Legal Liability Insurance for Warehouses: What Is It?
Warehouse legal liability insurance is a specialized form of coverage purchased by businesses that own or operate warehouses. Such coverage provides protection for a warehouse operator’s legal liability for the loss of or damage to property on account of its negligence committed while such property is in the entrusting, custody or care of that warehouse operator. The intent of such coverage is to protect businesses from the cost of claims arising out of goods held in the care of the businesses .
It is generally considered a standard business practice to maintain warehouse legal liability insurance, and it is typically required by lenders providing warehouse financing. Coverage usually extends to the building, machinery and equipment, and personal property of the business, including damages for liability to others. Warehouse legal liability insurance generally covers business losses resulting from physical damage to the property of others while such property is either being stored or transported to or from a warehouse or distribution facility. In some jurisdictions, this is referred to as "Goods in Transit Insurance."
Warehouse Legal Liability Insurance Coverage
Amongst the most crucial areas covered by warehouse legal liability insurance are coverage for property damage and loss of goods, coverage for physical damage to a client’s goods while being stored or handled at the warehouse, and coverage for third-party liabilities arising from damage or loss.
Coverage for property damage generally includes coverage for any losses arising out of physical loss or damage to a customer’s product resulting from a fire, vandalism, theft, or similar events happening on premises. Coverage for loss of goods refers to damages as a result of missing goods from a warehouse. Both of these types of coverage can be subject to limits as specified in the policy and may not cover damages resulting from specific risks or claims.
Third party liability coverage protects against allegations by third parties for damages caused by the insured’s negligence to those third parties. For example, it may provide protection against a third party who claims that their goods were damaged while in the insured’s custody. Coverage can be limited to specific amounts, or "blanket."
Who Needs Warehouse Legal Liability Insurance?
Warehouses that store goods owned by others for compensation face a variety of risks related to the inventory damage, destruction, or disappearance. The liability covers the acquired legal liability from the loss of customers’ goods while in the warehouse’s care, custody, and control. There are two general types of warehousemens liability insurance:
• the "B" form or "meaning and source" policy;
• the "D" form or "bill of lading" policy.
Businesses that typically run warehouse and storage facilities include:
• private or third-party freight storage handling services;
• public warehouse storage facilities;
• refrigerated/frozen storage facilities;
• container storage operations;
• distribution centers;
• retail distribution warehouses;
• pool and interchange cabinets; and
• municipal or public storage lockers.
Warehousemen as bailees face very specific risks. A bailee is one to whom goods of another are delivered for some expressed purpose under a bailment (a special relationship or the contract that creates an obligation). The bailee is the custodian of the bailed property, receiving a temporary possession and control of the property but not ownership. It is the basis for the habitual business practice of warehousing and trucking.
By the nature of their business, warehousemen have particular obligations imposed upon them under common law and statute law. It is the responsibility of the warehouseman to use due care to protect the bailed goods against loss and destruction. This level of responsibility does not absolve the owner of the goods from their own responsibility when there is a natural disaster. All parties are required to use due diligence, defined as using the care that a reasonably prudent person would exercise in comparable circumstances.
Warehouse Legal Liability Insurance Benefits
Benefits of Warehouse Legal Liability Insurance can be highlighted in a number of ways that can help warehouse clients understand the value of having coverage. The primary advantage of simply being covered by a policy that can work hand in hand with your clients insurance program is benefit in itself.
Suppose for a moment that your warehouse is covered by a policy that covers you very well. You have coverage in place for actual sellable or measured damages on a case by case basis and coverage in place for the total monetary damages accrued from all inventory or goods in the same shipment on the given date. Your policy then works in conjunction with the client policy to make sure that the client and the warehouse operator are both indemnified for their respective exposure.
The written coverage also removes doubt or suspicion from the equation. Without a written contract that specifically details coverage, warehouse operations may begin to believe they are covered for items they are not, or their clients may expect them to cover damages where the written contract does not permit for it.
There is also peace of mind that comes with warehouse legal liability insurance coverage. Owners and operators can rest easy knowing that they have a cushion when things go poorly that is in addition to the provisions of their lease or other contractual obligations they have with their client. Additionally, if the contract is well written, these benefits will extend on to the insurers of your client as well.
This means that both parties can be sure, beyond a reasonable doubt, that damages within the scope of the policy are covered by the insurance. They can also trust that they will not be left holding the bag with an attorney’s fees unexpectedly when the extent of their exposure becomes clear.
Factors in Insurance Premiums
Other factors that influence the cost of warehouse legal liability include the location of the warehouse and the economy. Constricting highly developed cities such as New York City or Los Angeles may also be a factor taken into account. The size of the warehouse and the goods being stored within the warehouse also impact the cost of insurance. The type of goods being stored in the warehouse can influence cost as well. For example , some insurers will not insure a warehouse if it stores artwork or fine wine. The more susceptible the goods are to theft or damage, the greater the premium. Past claims history can also affect warehouse legal liability premiums.
Selecting the Appropriate Policy
After you have determined that warehouse legal liability insurance coverage is applicable to your situation and you have conducted an analysis as to its appropriateness, it is time to purchase a policy (or not) and to begin to determine the value of that policy. There are essentially two steps to buying the coverage (1) find an appropriate form or wording to purchase; and (2) find the right provider.
Given the widespread use of the Legal Liability for Cargo Clauses, a policy should be sought which has an endorsement or foundation wording similar to it. Many of the terms under the Legal Liability for Cargo Clauses have received significant endorsements or are settled law in many jurisdictions. Because the applicability of terms will be easier to determine with some forms, a policy with terms easily identifiable as being similar to those contained in the Legal Liability for Cargo Clauses should be selected. Several examples have been provided as appendices to this memorandum.
With the terms of the coverage identified, it is time to identify an appropriate provider. The usual process for doing so involves conducting research, qualifications review, and a solicitation of proposals. Within the context of the research, an appropriate broker should be identified. While there is no particular broker that is best suited for this type of insurance, the selection of a broker with experience in the field will facilitate the process. A broker familiar with the insurance markets will be helpful in finding an appropriate policy. As is often said – you get what you pay for. It is important to resist the undertaking to procure insurance coverage on an "apples to apples" basis. Trying to buy a policy on a competitive basis with comparable policies may reflect a misunderstanding of coverage. This misunderstanding has two analytical components:
After determining that the broker has the experience and knowledge necessary to assist the insured to obtain the coverage, the next decision point involves the proper selection criteria to be identified for the provider. Some of these criteria are known. Like all other businesses, insurance providers have reputations which can be researched through some fairly simple investigation among others in the industry. After that, the insured should be aware of its own risk profile and may prepare a list of information needs. For example, the risk may involve warehousing on an "as required" basis, and may involve little or no notice to the provider or to its own customer. Here, a set of minimum notice requirements would be appropriate. In addition, an accurate analysis of one’s own risk profile will assist the insured to identify the minimum amount of coverage needed. The insured may also need to analyze the trade area within which it operates to ascertain the market value of its risk, and therefore, the value of the insurance coverage.
Finally, the insured should find more than one insurance provider willing to quote coverage and be ready to compare them, with the understanding that the brokerage process involves more than finding the lowest price. The ability of the insurer to adjust claims, the strength of the financial rating company, the track record of the company and the willingness of the insurer to provide coverage for the unique needs of the insured (for example, a limited amount of prior notice may be required) are all important considerations in making the final selection. In some cases, an insurer’s willingness to negotiate on things like deductibles or sublimits may reflect its attitude toward becoming a long-term business partner.
Legal Obligations and Guidelines
In many jurisdictions, there are few legal requirements specifically mandating that warehouse operators carry a certain amount of warehouse legal liability insurance. However, businesses involved in the warehousing and logistics industry should be mindful of the legal landscape in their jurisdiction and industry standards, as these factors may influence or dictate the coverage requirements for their operations.
Beneficial Owner Identification: One common requirement tied to legal liability insurance policies is the obligation of the warehouse operator to identify and be aware of the identity of the beneficiaries of their legal liability insurance coverage. The insured may be the custodian of goods, but the actual owners of the goods may be entirely unknown to the insured. While this would likely be acceptable to most warehouse legal liability insurers, enforcement of this condition (requiring that the insured knows the identity of the beneficial owners) could void insurance policies on a retroactive basis and presumably could create delays when originally unknown beneficiaries later file claims. Many types of warehouse policies include this type of a condition.
Loss Control Programs: In some jurisdictions, government bodies require that warehouse operators implement specific procedures to ensure safety and minimize loss. For example, to comply with North Carolina law, a warehouse operator must require an owner who stores goods in its warehouse facilities to maintain named peril coverage and such coverage must be in an amount at least equal to the value of the highest value load at any given time. Additionally, the warehouse operator must implement reasonable procedures regarding the removal or relocation of goods within the warehouse. If the warehouse operator has reason to believe that the tenant’s coverage is inadequate at any time, the lease agreement must require the tenant to remove its goods or add to its coverage.
Disclaimer Readability: As discussed in the Disclaimer section of the article, North Carolina courts have held that policy disclaimers including ambiguous, unclear, technical and/or unusual language are subject to a stricter standard of review than "the ordinary, generally accepted insurance policy language." Therefore, to avoid the possibility of a court invalidating a legal liability insurance disclaimer based on technical language, it is prudent for warehouse operators dealing with goods they do not own to have legal liability insurance agreements that contain clear and unambiguous language that complies with North Carolina law.
Common Claims Scenarios
Scenario 1: Customer Stored Goods Damage
A customer sends a delivery of expensive furniture to your warehouse but fails to inform you that the shipment contains pieces that need special care. Following your standard procedures, your staff places the delicate furniture with other crates on a pallet in the general storage area, where it’s knocked over by a forklift later. The customer wants its money back, but you’re protected by warehouse legal liability insurance, which covers damages to the customers’ property while in your possession and storage.
Scenario 2: Negligent Care
Inadequate handling procedures may be the cause of a claim against your warehouse legal liability insurance policy, as could deliberate actions or negligent care of goods. An employee mishandles a carton of electronics and it’s damaged beyond repair. Your warehouse is liable for these damages , so it pays the customer out of pocket to avoid litigation. Your warehouse legal liability insurance protects you from such surprises, paying for damage encountered while the client’s property was in your hands.
Scenario 3: Bursting of Seams
It seems simple enough – close all seams before storage. Cover doesn’t always keep its intended content inside; a seam bursts and your customers’ clothes spill out onto the floor, ruining them. Your warehouse legal liability policy protects you from such damages to the client.
Scenario 4: Fire
The worst kind of loss – a fire destroys much of your warehouse and your clients’ possessions. Warehouse legal liability does not cover against natural disaster or criminal actions, but it’s possible your employee could be deemed negligent in causing the fire. All those in your employment could be victims of this protection plan in such an event, with coverage applied to all your workers on the premises.
