Analysis must be made of a written contract, warehouse receipt or other
document that relates to the obligations of the parties.
According to the Uniform Commercial Code (sec.
7-102-1-A) a bailee is defined as a person who by a warehouse receipt or
bill of lading or other document acknowledges possession of goods and agrees
to deliver them. A bailee's liability for goods in his possession is precise
and stringent and will be discussed later. The requirements of a bailment
are clear: the depositor turns goods over to the custodian to hold; the
latter receives and takes custody of the goods and stores them under his
direction and control. Access to the goods is under the dominance of the
The most frequent relationship between warehouseman and storer is bailee-bailor.
The bailee is bound to issue receipt and his potential liability is not
diminished by failure to do so.
Liability of Warehouseman as a Bailee
The warehouseman is not an insurer of the stored
goods. When goods in the custody of a bailee is lost, stolen, damaged or
destroyed by any cause, the latter is generally liable in law if the loss
or damage was caused or contributed to by his negligence.
Insurance Services Office statistics show the
relative difficulty of achieving underwriting success over the last six
years for which data is available:
Year, Earned Premium, Incurred Losses, Loss Ratio
1980, $12,912,337, $20,511,737, 158.9 percent
1981, $10,537,626, $6,261,184, 59.4 percent
1982, $11,239,872, $8,194,322, 72.9 percent
1983, $11,210,533, $12,560,206, 112.0 percent
1984, $11,995,797, $10,206,002, 85.1 percent
1985, $13,315,546, $9,780,434, 73.5 percent
Total 1980-85, $71,211,711, $67,513,885, 94.8 percent
For the years 1981 through 1985, fire and lightning
accounted for 18.39 percent of the losses. Breakage, collision and upset
ranked second at 16.3 percent of the losses; and theft, burglary and robbery
accounted for 13.94 percent of the losses.
II. UNDERWRITING "SOFT SPOTS"
In this section attention will be focused on less
obvious causes of loss and issues which may contribute to less-than-profitable
results for the class. The major risk (and source of claim severity) to
goods in storage remains loss due to fire. Underwriting the fire aspect
of a warehousing account does not complete the underwriting process. The
legal liability aspect as discussed earlier complicates the process to
a great extent.
LIMITS/LOSS ESTIMATES/GROSS RECEIPTS
By its very nature, a warehouse represents a continuing,
changing exposure as goods are shipped out and replaced by other goods.
Often the replacement goods present entirely different underwriting concerns.
A modest exposure of canned goods and major appliances one day may be replaced
the next by volatile petroleum products and high-value consumer electronics.
This constant change of exposure not only makes it difficult to key to
a particular cause of loss but equally difficult to establish either normal
or maximum loss estimates. This complicates the issue of what limit of
liability is appropriate of insured and insurer alike. While no insured
wants to be under-insured neither is there any desire to pay for excessive
limits. Likewise, the insurer is faced with a choice of retaining all of
a high PML or purchasing reinsurance which may not reflect a true exposure.
There is no simple solution to this dilemma for either party.
One starting point, however, is the review of prior gross receipts broken
down on a monthly basis. Substantial fluctuations from month-to-month may
indicate seasonal impacts and, hence, value concentrations. Underwriting
attention can be keyed to such concentrations. Studying the warehousemen's
customers during peak periods and the basis on which they release liability
on their goods would assist in estimating value exposures. Peril and loss
estimates can be projected in this manner. Initial approximations should
be modified for the impact of customers who declare higher valuations on
their property; amounts in certified storage; connection to a common carrier
operation; and the amount of goods stored within terminal premises while
remaining "in the course of transit."
ACTS OF GOD/EXTENDED COVERAGE
Underwriters should never presume there can be
no liability imposed under a contract if the cause of loss or damage is
"outside the control of he insured."
A casualty is said to be an "Act of God" when it results from
the direct, immediate and exclusive operation of the forces of nature,
uncontrolled or uninfluenced by the power of man and without human intervention.
Thus, no carrier, warehouseman or other bailee is deemed liable at common
law or under the usual statutory definitions for loss solely caused by
an Act of God, unless he agrees to assume such risk, or unless he had warning
of the impending loss and could have taken reasonable steps to avoid it.
A hurricane engulfed defendant's warehouse and
damaged plaintiff's goods. Defendant-warehouseman claimed no liability
by reason of an Act of God (which no one denied). But the warehouse was
located near a river which had during bad weather in the past risen above
the lower level of the warehouse building. Bad storms were always a threat
to the contents of the building and the warehouseman ought to have been
aware of this. Bu he took no precautions to prevent the hurricane damage
and was held liable.
Other perils such as theft, collapse, freezing,
sprinkler leakage or other water damage may give rise to a determination
of liability if it can be held that a "reasonable man" should
have taken greater means to protect the property under his control. The
point here is simply that all potential causes of loss must be considered
when analyzing a warehouse account. Liability may arise from numerous causes
of loss beyond the risk of fire.
A warehouseman may be found liable for representations
made to customers which extend beyond the liability agreed to in the warehousing
receipt. Copies of advertising or promotional material should be obtained
by underwriters to determine if potentially damaging statements are made.
Statements that the building is "Fireproof" or offers "full/high/complete/total"
security virtually assure that no defense will exist for any fire or theft
claim against the warehouseman who advertises as such.
The intended scope of coverage provided and the
actual language of most warehousemen's legal liability policies are an
important underwriting aspect. Few warehouse accounts are simply a place
to store goods. A simple review of the local yellow pages reveals services
ranging from domestic and international transit and distribution to the
rental of moving vehicles and equipment by "full-service" warehouses,
plus crating and forwarding services.
Many of these operations are outside underwriting intent. Others, notably
the consolidating, repacking, or crating of goods, fall into somewhat of
a gray area. This is due to the fact that such operations historically
have been part of the warehousemen's services; are directly involved with
the covered property; and are done at the insured premises. Most warehousing
receipts address these additional operations as "Extra or Special
Services." These extra services are beyond that of basic storage and
are subject to separate, additional charges. Policy language may or may
not address this issue clearly. This "servicing" of goods goes
beyond warehousing per se and moves the warehouseman toward the status
of bailee or processor with an increasing degree of liability. Defense
under the warehouse receipt may terminate in such instances. If "non-warehousing"
services are performed, are they performed under separate contract? If
so, a distinction and determination of specific liability is required.
Many policies cover the insured's liability as a "warehouseman or
bailee." Underwriters must determine if the insured assumes all aspects
of the warehouse operations are covered and if this intent in granting
coverage is clearly stipulated.
If policy language is not clear in addressing this point, an underwriter's
exposure, by policy terms, may be greater than originally intended, underpriced
given higher liability, or for "no charge" if only warehousing
receipts are being reported. Conversely if processing work receipts are
included in gross receipts, the insured would have a "reasonable expectation"
of recovery in today's litigious environment.
DEFENSE COST/DEBRIS REMOVAL
The real potential sleeper in most warehousemen's
legal liability policies relates to the unlimited expense coverages afforded;
i.e., those coverages which do not contribute toward exhaustion of policy
limits. Normally these are twofold; one relating to defense coverage and
the other relating to debris removal.
In addressing defense cost coverage, most underwriters are aware of the
impact defense against suits has had on the general liability business
and its pricing. Using this as the backdrop, have marine underwriters followed
casualty underwriters and incorporated consideration of this coverage into
pricing? While long and costly litigation has never represented a major
challenge to inland marine business, everyone is cognizant of the expenses
involved. With this in mind, even the most "groundless" of suits
against an insured can quickly erode a premium base on an otherwise loss-free
account. Additionally, even if reinsurance has been purchased, defense
expenses might be borne solely by the primary insurer without an actual
loss occurrence to trigger recovery and sharing of loss expenses. There
must be consideration for such probabilities in rate development.
Additionally with respect to defense costs, does policy language specifically
state that the duty to defend ends with the exhaustion of policy limits?
If this point is not made, a total loss to policy limits may be irrelevant.
Underwriters still will face the continuing costs of defense.
Warehousemen's Legal Liability presents considerable potential to loss
involving environmentally hazardous materials. The unlimited debris removal
provision in most WLL policies makes this consideration especially troublesome.
Few, if any, marine policies in force today contain any type of pollution
exclusion. Given what appears to be an endless list of materials that are
categorized as environmentally unsafe, it is not difficult to envision
a loss where debris removal expenses, as presently provided, would be several
times the amount of the direct loss to the covered property.
While primary insurers begin to address this issue in their coverages,
many reinsurers have already begun to exclude any form of pollution liability.
Both treaty and facultative placements are being dealt with in this manner.
This may be a response to the "absolute" pollution exclusion
of the casualty industry. Reinsurers would like to avoid third party recourse
against first party, legal liability contracts. Nevertheless, a primary
writer may suddenly find the original net retention unknowingly exceeded
by this exposure. Consideration of potentially costly clean up and/or disposal
expenses should be incorporated into both normal and maximum loss estimates.
III. SPECIALIZED WAREHOUSING - THE HOUSEHOLD GOODS
While not directly the intent of this overview
to deal with specific, specialized warehousing occupancies; the size, nature
and extent of household goods warehousemen/warehousing deserves some comment.
The $5.4 billion household goods moving industry is comprised of approximately
250 national van lines, 5,000 agents and 23,000 independent operators.
Household goods warehousing represents a major segment of this business
and this specialized class poses unique and difficult challenges to underwriters.
The household goods mover and warehouseman has a complex legal liability
exposure for customer's property in its custody. As a practical matter,
it makes good sense for a firm engaged in both moving and warehousing of
household goods to cover all of the property of others in its custody (whether
it be property in transit or property in storage) with one insurer. This
helps to avoid claim handling disputes, eliminate possible "gaps"
in coverage, and reduces the mover/warehouseman's total risk costs. Thus,
the mover/warehouseman is best served by a package-type insurance policy
that includes all of the various coverages needed.
The warehousemen's legal liability section within a mover/warehouseman
package policy affords essentially the same coverage as a general commodities
warehousemen's legal liability policy. It may, however, contain an option
for the warehouseman to issue certificates of insurance to its customers.
This provides direct coverage for the customer's property held for storage,
regardless of the warehouseman's liability.
As with any warehousing risk, the underwriter must assess and be comfortable
with the physical characteristics of the risk. Of even greater importance,
when dealing with a household goods warehouseman risk, is a thorough underwriting
of the quality of management. Is the warehouseman financially stable, reputable,
and customer-oriented? Desirable qualities of management include (1) maintenance
of an overall risk management program to control loss frequency and severity;
(2) good hiring practices for drivers, packers, helpers for loading and
unloading and warehouse employees; (3) a formalized and active maintenance
program; and (4) a general positive attitude towards loss prevention and
These qualities can best be weighed by visiting the firm and learning how
the business operates, determining coverage needs, securing accurate loss
experience and determining the extent of the household goods exposed under
the warehouseman's liability.
While general commodities warehousemen form a high-limit class subject
to infrequent and severe losses, the household goods warehousemen class
is generally bogged down by loss frequency problems. Past loss experience
is obviously a good indicator of the quality of an account. Abnormally
high loss frequency is symptomatic of weakness in management's loss prevention
and control program. Higher deductibles can help to reduce loss frequency,
but some type of claims analysis should be undertaken to assist the warehouseman
in identifying and correcting problem areas.
From an underwriting standpoint, the household goods warehouseman deserves
a conservative approach with a strong emphasis on risk selection and control.
All well-managed warehousemen are good prospects; especially those associated
with national van lines, those which have U.S. governmental military agency
contracts, and those which are closely-held, family-run operations. To
establish and maintain a profit in this class requires thorough and cautious
underwriting during the risk selection process. The underwriter must be
satisfied that he is dealing with a household goods warehouseman with a
top quality management team doing everything in its power to minimize its
exposure to loss.
The foregoing discussion merely "scratches
the surface" on the overall topic of Warehousemen's Legal Liability.
Beyond the fundamentals touched on here is a maze of complexity arising
out of government regulation, burden of proof, changing liability relationships
and negotiable documents of title. The depth of this topic usually calls
for legal counsel and expertise. Specialized training in the field is highly
recommended. However, familiarity with some of the basics should enable
interested insurance personnel to deal with some of the routine matters
in this area.
In the two sections that follow, we have set forth those questions which
were found to be common to many application forms for this class of business,
plus some concepts and clauses which appear in some company policies.
V. THE APPLICATION
The purpose of any application is to provide the
underwriter with all the necessary underwriting information. The manner
in which the information is assembled should be clear, concise, and straightforward.
The following sample application for a General Warehousemen's Legal Liability
policy addresses the underwriting concerns and risk specifics of this troublesome
class. The annotations which follow the sample expand on many of the relevant
underwriting and loss control principles. There are other underwriting
considerations for specific classes of warehousing risks (i.e., household
goods, cold storage, etc.) which are not addressed here. Underwriters should
consult with loss control personnel in developing specific information
relative to such specialized classes in conjunction with their overall
GENERAL WAREHOUSEMEN'S LEGAL LIABILITY
- Name of Insured:
- Location(s) to be Insured:
- How long has current management operated this business?
- Description of Premises:
- What is ground floor area?
- Height in stories?
- Total area (or cubic capacity) of premises available for storage?
- Identify and describe area(s), if any, occupied by tenant(s) or lessees:
- Any basement(s)? If answer is "Yes," is basement protected
by automatic sump pump? Is property stored on shelves or pallets?
- What kind of construction: Walls? Roof?
- Year built? If recently remodeled, when?
- Describe by location and size all pedestrian and vehicle access doors
on exterior of building:
- Premises Protection:
- Is location sprinklered? If "Yes," wet or dry system: Manufacturers
name and when installed: How often serviced? By whom? Is system equipped
with a Sprinkler Alarm? If "Yes," describe:
- List any other private fire protection: Distance to nearest responding
- Are your premises protected by an operating Premises Burglar Alarm System?
Central Station? Local Alarm? Extent of Protection (i.e., 3AA Alarm): Name
of Protection Company: Underwriters' Laboratories Certificate No.: Date
- State number of watchmen employed exclusively by you and maintained on
duty within your premises at all times when not regularly open to business:
Do they signal a Central Station and how often? How many clock stations
on premises? How many pull boxes for Central Station Signals?
- Estimated total values in storage during previous year: Maximum value
any one time: Average value any one time: What is rate of turnover of commodities
- Give percentage (by weight) of goods or commodities stored:
- Canned Foods
- Other Foodstuffs
- Industrial Chemicals
- Cloth Products
- Paper Products
- Home appliances (other than radio or TV equipment)
- Radio/Television/Electronic Equipment
- Liquor, wines, spirits
- Tobacco products
- Other (describe)
- Any red label commodities (describe)
- Total number of employees? If any employee(s) bonded, give details:
- List annual gross receipts for each of last five years (storage and
- What are estimated gross receipts for the next twelve months? Storage:
- Give details and amount(s) of all previous losses, insured or not insured,
occurring during past five years, which would have been recoverable under
this type of insurance:
- Name trade associations in which memberships have been held for one
year or more:
- Do you subscribe to a loss control program furnished by an outside organization:
If "Yes," give name of organization and briefly describe services
- Attach a copy of latest financial statement.
- Attach a complete copy of the warehouse receipt(s) used. List any commodities
stored under special agreements and pertinent details of such agreements:
- What policy limit is desired? What deductible?
NEW YORK NOTICE
Any person who, knowingly and with intent to defraud
any insurance company or other person, files an application for insurance
containing any false information, or conceals for the purpose of misleading,
information concerning any fact material thereto, commits a fraudulent insurance
act, which is a crime.
The applicant agrees that the statements contained in this application are
true and that, if insurance if effected, material misrepresentation or concealment
of any information voids this insurance.
Signed: By: Date:
GENERAL WAREHOUSEMEN'S LEGAL LIABILITY INSURANCE
1. Name of Insured:
All affiliated or subsidiary companies that are
to be insured should be named here.
3. Location(s) to be insured:
List each location that is to be insured. All
underwriting information should be provided for each location covered.
4. Background of Management:
The background and experience of the insured is
crucial in this type of risk. How long has the insured been in business?
Is this a new venture? If so, are the principals and/or management experienced
in this type of business?
5. Description of Premises:
This information must be provided for all locations
that are to be covered. This information will give the underwriter a general
idea of the capacity of the insured's facilities and a ballpark estimate
of the magnitude of the risk. Special attention should be given to Item
(d) which addresses adjacent exposures, if any.
6. Premises Protection:
Sprinkler and burglar alarm systems are important.
This equipment must be kept up-to-date and in good working order, or the
insured could be viewed as negligent. The extent of the sprinkler system
must also be considered. Does the system have a valve alarm which will
notify the alarm company that someone has shut off the system? Is there
a waterflow or temperature alarm?
The installation of a burglar alarm is almost mandatory. A prudent man
would want his goods protected during the time his establishment is closed
The question is, to what extent should the protection be? Basically, the
more attractive the commodities stored are to theft and/or burglary, the
more extensive the alarm system should be.
7. Estimated Values at Risk:
To determine an estimated value of goods in storage
at any one time will be difficult for the insured to answer. He may, however,
deal with only one or two customers and be able to develop accurate information.
The turnover rate i.e., how long goods generally remain on premises prior
to shipment is also an important factor.
8. Commodities Stored:
This is important because it tells the underwriter
the commodities the insured handles. This will help the underwriter gauge
the amount of protection and security the insured should have to properly
protect the property.
9. Number of employees:
Gives the underwriter more information about the
size and scope of the insured's operation.
10. Actual Gross Receipts:
Actual gross revenues for storage and handling
for prior years.
11. Estimated Gross Receipts:
Estimated gross revenues for the upcoming year.
Does this estimate track with prior years' actual receipts? Is the business
12. Prior Loss Experience:
If there were any previous losses, the underwriter
should delve into the facts concerning those claims.
13. Trade Associations Memberships:
Is the insured active in his industry trade groups?
14. Loss Control Programs:
Does the insured take any additional steps to
safeguard the property stored?
15. Financial Information:
A copy of the insured's latest financial statement
should be obtained. This will tell the underwriter whether or not the insured's
business is profitable or unprofitable; growing, shrinking, or stagnant;
and the degree and nature of debt the insured has taken on. It will also
serve as a check on information provided elsewhere in the application.
16. Warehouse Receipt:
A copy of the insured's warehouse receipt must
be obtained. Is it the receipt recognized by the American Warehouseman's
The warehouse receipt must state three essential
- The customers' goods are not insured
- The Warehouseman shall not be liable for loss or damage unless he has
failed to exercise reasonable care
- The amount the warehouseman is liable for if proven negligent.
In addition, any commodities that are stored under
special agreements should be listed and the agreements outlined.
17. Policy limit and deductible:
How do the policy limit and deductible compare
with the average value of property in storage at any one time?
Finally, the application must be signed and dated
by the applicant. Any material misrepresentation or concealment of any
information will render any insurance provided null and void?
This application for General Warehouseman's Legal Liability Insurance is
designed to give the underwriter the basic underwriting information necessary
to evaluate a risk. It is the underwriter's responsibility, however, to
review the application carefully and question any information that is unclear
VI. THE FORM
In a class of business as complex as Warehousemen's
Legal Liability, the importance of a well-constructed, precise policy form
cannot be overemphasized. As the nature of warehousemen's legal liability
involves Federal and State regulation, plus the presence of negotiable
documents of title, there are many individual requirements necessary to
enact a viable policy form. Matters such as state requirements for loss
payees - (e.g., Illinois, Nebraska and Wisconsin) not addressed within
the scope of this discussion - should be examined with each potential assumption
The following clause suggestions are of a general nature; hence, do not
address specialized commodity warehouse liability, such as that imposed
on commodity warehousemen in grain growing states. Underwriters should
always consult with legal and claims departments, and company underwriting
management in the drafting and initiation of any policy form.
(The policy should state clearly that it covers
only that liability of the insured which is imposed by statute or regulation,
for loss or damage of property of others entrusted to its care, custody
or control at specified locations.)
DURATION OF COVERAGE
(A statement should show dollar limits, (1) per
disaster for general commodities, (2) for furniture movers, (3) for EDP
equipment storage, and (4) general merchandise in storage, whichever is
(In lieu of a straight deductible, a warehousemen's
liability deductible and a Sue and Labor deductible may be substituted.)
PROPERTY NOT COVERED
(Such items as a company may wish to exclude must
DEFENSE SETTLEMENT, EXPENSE COVERAGE
DISCLAIMER OF LIABILITY
REPORT OF GROSS RECEIPTS
DEFINITION OF WORDS AND TERMS
(Such terms as: premises, location, occurrence,
insured, named insured, household goods, general merchandise, receipts,
gross service revenue, gross transportation charges and motor truck gross
transportation revenue should be enunciated clearly.)
NOTICE OF CLAIM
COOPERATION OF THE INSURED
ACTION AGAINST THE COMPANY
(Liability of a company is generally limited to
the actual cash value of the property at the time any loss or damage, ascertained
or estimated according to such actual cash value with proper deduction
for depreciation, however caused. Also, generally, in no event, does it
exceed what it would then cost to repair or replace the same with material
of like kind and quality.)
The Exclusions generally found in a Warehousemen's
Legal Liability policy include:
- Mysterious disappearance, shrinkage, loss of
weight, unexplained loss, loss or shortage disclosed on taking inventory;
- Any liability assumed by the Insured under any contract or warehouse
receipt beyond that imposed by law on the Insured as a public warehouse
- Breakdown or failure or improper operation of any refrigerating machinery
- Insects, vermin, rodents, bacteria, molds, inherent vice, rust, dampness
of atmosphere, extremes of temperature or fumigation, latent defect, weevils
or other infestations or fumigation;
- Wear, tear, deterioration and contamination;
- Strikers, locked-out workmen or persons taking part in labor disturbances,
or riots or civil commotions;
- That portion of any loss or damage from which the Insured has been released
- Any repairing, restoration or retouching process;
- Any processing operation including but not limited to cooling, thawing,
packaging, repackaging, mixing, ripening or freezing, or any actual work
upon the property as described above unless loss by fire or explosion ensues,
and then only for such ensuing loss;
- Any dishonest, fraudulent or criminal act by any Insured, a partner
therein or an officer, director or trustee thereof, employees or agents,
whether or not occurring during the hours of employment; plus those against
any dishonest acts by anyone entrusted with the property;
- Forged bills of lading, loading, shipping or warehouse receipts;
- Any loss, destruction or damage caused by or resulting from interruption
of heat, light, power, gas or fuel supplied to the premise(s) covered;
- Any loss, destruction or damage to property of others in premises covered
when the Insured's relationship to the owner or storer of such property
is that of a lessor;
- Loss or damage caused by or resulting from earthquake, mudflow, earth
sinking, earth rising or shifting, landslide or other earth movement (unless
specifically endorsed hereon) unless loss by fire or explosion ensues,
and then only for such ensuing loss. This exclusion does not apply to property
in due course of transit;
- Loss or damage caused by or resulting from:
- flood, surface water, waves, tidal water or tidal wave, overflow of
streams or other bodies of water, or spray from any of the foregoing all
whether driven by wind or not;
- water which backs up through sewers or drains;
- water below the surface of the ground including that which
exerts pressure on or flows, seeps or leaks through sidewalks,
driveways, foundations, walls, basement or other floors or through
doors, windows or any other opening in such sidewalks, driveways,
foundations, walls or floors;
- release of water impounded by a dam regardless of cause, unless
loss by fire or explosion ensues, and then only for such ensuing loss.
This exclusion shall not apply to property in due course of transit;
(Consideration should be give to utilize clauses regarding concurrent causation on these exclusions.)
- The War Risk and Military Action Clause;
- The Nuclear Hazard Clause; and
- Delay, loss of market or use, business interruption or other consequential
Other clauses common to this class of business
Misrepresentation and Fraud
No Benefit to Bailee
Notice of Loss
Protection of Property
Subrogation or Loan
Impairment of Recovery Rights
Claims Against Third Parties
Examination Under Oath
Conformity to Statute