Understanding customer goods cover under a first party policy.
I received a phone call asking me to explain why anyone would insure customer’s goods under a fire or ISR policy and not simply rely on the public liability section of a business pack or a standalone liability policy.
When one party, say an insured, is holding for some reason the property of another. This could be goods sold but not delivered, goods on consignment, there is a situation known in legal terms as ‘bailment’.
This may involve a written contract, which sets out who is responsible for insurance, but more often than not there is no contract in place.
In simplest terms, the bailor entrusts the possession of the good or property to another individual known as the bailee.
In such situations there is not strict liability. It does not normally require the bailee to have an armed guard on the property with a machine gun to stop burglars in one hand and a fire extinguisher in the other to protect it against fire.
What the bailee has to do is to take reasonable care of the property in their possession.
This can become quite a complex area because what would be reasonable to protect say a neighbours aluminum ladder would be completely different to a jeweller entrusted with a clients multi-million dollar diamond ring. The big difference between bailment and say the tort of negligence is the onus of proof.
In a normal negligence situation the agreed party has to show that the other party owed them a duty of care, that they breached that duty of care and as a result of that breach, they have suffered loss, injury or damage.
In the case of bailment, the bailor simply asks for their goods back and it is up to the bailee to demonstrate to the satisfaction of the court that they have taken reasonable care. If they fail to do so then they would be held responsible for the property.
Turning now to the insurance implications, having a public liability policy is one thing. There are two issues to consider, firstly, the insured has to have been found to be negligent for the policy to be triggered. The public liability policy would normally provide defense costs to the insured, to defend any action brought against them where the insurer felt that there was no negligence on the part of their client the insured. Another issue is that typically policies have low limits for care, custody and control. These often can be negotiated higher with the underwriter, but the limits can range from $50,000 to $250,000 or even higher as a standard cover. This may not be adequate for all clients.
In some cases, an insured who wishes to protect their brand elects to insure the customers goods under a first party policy which typically provides cover for this from the insured perils covered by the policy. The cover under most fire policies is limited to the property of customers which are otherwise not insured. The reason for this is that the ISR or property insurer covering the bailor does not want to have the situation of dual insurance which could in some industries involve hundreds or even thousands of customers. This would be a nightmare to administer.
The cover is really designed to protect the brand of the insured and to allow them to reimburse their clients for lost property which may be lost or damaged as a result of an insured peril but where the insured has no legal liability but rather a moral obligation or a commercial relationship with the client such that he does not want to upset them to the point where he could lose them and there by damage the business in the long term of permanently. I regularly recommend that an insured have this form of cover and a reasonable example was for a panel beater. He felt that he not need the cover as he only did insurance work and all the vehicles in his custody/control would have been insured by the customers insurer and he felt, as did his broker that the insurer’s involved would understand the rules of bailment and would only ‘come after him’ if he was negligent and therefore could rely on their liability policy.
Knowing the panel beating industry as I do, I realise that quite often parts are moved from the vehicle, such as wheels, bonnets, doors etc for repair and whilst they are no longer fitted to the vehicle they are suddenly not insured by the motor vehicle policy. Having $100,000 cover for customers goods not otherwise insured protects the insured and his customers from the messy situation where parts removed from the vehicle would not be insured by the motor policy. His taken out of the cover, provides protection to his brand and to his customers for their property whilst it is temporarily removed from the vehicle.
Another reason why insuring property under a first party policy and not a third party policy is that it can supplement the care, custody and control limit under a public liability policy, but it must be remembered that typically a public liability policy would cover a wider range of circumstances giving rise to loss or damage, and could in some cases cover the consequential loss as a result of the property but this is a subject for a separate post.
If you have any further questions on this subject or comments to add please do so in the comment box below and remember to hit the “ask me a question” button should you have any questions on insurance or risk management.