Conrad Cleaners has a cleaning location near an area of highly priced condominiums with ocean views, and most of the clientele are wealthy.  Mrs. Smythe, a good customer, brings her winter coats in each Spring for cleaning, and then has them picked up for storage by a local storage company.  However, this Spring the local storage company has gone out of business, so Conrad tells Mrs. Smythe that she should not worry, as he knows a good storage company and he will make the arrangements, and since Mrs. Smythe is going on a three week cruise, it will be all be taken care of by the time she gets back.  (Continued on next page)

 

In realty, Conrad was blowing smoke as he had no idea as to where he could store the coats.  Before Mrs. Smythe arrived home, the coats were destroyed when Conrad’s sprinkler system started operating one night, and by morning when Conrad arrived at the store, water was all over, and some cans of cleaning fluid and dye had fallen and a lot of clothing was ruined, including Mrs. Smythe’s coats.

Does Conrad’s Bailee policy cover this?  According to the standard wording of the policy, goods which are held for storage (or at no charge) would not be covered.  Who will end up paying for the “unstored” coats of Mrs. Smythe?  Conrad, if he wants to stay in business in this area.

 

VALUATION

 

The policy will pay for the actual cash value, plus any labor or service charges that may have accrued.  There is a limit of liability for any single loss, plus a catastrophic limit of loss, with separate limits for each location or branches.

 

LOSS REPORTING

 

This form has typical loss reporting requirements, such as reporting to police in case of theft, immediate notice must be given to the insurer or its agent and proof of loss must be filed within 4 months of the date of the loss. 

 

This form is attached to the basic Inland Marine Transportation policy which contain other clauses common to Inland Marine insurance.

 

BAILEES ALL-RISKS POLICIES

 

With the All-Risks form, there are usually 2 separate limits of liability – one for goods on premises of the insured, and the other for goods in transit.  This form usually contains a deductible. 

 

Like all All-Risks policies, there are no specific perils, all risks are assumed subject to exclusions.  In addition to the COMMON EXCLUSIONS discussed previously, the form will exclude all property belonging to the insured or its affiliates, goods held for storage, damages sustained due to any process while actually being worked upon and resulting therefrom (except for fire), loss while goods are in custody of any other bailee, and loss due to the dishonesty of the insured, employees or others to which the property is entrusted.

 

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FURRIERS’ CUSTOMERS POLICY

 

The furrier requires a different policy than that offered to dry cleaners and laundries, for obvious reasons.  The furs are usually stored on the premises for an extended period of time, and the furs are generally of much more value than any items in a dry cleaners or laundry.  The theft hazard is much more significant with a furrier, than with the dry cleaners or laundry.  The coverage offered covers more than just what the furrier is liable for, it actually will cover the property of the customer.

 

The Furriers’ policies cover two types of property:

 

1.  FURS & ARTICLES TRIMMED IN FUR

Any article of clothing that is either fur, or is trimmed in fur, is covered, whether the insured accepts it for storage or for cleaning, altering, repairing, remodeling or similar services.

 

2.  GARMENTS OTHER THAN FURS

Garment other than fur can be covered but only if it is accepted for storage.  Cleaning and repair of other articles must be covered under the bailee’s customer policy.  If both fur and non-fur items are accepted, then the furrier must carry both policies to be able to have the necessary coverage. 

 

This type of coverage is also available to other businesses that may accept furs for storage.

 

Unlike the bailee customers policy, if furs that are cleaned and in storage are damaged or destroyed, the insured cannot be reimbursed for the cleaning services unless there is a separate endorsement covering such service charges.

 

PROPERTY NOT COVERED

 

Any property owned by the insured, a subsidiary or affiliate, is not covered.

 

Property on the premises or while in transit to or from the customers location, or to another location for storage, repairs or alternations is covered, while in the U.S. or Canada.

 

COVERED PERILS

 

This policy is an All-Risks policy and will cover mysterious disappearance, water damage, dampness, chemical damage and any other peril not specifically excluded. 

 

PERILS NOT COVERED

 

In addition to COMMON EXCLUSIONS discussed earlier, the following exclusions are basic to furrier policies:

 

  1. The policy will not cover loss or damage caused by any work on the insured property, unless the damage was caused by fire or explosion.

 

CONSUMER APPLICATION

At Chins Furrier’s, an employee was cleaning furs before storing them for the summer.  He inadvertently spilled cleaning fluid over 3 coats but he dropped a lit cigarette onto one of them, setting it on fire.  The employee was able to confine the fire to the one fur.  The other two furs were ruined, however, as the cleaning fluid spots damaged the fur.

The Furriers’ policy would not cover the damage to the spotted coats, but would cover the one that was further damaged by fire.

 

  1. The policy will not cover any warranties or assumed liability of the insured.

 

CONSUMER APPLICATION

Chin (of Chin’s Furriers) was going to make some minor repairs to a mink coat for a customer, who mentioned that she would like to have the mink just a little lighter.  Chin promised the customer that he could accomplish this, and he further guaranteed that she would be happy with the color.

When Chin’s customer came to pick up the mink, she nearly had a heart attack.  The mink was a lighter color, in fact it was several lighter colors.  When Chin had attempted to die the mink, the chemicals did not cover evenly.  Chin agreed to reimburse the customer for the fur.

His insurance would not cover the damage as he had assumed the liability for the process.

 

  1. The policy does pay for loss caused by the dishonesty of an employee, but is only as an excess over any other insurance covering employee dishonesty.

 

CUSTOMER APPLICATION

Chin (yep – he’s still in business) decided to hire a couple more employees.  Since they were not family members and he did not know them well, he decided to take out an additional policy (a Blanket Position Bond) which covers any dishonesty of any employee up to $5,000.  This is in addition to his Bailees Customer Form policy.

A stored mink worth $8,500 disappears one day, and one of his new employees does not show up for work and cannot be found.  Chin heaves a sigh of relief when he discovers that although his Blanket policy will cover only $5,000, his Bailees Customer Form policy will cover the additional $3,500.

Chin had accepted the stolen coat for the amount of $8,500 and had given the customer a receipt for that amount.

 

 

F Like the Bailees’ Customers Form, the Furriers’ policy is liable only for the actual cash value of the property at the time of the loss, or the cost to repair or replace the property with like kind and quality, whichever is less.  In addition, the policy does not cover any property unless the insured has issued a written receipt for the item.

 

POLICY LIMITS

 

The policy has a limit for each article and a maximum limit for each of the premises used for storage, whether listed or not, and for property in transit.  There is also an aggregate limit for any one loss, regardless of how many locations may be involved.

 

EXCESS LEGAL LIABILITY

 

Normally, the furrier will not be responsible for more than the amount stated on the receipt given to the customer at the time the property changes custody.  However, if the bailee is guilty of gross negligence or of conversion, then they could be held liable for an amount greater than that in the receipt.  This added liability can be insured against under an endorsement, the Furriers’ Customers Excess Legal Liability Endorsement.  This Endorsement contains a limit per article and a limit for all loss sustained in any one situation.

 

CONSUMERS APPLICATION

Chin accepts a fur for cleaning and storage from Mrs. Richley, a beautiful sable for which he gives Mrs. Richley a receipt for $55,000.  Earlier in the year, he had added a Legal Liability extension endorsement to his Customers policy.  The fur had a stain that other furriers had declined to attempt to remove, however Mr. Chin was able to restore the sable to where it looked like new. 

The annual Furrier’s Ball was coming up, and since Chin knew that many other furriers had turned down cleaning of this coat, he wanted to show the other furriers how good he was, so he had his girlfriend wear the sable to the ball. 

Upon arrival at the ball, his girlfriend wore the sable around the entire room while Chin bragged about his accomplishment.  Thereafter, the girlfriend took the sable to the cloakroom as she thought it was too warm to keep wearing it all night.  When they got ready to leave, the sable was gone.

Under his Customers policy, he would not have been covered as the sable had been moved from the premises without the permission of the owner.  However, the Excess Legal Liability Endorsement did cover the coat, assuming the limit of liability under the Endorsement did not exceed the $55,000.

 

FUR FLOATER COVERAGE

 

An unusual aspect of this type of policy is that in all but 9 states, the policy may cover property even when it is not in custody of the insured.  This is done by issuing a Certificate to the owner of the property when the insured items are not in the custody of the insured.  The customer will pay extra for this service, of course, but it is less expensive than having to purchase a regular Fur Floater.

 

PREMIUMS

 

Premiums are determined by using a fire insurance rate plus a loading charge, depending upon the construction and security of the vault.  The insured is required to report each month of the values of goods covered by stating the total amount shown on the receipts at the end of the previous month.  The monthly reporting is usually not required if the policy is less than $100,000 and which do not provide for the issuance of certificates.

 

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MISCELLANEOUS BAILEE FORMS

 

The bailee coverages just discussed have been around for years and are the principal bailee plans.  However, special situations have arisen and the bailee forms have expanded in number to provide coverage when necessary.  There will continue to be additional forms as commerce continues to grow, and with the increasing service sector of the economy and the incredible growth of technology, specialized forms will need to be created.

 

There are various other Bailee forms that are Inland Marine class of business under the Marine Definition.  Some of the more important ones should be mentioned here.

 

WAREHOUSEMEN’S LEGAL LIABILITY

 

Warehousemen are insured only for losses for which they are legally liable, and as a bailee, a warehouseman is liable caused by its negligence and the burden of proof is on the shoulders of the bailee.  Therefore, coverage for defense costs are an important part of this policy.  This is a nonfiled form(s).

 

The determination of the amount of the warehouseman’s liability for negligence can be limited by applying Section 7-204 of the Uniform Commercial Code, which allows the limitation as to damages by contract or by the warehouse receipt.  The amount can be extended and additional rates can be charged, subject to the warehouseman’s tariff.  The warehouse receipt, for instance, can limit the liability by using a certain percentage of the base rate (such as 500%).  With some warehousemen, particularly cold storage warehousemen, the limit could be based upon the square footage taken by the goods of the bailor.

 

Basically, there are the two types of warehousemen – general storage and cold-storage.  Each is rated differently  and cold storage warehousemen generally have conditions that do not appear in the warehousemen’s policy that covers the storing of general merchandise.

 

Typically, the insuring clause states that the insurer will pay all sums the insured becomes obligated to pay by reason of its legal liability.  Defense costs are usually insured, with supplemental coverage available for premiums on appeal bonds or on bonds to release attachments for amounts not in excess of the insurer’s limit of liability, interest on the judgement or other reasonable expenses incurred by the insured at the insurers request.

 

Property excluded varies from one insurance company to another, but usually include such things as bills, deeds, money, bullion, furs, manufactured tobacco, alcoholic beverages, jewelry, watches, precious stones, gold, silver, platinum, etc., animals, fish, birds, property of insured’s employees, and property owned by the insured.

 

Perils excluded include insects, vermin, mechanical breakdown, faulty material, repairing-restoration-retouching process, water damage, willful illegal sale of property, illegal conversion, etc., assumed liability, employee dishonesty, war & nuclear hazard.  There is also usually an exclusion of dampness or dryness of atmosphere, changing of temperatures, etc., etc.

 

If the warehouse is refrigerated, the coverage could be extended to cover the insured’s legal liability for damage to property due to a change in temperature, in which case the insured must maintain protective safeguards.  The insured could even be required to maintain mechanical breakdown insurance covering the heating and refrigeration equipment at the insured’s premises.

 

PRESSING OR TAILOR SHOPS

 

This is a another type of the bailee customers policy, usually written on small shops that do clothing repair and tailoring, in most cases acting as an agent for a larger laundry or dry cleaner.  The premium is usually quite small and is paid on an annual basis.

 

REPAIR SHOPS

 

This form will also follow the format of the bailee customers policy but are written to cover property being repaired, such as television sets, stereo units and other electronic items, plus small machinery (not automobiles, discussed later).  If an expensive TV is destroyed in a fire and the bailee is not legally responsible, customers would be quite unhappy, so this form can be written for the benefit of the customer.  Coverage is usually on a Named Perils basis, but it can also be written on al All-Risks basis.

 

DEPARTMENT STORES & FURNITURE STORES

Many Department and Furniture stores also repair customer’s property and believe that it is necessary to buy bailees customers insurance.  Whether such coverage is necessary or not, depends upon the value of the property being repaired.  For instance, if very expensive furniture is being repaired, then it would be of importance to have such coverage.  If the amounts are small, the store’s general property insurance might be adequate.  Again, loss that would not be the responsibility of the bailee would probably be covered, as for stores of this type, reputation is all-important, so an Inland Marine coverage might just save the store’s very existence.

CONSIGNMENT STORES

Many stores accept property on consignment for sale or for distribution.  Art galleries are often used as a prime example of the necessity of having bailee customers insurance &/or bailee legal liability insurance.  Art galleries very often accept artwork from various artists for sale and display.  Some of the artwork can be extremely valuable, and therefore the art galleries as a matter of practice, contract with the artists or the owners of the art as to the value of the art. 

AUCTIONEERS

Auctioneers accept property that will be sold at auction, and therefore assume bailee risks.  The need for insurance will depend greatly upon the contract between the auctioneers and the owners of the property.

COLD STORAGE LOCKERS

The 1953 Definition specifically mentioned this coverage, but it was ignored in the 1976 Definition as it was automatically qualified.  The early Definition named this class because in some instances there is no processing involved, and at that time it would not therefore qualify.  The coverage applies to customer’s property accepted for storage in a cold storage locker.  It can be written either All-Risks or Named Perils.  The policies will usually require that the insurer be notified immediately if the refrigeration units fail and are not likely to be repaired within 6 hours.

SELF-STORAGE UNITS

This is a relatively new industry that continues to grow as the society becomes more mobile.  These units resemble rows of private garages and since the owner of the units has no control over the contents – the customers rent the units and then put their property inside the units – there is a question whether the owner of the units can have a responsibility for a loss.  Of course, in today’s litigious society, such insurance might provide peace of mind for the units owner.

AUTO REPAIR

Automobile dealers, service stations, body and muffler shops, brake shops and similar types of businesses that take care of their customers’ cars, are NOT an Inland Marine class of business.  Even though they appear to be “bailees”, the coverage originated as a branch of automobile insurance and still is under commercial automobile insurance lines. 

 

However, under the garage coverage form filed by the ISO, which provides liability coverage for garage operations and liability physical damage coverage on the insured’s automobiles, there is a garagekeepers section that covers damage for customers cars left with the insured.

 

OTHER BAILEE COVERAGES

 

There are so many bailee coverages that it is not possible to list them all.  Some of the coverages are

  1. film developers, enlargers and retouchers;
  2. picture framers, fine arts cleaners and restorers;
  3. boatyards and mooring facilities (can be either Marine or Inland Marine);
  4. kennels, horse breeders and veterinarians;
  5. bank safety deposit facilities.

 

In addition, there are situations where the property is rented but there is no landlord-tenant relationship such as there would be in real estate.  Therefore, the relationship is that of a Bailment For Hire, or in some cases, Bailment Lease.

 

F Bailment for Hire:  A contract in which the bailor agrees to pay an adequate recompense for the safe-keeping of the thing entrusted to the custody of the bailee, and the bailee agrees to keep it and restore it on the request of the bailor, in the same condition substantially as he received it, excepting injury or loss from causes for which he is not responsible.

             Bailment Lease:  A legal method by which one desiring to purchase an article but unable to pay therefor at the time, may secure possession thereof with the right to use and enjoy it as long as he pays stipulated rentals and becomes absolute owner after completing such installment payments, on payment of an additional sum which may be nominal.

 

The following businesses may operate as a bailment for hire, or may also, in some cases,  operate as a bailment lease.  For instance, many of the furniture stores lease (or rent) furniture and the payments go toward the purchase of the furniture which remains the property of the store until the payments, or a percentage thereof, equal the selling price of the furniture.  At that time, title to the furniture passes to the customer.

 

  1. car, truck and boat rentals or leases;
  2. furniture rentals;
  3. computer and equipment leasing;
  4. telephone systems leasing.

 

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BAILOR COVERAGES

 

F  A Bailor is an individual who retains title to property that is being transferred on a temporary basis to the care, custody and/or control of another.

 

While it is common practice for Bailees to carry insurance on customer’s property which is in their custody, in some situations it is usual for the owner of the property – the “Bailor” – to insure goods that are no longer in their control and are in the hands of a bailee.  A typical situation would be where a shipper insures his own goods while they are being transported.

 

In certain businesses, work is done at other locations, perhaps even contracted out for repair or assembly for instance.  The garment industry uses bailor coverage as they customarily send out clothing to contractors and subcontractors.  The policies are Inland Marine policies because under the Nation-Wide Marine Definition, Inland Marine status is granted to “property in transit to and from and in custody of bailees.”

 

CONSUMER APPLICATION

Fine Arts Publishing Company prints magazines and brochures on various fine arts that are for sale, or just of interest to art connoisseurs.  They contract out the actual printing as it takes very expensive specialized equipment to print at the quality they feel their readers want. 

On occasion the printer will subcontract out special typesetting jobs also.  Fine Arts wants to protect their plates, negatives and in particular, their artwork, while it is in the hands of the printer and any of the printer’s subcontractors.

There is no filing on this type of insurance, but it qualified as a Bailor policy under the Definition.

 

Note that the term “Floater” is used with these types of Inland Marine policies.  This is proper, and many Bailor coverages are called “Owner’s Commercial Floaters.”

 

F  A “Floater” is the coverage for property which moves from location to location, either on a scheduled or unscheduled basis.  If the Floater covers scheduled property, coverage is listed for each item.  If a Floater covers unscheduled property, all property is covered for the same limits of insurance.

 

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GARMENT CONTRACTORS’ FLOATER

 

Clothing (garment) manufacturers as a matter of practice, will send out jobs to be performed by contractors or subcontractors.  Manufacturing of garments include several different specialties, and there are contractors that do the pleating, button-hole makers, embroiderers, etc.  Some of the manufacturers require their contractors to insure the goods, but generally it is the manufacturer who buys the insurance.  Interestingly, the policy is called a “Garment Contractors’ Floater, even though it is purchased by the manufacturer.

 

This insurance covers garments and parts of garments, materials, supplies and even containers for such property, and the property is insured whether it is finished or unfinished.  It covers not only the property of the insured, but any property held in trust, on consignment or commission, or anything upon which the insured has made advances.

 

The policy does not cover property on the premises of the insured, therefore it is provided only when the property is away from the insured’s premises, in the U.S. or Canada.

COVERAGES

There are actually three coverages with this policy, appropriately labeled “A”, “B”, and “C.”

COVERAGE A

This policy covers property, which is temporarily at a location other than the insured’s, and is at the contractor’s (or subcontractor’s) location even if the contractor is not named in the policy.  (Coverage on unnamed contractor’s premises is limited to a percentage of the total amount of insurance – see discussion later under Coinsurance Clause). 

 

This coverage is rather broad as it also covers property of others for which the insured is liable or has made an advance payment.

 

The coverage extends to transit coverage between the insured’s premises and the premises of the contractor or subcontractor, or mills and/or suppliers, and transported by railroad or railway express company, public or private truckers, land transfer of other land transportation carriers, air transportation carriers, on trucks owned or operated for the insured or the contractor, or messengers. 

COVERAGE B

Coverage B applies only if the declarations show a limit of insurance for that coverage and if Coverage B is purchased, the property is also insured while at the insured’s premises, or in transit between the insured and the contractor.

COVERAGE C

Coverage C is available only on All-Risks form and can cover the following types of property while at the location described in the policy:

  1. furniture and fixtures,
  2. machinery, tools and their parts,
  3. patterns, molds, models and dies, and
  4. office equipment and supplies.

 

Coverages B and C oftentimes are not purchased as goods can be covered under a regular commercial property insurance policy.

PROPERTY COVERED

 

All property while in transit is covered when being transported between the insured’s premises and that of a contractor or subcontractor.  It is covered against all risks of loss or damage, from any external cause, subject to the stated exclusions.

 

While the goods are on the premises of the contractors or subcontractors, the property is covered against the following perils:

  1. Fire and lightning.
  2. Windstorm, hail, smoke, vehicles and aircraft (there are no coverages for explosion, riot or civil commotion.
  3. Sprinkler leakage.
  4. Water damage.  There is considerable differentiation between goods on the insured’s premises (which has a much more restricted coverage provision) and on the contractors premises.
  5. Burglary – requiring force and violence visible marks, entering by force and violence.
  6. Holdup – defined as the forcible taking of property by violence or other felonious act committed in the presence of a custodian of the property.

 

CONSUMER APPLICATION

Fabric Finishers, Inc., is a contractor of Stuart’s Clothing Mfg., and is under contract to perform trendy embroidery on certain expensive articles of clothing.  Fabric’s plant is in a commercial building with a lot of foot and car traffic in front. 

Fabric had recently received a lot of publicity in a trade journal about the quality of the work they were performing.  After lunch hour, a thief mingles with the employees and gains entrance to the building.  He takes 4 pair of embroidered slacks and puts them into a shopping bag when no one is watching, and is able to leave the store undetected.

Later in the day, another thief is walking by and sees a stack of very expensive embroidered slacks stacked on a table near a window.  He returns later with a brick and when the workers take a coffee break, he breaks the window with the brick, snatches several pair of slacks, and then in full sight of the supervisor of that department, runs down the street.  The supervisor gives chase, but is unable to catch the thief.

The policy would not cover the stolen slacks that were removed without anyone knowing about it, but in the second instance, the policy would cover this situation as it was “forcible taking by violence” and in the presence of a custodian of the property.

 

7.    Boiler explosion, originating within steam boilers, pipes, fly wheels, engines and machinery connected therewith.  (No other type of explosion is covered).

OPTIONAL ADDITIONAL COVERAGES

The following 4 additional coverages are used so common that the policy form lists them with space afterwards for the word “covered”, and if covered and the premium paid, then these additional coverages will be included.

 

  1. Theft.  When covered, it will substitute for No. 5 above.
  2. Strikes, riots, malicious mischief and explosion.  The “explosion” part excludes explosion of steam vessels, but the basic policy will cover steam boiler explosions.
  3. Consequential damage to garments. 
  4. Consequential damage to garments including broken lots, size or color ranges (includes coverage granted under No. 3 above.  If the insured sells by full lot or range of sizes and colors, and is unable to do so because of a loss due to an insured peril, then the insured is covered for such loss.  However, the loss must pertain to only garments located at the location of the loss.

 

CONSUMER APPLICATION

Garments of Fabric Finisher’s, Inc., while working on garments for Stuart’s Mfg., has a fire loss which causes damage to 24 size 16 embroidered slacks.  It is normal practice of Fabric to work on one size at a time of specialty and expensive items such as this, and then ship the finished goods to Stuart’s when the order for a particular size is completed.  Therefore, Stuart’s already has a full stock of other all other sizes of these slacks. 

Since Stuart’s is not able to make up a full lot of these slacks by the contracted time, Stuart files for a loss under their policy.  However, the policy does not cover undamaged garments that were located at Stuart’s warehouse, since the loss occurred at the contractor’s (Fabric) premises.  Stuart could only collect for the damaged ones under this policy.

ITEMS EXCLUDED

There are several exclusions, as listed below.  Many of the types of property excluded would not be covered under Coverage A or B as shown above, as they pertain only to garments specifically listed.  Some of these exclusions would apply under Coverage C, however.  Note that many, if not most, of these items that are excluded can be insured under other Inland Marine or commercial property coverages.

  1. Property shipped by Mail.
  2. Leggings, spats (do people still wear these?), footwear or hosiery.
  3. Headwear.
  4. Jewelry or Costume jewelry.
  5. Fine arts.
  6. Musical instruments, photographic equipment & supplies and accessories.
  7. Signs or outdoor equipment.
  8. Air conditioners or domestic appliances.
  9. Carpets or cloth awnings.
  10. Data processing equipment and media (such as diskettes, magnetic tapes, compact discs, and includes data stored on the media.

 

HAZARDS EXCLUDED

(See COMMON EXCLUSIONS discussion earlier)  This policy also excludes:

 

  1. Delay or loss of market.  Even though the insured would be covered for damage to goods in transit, he is not covered for a delay in making delivery.
  2. Chafing and/or rubbing.
  3. Dishonest acts of employees of the insured, or of a contractor or subcontractor.

 

VALUATION OF LOSS

This policy pays for loss or damage up to the actual cash value of the property at the time and location of the loss, but not more than replacement cost.  Cost of labor is taken into consideration in determining the actual cash value.

 

COINSURANCE CLAUSE

This form is written with a 100% coinsurance clause and the insured is required to carry insurance which is equal to the total value of the goods, whether on the insured’s premises, or on the premises of a contractor.

 

Under available Coverage A, earlier it was mentioned that unnamed contractors can be covered but only for a percentage of the insured amount.  A discussion of the limits of liability for both named and unnamed contractors warrant a discussion at this point.

 

There is a maximum limit of liability listed beside each named contractor in the policy.  For the unnamed contractors, a limit of liability is inserted to apply to any unnamed location, but only for a maximum of 25% of the total amount of insured carried, or $25,000, whichever is less.  Therefore, the insured does not have to specify any contractor that has custody of his goods, if the value of such goods does not exceed 25% or the total amount carried, or $25,000.  If any contractor has goods of the insured for amounts above the 25%/$25,000, then the contractor must be listed and the limit of liability must be set high enough to cover the risk

 

CONSUMER APPLICATION

Stuart’s Manufacturing sends garments to be processed to four different contractors, each of whom is “expert” in their specialized field of garment manufacturing.  The values of the garments sent to each contractor at any one time would be valued as follows:

Fabric Finishers                 $50,000

Button Magic                    $25,000

EZLinings                         $30,000

StraytSeems                      $45,000

                                                                                                        (Continued on next page)

 

 

 

 

 

 

 

 

 

 

To comply with the coinsurance requirements, he carries $150,000, which is total of all goods at all contractors.  The limit of liability for unnamed contractors would be 25% of the total insurance ($150,000) or $37,500.  Therefore Fabric Finishers and StraytSeems will have to be specifically named in the policy.  The only two contractors would be automatically covered as the total values of the goods in their custody would be under $37,500.

 

F The Coinsurance clause requires that the insured carry 100% of the values at risk at all contractors, whether named or unnamed.

 

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GARMENT CONTRACTORS ALL-RISKS FLOATER

 

If the policy is written on an All-Risks basis, the policy will insure against all direct physical loss of or damage to the property covered subject to the exclusions of the basic policy.  As typical of an All-Risks policies, the exclusions are most important.

 

  1. Sabotage, theft, conversion, or other act of omissions or a dishonest character by the insured or employees or by any person to whom the insured property is delivered or entrusted to for any purpose.  An exception is made for loss which occurs while the property is deposited for safe custody or while in the custody of a carrier for hire or a porter not on the insured’s payroll.
  2. Nuclear Reaction of radiation and contamination.  If caused by a fire, the direct loss that results from the nuclear reaction would be covered.
  3. Delay, loss of market and gradual deterioration, any type of rubbing, chafing, insects, vermin and inherent vice.
  4. Seizure or destruction under quarantine, or customers’ regulation, is not covered.  Confiscation by order of any government or public authority and contraband or illegal trade is not covered.
  5. Mysterious disappearance or an unexplained loss or shortage that is disclosed when taking inventory is not covered.
  6. Hostile or war-like action in time of peace, and any weapon of war that is employed to create an atomic fusion or radioactive force, or any insurrection, rebellion, revolution or civil war.
  7. Loss resulting from property being worked on, except if fire or explosion develops, in which case the policy would cover any loss created by the fire of explosion.

 

PATTERN AND DIE FLOATER

 

Another type of Bailor insurance is the Pattern and Die Floater.  In manufacturing, many companies will send their patterns and dies to foundries where they are used in castings.  As with the Garment policy, the policy covers loss or damage to the property while it is in transit to and from and on the premises of, the foundry. 

 

The policy can be written on a Named Perils basis, or on an All-Risks basis.  Exclusions usually exclude losses arising out of wear and tear, depreciation, poor workmanship, inherent vice, fading, rusting, splitting, cracking, and other similar types of situations.  There is usually a coinsurance clause if the policy is not written on a reporting form.

 

The key difference in this coverage and other floaters is that patterns and dies can become obsolete rather rapidly at times, so the valuation can be difficult.  Some forms’ valuation clause values the property at replacement cost at place and date of loss, less depreciation, including depreciation for obsolescence.  Record keeping of all patterns in use, with attendant values, is very important.

 

 

 


STUDY QUESTIONS

 

1.  A Bailee is

      A.  a person who has temporary rightful possession of another’s property.

      B.  a person or firm who posts bonds to release people from incarceration.

      C.  an owner of property who puts his property into the possession of another for a lawful purpose.

      D.  a person or business that transports the goods of others for a fee.

 

2.  If a neighbor borrows a riding lawnmower when his mower is broken, this is legally

      A.  Gratuitous bailment for the benefit of the bailor.

      B.  Gratuitous bailment for the benefit of the bailee.

      C.  Bailment for hire.

      D.  Implied Bailment.

 

3.  The degree of care that a bailee has towards the bailor,

      A.  depends greatly upon the type of bailment in question.

      B.  is that of what a normal person would exercise with their own property.

      C.  is much more than that of a carrier.

      D.  is not established by law or practice.

 

4.  The type of Bailee’s insurance that would cover a loss to customer’s property caused by an insured peril, whether the bailee is responsible or not, is

      A.  Bailee’s Liability Policy.

      B.  Bailee’s All-Risks policies.

      C.  Bailee’s Customers insurance.

      D.  Bailee’s Negligence Blanket insurance.

 

5.  Under a Furriers’ Customers Policy, how will coats not made of fur or fur trimmed, be covered for repair &/or cleaning?

      A.  Under the Furriers’ Customers Policy, all coats are covered if they are accepted for cleaning and repair.

      B.  The Furrier will have to also have a Bailee’s Customers policy.

      C.  The Furrier can not be covered for non-fur coats under any situation.

      D.  The Furriers’ Customers Policy will cover the non-fur coat if it is also accepted for storage.

     

 

 

 

6.  Jones Furriers’ ruined an expensive sable coat when an employee dropped a lit cigarette on the coat.  The receipt given by Jones to the owner indicated the coat was valued at $50,000 and Jones offered that amount to the coat owner.  The coat owner sued anyway.  What can happen next?

      A.  Jones is on good footing – legally the owner must accept $50,000 in full payment.

      B.  There is no additional coverage available to Jones, so anything awarded over $50,000 must always come out of his own pocket.

      C.  Since the coat was ruined by an employee, Jones has no liability.  The coat owner must go after the employee exclusively.

      D.  Jones could have carried the Furriers’ Customers Excess Legal Liability Endorsement, which would have insured Jones against any added liability.  The coat owner may certainly sue if the bailee (Jones) was guilty of gross negligence in the eyes of the court.

 

7.  Direct Cable is a telemarketing firm that leases the telephone equipment as they are not financially able to pay for it at one time.  They pay a set sum each month until such time as they have paid a predetermined amount, approximately the worth of the system, at which time they will make a modest payment, and then the equipment is theirs.  Direct wants to protect this system as they are functioning as a Bailee until the equipment is fully purchased and the title has passed.  What type of Bailee situation is this?

      A.  Bailment Lease.

      B.  Bailment for hire.

      C.  Installment Bailment.

      D.  Reversible Ownership Bailment.

 

8.  The coverage for property which moves from location to location, either on a scheduled or unscheduled basis, is called

      A.  Inland Marine Coverage.

      B.  Marine Coverage.

      C.  Motor Truck Cargo insurance.

      D.  a Floater.

 

9.  A Garment Contractors’ Floater policy

      A.  covers garments or parts of garments while on the premises of the insured.

      B.  is never bought by the manufacturer, only by the contractors.

      C.  does not cover property on the premises of the insured, so it is provided only when the property is away from the insured’s premises in the U.S. or Canada.

      D.  covers garments that are completely finished only.

 

10.  The biggest problem at loss time with the Pattern and Die Floater is

      A.  the loss evaluation must be done by contracted Engineers only.

      B.  that patterns and dies can become obsolete in a short period of time.

      C.  that any loss settlements must be approved by the State Pattern & Die Committee of the Department of Management Control.

      D.  the costs of Patterns and Dies are so inexpensive that it is more expensive to investigate a loss than to just simply pay for the loss without investigation.

 

ANSWERS TO STUDY QUESTIONS

 

1A     2B     3A     4C     5B     6D     7A     8D     9C     10B