Bonded Stores / Warehouses

Bonded Stores / Warehouses

A bonded store, or bonded warehouse, is a building or other security area in which goods that are subject to a duty or levy, such as an import duty, excise tax or the like, can be stored, manipulated, manufactured or assembled without the payment of a duty. Depending on the jurisdiction, it may be managed by the state or by private enterprise.

When it comes to Insurance there are a number of issues to consider.

Property Insurance

The standard basis of settlement for raw materials or stock not manufactured by the insured, is the replacement cost, as long as the replacement cost is done with reasonable dispatch. In the case of work in progress or finished goods, it is the cost of the direct labour, direct materials and direct factory overheads.

The cost is established at the time and the place of the loss. The problem arises that duty is not incurred at the time and the place of the loss. However, in the event of the loss or destruction of the goods, the government is going to seek payment of the duty. This is in fact a consequential loss, which under Property Exclusion 9 of an ISR policy for example, reads:

“The Insurer(s) shall not be liable under Section 1 and/or Section 2 in respect of…

9. Consequential loss of any kind including consequential loss due to delay, lack of performance, loss of contract or depreciation in the value of land/or stock except as herein provided under Section 2.”

Section 2 of an ISR policy known as the Consequential Loss of Profits (Business Interruption) section does not address duties payable on the destruction of the raw materials, work in progress, or finished goods.

As a result of this, there is an endorsement available which is in common use today, LDUTYVB4 – Liability for Duty.

The endorsement reads:

“The policy extends to include the Insured’s liability for customs, excise and other duties that the Insured becomes liable to pay in the event of Damage to Property Insured.

Provided always that the liability of the Insurer(s) shall not exceed the Sub Limit of Liability shown in the Schedule against ‘Liability for Duty’.”

On reading this further, I would prefer the endorsement to read “in the event of physical loss, destruction or damage” to avoid any confusion.

This is subject to a sub-limit which is rated accordingly.

When considering both the exposure for the goods being stored and the liability while being stored, it is important that the contractual risk be fully understood by all parties, including the insurance broker for both the bonded store operator and the person owning the goods.

One option for the bonded store operator may be to take out customers goods cover under their own property policy, again this will only cover the value of the goods at the time of the loss, and there would be a need to arrange additional coverage for any duty payable as a consequence of the loss, destruction or damage of the goods.

When it comes to Business Pack policies, it is important to review the coverage to address this very real liability in respect of duty whether it be for the bonded store operator or the owner of the goods. At last review, only one Business Pack policy on the market provides cover automatically for duty and it was for a modest 5% of the stock Sum Insured.

Liability Exposure

There is a real and present exposure for not only the company which runs a bonded store but also an employee of a bonded warehouse operator. This was established in the case Zaps Transport (Aust) Pty Ltd, Domenic Zappia & John Zappia [2017] AATA 202 where the Administrative Appeals Tribunal (‘AAT’) were asked to consider who was to be held liable for duty on cigarettes held in a bonded warehouse. Claims had been made against the company whom held the warehouse licence, a director of the company and the director’s son, a manager who dealt with the day to day operations of the warehouse.

Under longstanding Australian legislation, namely Section 35 A(1) of the Customs Act [1901] provides that:

“(1) Where a person who has, or has been entrusted with, the possession, custody or control of dutiable goods which are subject to customs control:

(a) fails to keep those goods safely; or

(b) when so requested by a Collector, does not account for those goods to the satisfaction of a Collector in accordance with section 37; that person shall, on demand in writing made by a Collector, pay to the Commonwealth an amount equal to the amount of the duty of Customs which would have been payable on those goods if they had been entered for home consumption on the day on which the demand was made.”

 On any reading of this, this is a very strict test and liability will be imposed upon the bonded warehouse/bonded store operator regardless of the adequacy of the security measures taken by them.

Putting aside the normal rules of bailment, when it comes to this legislation the key question is, has the company, director or manager been ‘entrusted with’ the possession, custody or ‘control’ of the goods?

In the case of Zaps Transport Aust the AAT found that the company had been entrusted with the possession, custody or ‘control’ of the cigarettes.

When it came to the director, they were held to be in overall command of the business and had no real direction over what happened to the goods. This, in the eyes of the AAT, was sufficient for him to be held liable for the duty. As for the manager, the AAT also found that the manager was in possession, custody or control of the goods as he directed what happened to goods on a day to day basis, exercised and delegated authority under which he could accept and release the goods, and employees followed his orders in respect of the goods.

Naturally, the director and manager thought this was a harsh decision for normally directors and managers are protected by the corporate bail and will not be held personally liable for the companies that they are associated with.

As you would expect with any taxation laws, despite the fact that there was no suggestion that the cigarettes were stolen due to the acts of the company, the director or the manager, it was interpreted that there was strict liability on all three parties.

This was then taken to the High Court in 2018. Comptroller General of Customs V Domenic Zappia [2018] HCA 54 and it was held that the way the AAT had interpreted the legislation was valid.

Under the circumstance it is therefore paramount for an Insurance broker to discuss this very real exposure with their client and recommend that a limit for goods in care, custody or control be sufficient to cover not only the goods that are being stored, but in addition, the liability for any duty payable.

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