This article is part of a series sponsored by Amwins.
Historically, warehouse legal liability (WHLL) has been a complicated line, with many gray areas and multiple interpretations of its coverage. During the course of the recent weak market, WHLL has strayed away from its original intent. As healthier market conditions re-emerge, it can go back to its roots: taking on the legal liability of the person or organization providing warehousing and handling services. In one sense it is a non-transit (or static) relative of cargo legal liability, but in another sense it is an entirely different animal.
Warehouse Legal Liability Insurance Agreement
Like most policies, WHLL has specific triggers that activate coverage during an event, the most important of which is physical loss or damage. This can cause confusion because WHLL appears to have the same coverage triggers as first-party property insurance, even though WHLL is casualty insurance. The main difference is that WHLL is only triggered when the insured (either as a warehouse operator or trustee) assumes liability for physical loss or damage. A standard property policy will respond whenever there is loss or damage and the policy does not otherwise exclude the loss. Simply put, since warehouse operators have a responsibility to ensure that stored property is protected from damage, failure to do so can result in legal liability to the property owner. To add to the confusion, some carriers have previously used actual first-party coverage for warehouse legal liability (warehouse all risks), thereby confusing the question of how WHLL policies cover losses.
What legal responsibilities does the insured bear?
A warehouse operator’s legal liability will vary based on several factors. First, under the law, warehouse operators are subject to relatively relaxed custody standards, meaning they only have to prove that they took reasonable actions to preserve or protect the property in their custody. In contrast, motor carriers have some of the strictest custody standards and take full responsibility for the cargo in their custody, custody and control. In other words, if there is loss or damage to property in the warehouse operator’s custody, custody or control, the warehouse operator is not necessarily liable for that loss or damage. A true WHLL policy will respond based on the insured’s liability under the law.
The primary driver of the insured’s liability as a warehouse operator (and therefore the primary driver of risk under a WHLL policy) is the warehouse receipt, storage contract or service agreement. This can be confusing to insurance professionals and insurance buyers because a warehouse legal liability policy responds to the insured’s liability, whereas a contract determines the insured’s liability. Therefore, the terms of a storage contract can limit or expand the losses covered by a WHLL policy.
Taking Warehouse A as an example, the contract used by this warehouse stipulates that the insured will not be liable for loss or damage to the goods stored unless caused by the negligence of the warehouse, and further losses will be limited to $0.50/pound (based on the weight of the goods). Warehouse B has exactly the same WHLL policy coverage but uses a contract issued by the owner of the goods which states that the warehouse is responsible for all loss or damage (however caused) while in the care, custody and control of the warehouse. In addition, there is no limit on the amount of warehouse B’s liability to the cargo owner. Both warehouses suffered identical fire damage, losing $1,000,000 worth of goods.
Under the contract with Warehouse A, the warehouse is only liable if the insured fails to take reasonable steps to prevent a fire, so the cargo owner will likely have to prove that the insured was aware of the unsafe fire conditions and failed to correct the problem. If this is confirmed, then the $1,000,000 loss would be limited to $0.50/lb. Assuming the cargo is 500 tons, the WHLL policy only needs to respond to USD 500,000.
On the contrary, Warehouse B bears all losses. Therefore, like a property all-risk policy, the WHLL policy must pay for fire damage regardless of whether the warehouse was actually negligent, and the WHLL policy must pay for the full $1,000,000 of the claim.
To make matters even more confusing, while a contract can increase the insured’s liability, this does not always mean that WHLL will respond to the increased liability. Continuing with our Warehouse B example, we previously determined that the warehouse is responsible for all losses, which technically includes CAT events such as floods, storms, and earthquakes. Generally, warehouse operators are not liable for force majeure events because such events are beyond their control. If the WHLL policy does not cover CAT risks, an uninsured risk arises because the warehouse operator is liable for damage caused by the cargo owner due to a CAT event, but the WHLL policy will not cover these losses. There are two ways to resolve this situation: 1) obtain first-party CAT risk insurance, or 2) negotiate “liability for all losses” wording in the contract. The latter is the better option as it transfers the risk back to the cargo owner. Most warehouse contracts provide that the insured is only liable for failure to exercise the care of a reasonably prudent person.
Additionally, the contract establishes the warehouse operator’s legal liability for a certain monetary value.
Warehouse receipt
Warehouse receipt is a document produced by a warehouse when it accepts incoming goods from an individual or organization. This receipt is the same as the bill of lading, is legally binding and represents a contractual obligation. Underwriters prefer a warehouse receipt to a contract because it usually states that the warehouse’s legal liability is either the value of the merchandise multiplied by a certain amount per pound (usually between $0.15 and $3) or 5 to 10 times the monthly storage fee—whichever is lowest. Consider a $50,000, 5-pound box of microchips. If the warehouse operator’s liability is limited to $0.50 per pound, then he is only liable for $2.50 for a box of microchips.
contract
This is where things get complicated. In many cases, the cargo owner may require the insured to sign a contract for its services. This contract stipulates the limit of liability and the amount payable in the event of loss. However, contractual liability and legal liability are not the same thing. Legal liability is based on tort law, while contractual liability is based on the acceptance of additional liability that would normally be borne by the insured.
Most policies require the underwriter to approve and arrange contractual obligations at inception and to approve any additional contracts while the policy is in force. When an insured assumes additional liability beyond what is reasonable, the product is diverted from its primary purpose and additional underwriting considerations should be made.
Furthermore, it needs to be reiterated that under U.S. law, warehouse operators are not responsible for CAT events such as earthquakes and storms because these events are beyond human control. Instead, warehouse operators’ responsibilities are driven by their actions and that of their organization.
The fine print of a warehousing contract can have a large impact on the insured’s level of liability, and warehouse receipts can help fairly calculate the risk of the contract. Warehouse legal liability is a complex issue, so it may be worth working with an expert in the field who can anticipate its twists and turns.
We help you win
Warehouse legal liability risks only become more complex and consequential when coverage does not match actual liability. This is where we come in. Logistics Operations Plan for Amwins Program Underwriters It was built to eliminate this confusion.
Backed by specialist underwriters with deep logistics experience, global claims handling and fast turnarounds, we help retail partners provide their warehouse and logistics customers with the right protection, not just the policy that sounds right.
Insights provided by:
- Jason Baynard, Senior Vice President, Program Underwriters, Amwins
- Heather Frain, Senior Vice President, Plan Underwriters, Amwins
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