Property of others in the insured business’ care, custody or control has historically resulted in underinsurance, loss adjustment difficulties and uncertain coverage with respect to commercial property insurance forms. Over the years, coverage forms and rules changed to accommodate the different and changing needs of insured’s. Becoming familiar with the exposures and coverage options to address and respond to these exposures is necessary for sound underwriting.
Any business entity with property or goods of others in its care, custody or control is referred to as a bailee. The owner of the goods is the bailor. Bailees have a legal obligation to exercise a certain degree of care to protect and preserve the owner’s goods from being damaged. The bailee owes this obligation only when the cause of loss is within its control. If property of others is damaged or destroyed due to the negligence of the bailee or its employees, the bailee is responsible and is required to compensate the owner. This is common law liability based on negligence and is usually referred to as “liability imposed by law.” In addition, a bailee may, by written or oral contract, assume liability for damage by specified causes of loss. Such contractual liability and liability imposed by law are included in the broader term known as “legal liability.”
Apart from legal liability, some businesses that provide services involving repairing, processing or storing customers’ goods may want to protect their customers by also obtaining coverage against loss by fire or certain other causes of loss regardless of legal liability. Doing so maintains customer good will as well as reflecting customary trade practice in some cases.
Customers’ goods are not the only kinds of personal property that may be in the insured’s care, custody or control. For example, leasing machinery, equipment and other personal property is a common commercial transaction and many insureds become bailees with respect to the personal property they lease.
To summarize, a bailee may have “legal liability” either “imposed by law,” “assumed by contract” or assumed voluntarily. All are examples of situations where a bailee may seek insurance coverage on the exposure.