Your Guide to Bailee's Liability Insurance
Ordinary business insurance doesn't usually cover you for property that is entrusted to you.
Many people aren't sure what a bailee is. Maybe you think it's vaguely related to bailing people out of jail. Maybe you know it refers to businesses but you're not exactly sure what kind of companies or professionals it applies to.
To make sure the terminology doesn't throw you, let's start by defining just what a bailee is.
A bailee is a business that takes possession of someone else's property and who are tasked with taking care of the property as if it were their own. A customer who entrusts their property with one of these businesses is known as a bailor.
Some of the businesses that are considered bailees include:
- Dry cleaners
- Jewelers who repair jewelry, watches, and other items
- Trucking companies that accept goods for shipment
- Auto repair shops
- Valet services
Basically, if your business ever takes possession of other people's property, you're a bailee.
You'll face special risks because of this. In this article, we'll go over the insurance coverage you'll need to keep your business protected.
What About My Business or Property Insurance?
Most likely not.
Business liability policies typically exclude "property of others under your care, custody, or control." Property insurance almost always covers only your business property, not the property of others.
Read these policies carefully to see what they cover and – more importantly – what they exclude. Unless you have some unusually great and comprehensive coverage, you'll need other policies to protect you for your activities as a bailee.
What About Hold Harmless Agreements?
Some businesses have bailors sign hold harmless agreements or other liability disclaimers before entrusting their property. These are meant to take the responsibility off the bailee's shoulders and indemnify the company in case something happens to the property while it is under their care.
Too bad it doesn't usually mean much.
Bailment law is different from contract law. In most cases, bailment law prohibits bailors from contracting away their rights. Unfortunately for businesses relying on them, they're rarely worth more than the paper they're printed on.
Don't depend on these kinds of agreements unless you have received legal advice from a knowledgeable lawyer. Unless they inform you that, in your specific case, these agreements would be legally binding, look elsewhere for protection.
What Exactly Are Your Responsibilities?
The degree of care required varies based on the property that is subject to bailment. For instance, a fine watch left with a jeweler for repair must be given a higher level of care than clothes dropped off to be laundered. But in every case, bailees need to take care of a bailors’ property as they would take care of their own property.
What Types of Insurance Are Available?
In general two types are available, though they sometimes go by slightly different names: warehouseman’s legal liability and bailee legal liability.
Warehouseman's Legal Liability Insurance
Warehouseman’s policies provide coverage when negligence causes damage to the bailor’s goods, and pays legal fees as necessary.
The downside to these policies is that they only provide coverage if you, acting as the bailee, are at fault.
So, if you run a dry cleaning business and you use the wrong chemicals to clean a customer's suit, a warehouseman's policy would cover you because the damage to the property resulted from your negligence.
If, on the other hand, the damage was caused by a small fire that broke out overnight, you wouldn't be covered because there was no negligence on your part.
Bailee Legal Liability Insurance
Bailee legal liability policies are more comprehensive. They cover damage or destruction to the bailor’s property regardless of legal liability. They often also cover transport of goods between your premises and the customer’s home or business (learn What You Need to Know About Insuring Freight).
Bailee policies are more expensive, though sometimes not by much. This extra cost could pay off in a big way, not only by providing full coverage for any loss but also by preserving the goodwill of your customers.
How Much Coverage Do You Need?
How much coverage you need depends, of course, on the value of the goods you will be holding. If a luxury vehicle you're looking after is somehow damaged, you will want enough coverage to repair it. But, if you run a laundry service, you will probably need less coverage.
As is always the case with insurance, deductibles can be written into the policy to reduce your premiums. Take a realistic look at the value of the goods you hold and set your limits accordingly. Think about how much you can afford both in premiums and out-of-pocket expenses and set your deductible accordingly (for more, see An Overview of Insurance Deductibles).
What You Should Buy
You can buy a separate bailees policy or add bailees coverage to either your existing property policy or existing comprehensive general liability policy.
In general, separate policies and additions to an existing property policies will cost more and will offer greater coverage, while those added on to liability policies will cost less and offer less coverage.
In any case, make sure you understand what is covered and what is excluded in any policy that you're considering. Obviously, it needs to cover property under bailment. Coverage for damage caused by flooding is also highly recommended (and note that many property damage policies exclude flood damage).
Aside from these, you will want a policy that provides broad coverage, including for losses caused by:
- Burglary and burglary (see this 6 Steps to Collecting Burglary Insurance infographic to learn more)
- Employee theft (for related reading, see Inside Jobs: How to Prevent Employee Theft)
- Collision (if you transport a bailor's goods)
- Wind, rain, and hail
- Causes of loss peculiar to your business
The Bottom Line
If your business acts as a bailee, you almost certainly need bailee's liability insurance. When shopping for a policy, take a good, hard look at your business and its risks, then read the policies carefully to make sure they provide the right kind of protection.
If there are any out-of-the-ordinary aspects to your business that could result in losses, bring them to your agent or broker's attention. They'll be able to guide you to the policies most suited for the realities of your business (find out How to Pick the Right Insurance Agent).