Summary: The American Association of Insurance Services (AAIS) offers legal liability coverage for warehouse operators through the use of form IM-7650, edition date of April 2004. Note that, even though this discussion is in the Public Liability section of FC&S, AAIS categorizes the coverage as inland marine insurance. This discussion presents the different sections of the coverage form along with an analysis of the sections.
Topics covered: Agreement Definitions Coverage Property covered Property not covered Coverage extensions
Perils excluded What must be done in case of loss Valuation How much we pay Loss payment Other conditions
Agreement
In return for “your” payment of the required premium, “we” provide the coverage described herein subject to all the “terms” of the Warehouse Operators Legal Liability Coverage. This coverage is also subject to the “schedule of coverages” and additional policy conditions relating to assignment or transfer of rights or duties, cancellation, changes or modifications, inspections, and examination of books and records.
Endorsements and schedules may also apply. They are identified on the “schedule of coverages”.
Refer to Definitions for words and phrases that have special meaning. These words and phrases are shown in quotation marks or bold type.
Analysis
This is simply the basic contractual agreement between the insurer and the insured — in return for a premium payment from the named insured, the insurer provides the coverage described in the warehouse operators legal liability coverage form. This coverage is subject to all the declarations, conditions, endorsements, and schedules that apply to the coverage form.
Definitions
1. The words “you” and “your”, mean the persons or organizations named as the insured on the declarations.
2. The words “we”, “us”, and “our” mean the company providing this coverage”.
3. ”Earth movement” means any movement or vibration of the earth's surface (other than “sinkhole collapse”) including but not limited to earthquake; landslide; mudflow; mudslide; mine subsidence; or sinking, rising, or shifting, of earth.
4. ”Flood” means flood, surface water, waves, tidal water, or the overflow of a body of water all whether driven by wind or not. This includes spray that results from these whether driven by wind or not.
5. ”Limit” means the amount of coverage that applies.
6. ”Perishable stock” means property preserved and maintained under controlled conditions and susceptible to loss or damage if the controlled conditions change.
7. “Pollutant” means:
a. any solid, liquid, gaseous, thermal, or radioactive irritant or contaminant, including acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Waste includes materials to be recycled, reclaimed, or reconditioned, as well as disposed of; and
b. electrical or magnetic emissions, whether visible or invisible, and sound emissions.
8. ”Schedule of coverages” means:
a. all pages labeled schedule of coverages or schedules that pertain to this coverage; and
b. declarations or supplemental declarations that pertain to this coverage.
9. “Sinkhole collapse” means the sudden settlement or collapse of earth supporting the covered property into subterranean voids created by the action of water on a limestone or similar rock formation. It does not include the value of the land or the cost of filling sinkholes.
10. ”Specified perils” means aircraft; civil commotion; explosion; falling objects; fire; hail; leakage from fire extinguishing equipment; lightning; riot; “sinkhole collapse”; smoke; sonic boom; vandalism; vehicles; “volcanic action”; water damage; weight of ice, snow, or sleet; and windstorm.
Falling objects does not include loss to:
a. personal property in the open; or
b. the interior of buildings or structures or to personal property inside buildings or structures unless the exterior of the roof or walls are first damaged by a falling object.
Water damage means the sudden or accidental discharge or leakage of water or steam as a direct result of breaking or cracking of a part of the system or appliance containing the water or steam.
11. ”Spoilage” means any detrimental change in the physical state of “perishable stock”. Detrimental change includes, but is not limited to, thawing of frozen goods, warming of refrigerated goods, or solidification of liquid material.
12. ”Suit” means a judicial proceeding that has been set up to determine liability and damages for loss to property of others that consists of covered property that is in “your” care, custody, or control. Judicial proceedings also includes arbitration proceedings that “you” may be required to submit to arbitration.
13. ”Terms” means all provisions, limitations, exclusions, conditions, and definitions that apply.
14. ”Volcanic action” means airborne volcanic blast or airborne shock waves; ash, dust, or particulate matter; or lava flow. Volcanic action does not include the cost to remove ash, dust, or particulate matter that does not cause direct physical loss to the covered property.
15. ”Warehouse receipt” means the receipt issued by “you” to “your” customer acknowledging that property is being stored at “your” warehouse and includes:
a. a description of the property;
b. the weight or number of units being stored; and
c. the limited liability assumed by “you”.
Analysis
This definitions section contains many terms that need no analysis, such as “you, your”, “we, us, and our”, “limit”, and “suit”; these terms speak for themselves. However, it should be noted that this policy has no “who is an insured” provision; coverage is for “your” legal liability and that means only the persons or organizations named as insureds in the declarations.
The description of “earth movement” lists several things as being included in the definition, but this list is not all-inclusive; earth movement includes but is not limited to the actions cited. For more information on the scope of “earth movement”, see Earth Movement Exclusion.
The definition of “pollutant” is familiar for the most part, but note that it adds “radioactive” to the list of irritants and contaminants; the insurer is making the point that things like a discharge from a nuclear reactor or a leak from a nuclear storage facility are considered pollutants. Note also, that the definition includes electrical or magnetic emissions and sound emissions. This refers to things like electromagnetic fields (EMF) associated with the use of electric utilities, and the viewpoint of some people that loud sounds are pollutants of the airwaves.
The sinkhole collapse definition deals with the settlement or collapse of earth supporting the covered property only; sinkholes occurring elsewhere are not included in the definition's scope. Also, the definition limits itself to “voids created by the action of water on a limestone or similar rock formation”, implying, perhaps, that only naturally caused sinkholes are meant to be part of the definition. However, since the definition does not specifically declare that man-made underground cavities are not part of the definition, the argument can be made that sinkholes made by human activities, either directly or indirectly, are included in the definition as long as water was the proximate cause of the underground void.
The comment about “falling objects” is interesting. “Falling objects” does not include loss to personal property inside buildings or structures unless the exterior of the roof or walls are first damaged by a falling object. This means that if a fire damages a roof and then some object falls out of the sky through the hole created by the fire, the loss caused by the falling object is not considered damage by a falling object under this policy.
The definition of “warehouse receipt” is important because that term is crucial to the coverage agreement in the policy. The warehouse receipt establishes the contractual bailment relationship between the insured warehouseman and his or her customer, describes the property being stored by the named insured, and limits the amount of the insured's liability to no more than that which is stated on the receipt.
Coverage
“We cover “your” legal liability for loss to covered property while under “your” care, custody, and control, and that “you” become legally obligated to pay as a warehouse operator under a “warehouse receipt” issued by “you”.
“We” do not pay for costs, expenses, fees, fines, penalties, or damages resulting from “your” violation of any law or regulation relating to any delay in payment, denial, or settlement of any claim.
Analysis
This section of the policy documents the coverage agreement between the insured and the insurer.
The coverage agreement applies to the named insured's legal liability for loss to covered property that the insured has in his or her care, custody, and control. The insured warehouseman has assumed a legal obligation to his or her customer to store and take proper care of the customer's goods. If those goods are damaged and the insured is legally responsible for the damage, this agreement establishes that insurance coverage has been arranged to apply to that damage. Note that legal liability is a crucial factor here. The named insured must have legal liability for the loss to the covered property or the coverage under this policy does not apply.
This section of the policy also establishes those items to which the coverage agreement does not apply. These pertain to costs and expenses the insured may incur due to violation of laws or regulations in dealing with the insured or the claimant.
Property Covered
“We” cover the following property unless the property is excluded or subject to limitations.
1. Coverage–”We” cover direct physical loss caused by a covered peril to property of others that “you” store at “your” warehouse.
2. Coverage Limitations–”We” only cover property of others:
a. while in storage in a warehouse building that is described on the “schedule of coverages” or within 100 feet of the described warehouse building; and
b. that is described in “your” “warehouse receipt”.
Analysis
The language of this clause may lead one to think that the warehouse operators legal liability policy is a named perils policy; however, under the “perils covered” clause, discussed below, the fact that this is an open perils policy comes out. The property that is covered is “property of others” and, it has to be described in the warehouse receipt and stored at the premises or location that is described in the schedule. This policy offers no off-premises coverage.
Property Not Covered
1. Aircraft or Watercraft — “We” do not cover aircraft or watercraft.
2. Art — “We” do not cover objects of art including paintings and statuary.
3. Assumed Liability — “We” do not cover property for which “you” have assumed liability beyond the liability imposed on “you” by law.
4. Contraband — “We” do not cover contraband or property in the course of illegal transportation or trade.
5. Furs — “We” do not cover furs or garments trimmed with fur.
6. Jewelry, Stones, and Metals — “We” do not cover jewelry, precious or semi-precious stones, gold, silver, platinum, or other precious metals or alloys.
7. Live Animals — “We” do not cover live animals.
8. Money and Securities — “We” do not cover accounts, bills, currency, food stamps, or other evidences of debt, lottery tickets not held for sale, money, notes, or securities.
9. Property You Owned, Lease, or Rent — “We” do not cover personal property that “you” own, lease, or rent.
10. Property In Transit — “We” do not cover property in transit. This includes property that is held as storage-in-transit under a bill of lading.
11. Property In Storage Space — “We” do not cover property for which “you” are acting as a lessor of storage space.
12. Property Not Under a Warehouse Receipt — “We” do not cover property for which no warehouse receipt has been issued.
Analysis
This list of property that is not covered by the warehouse operators legal liability policy is fairly well self-explanatory, but some commentary is warranted. The list reinforces the point noted above that property off-premises, such as property in transit, is not covered. Property not covered includes property under a bill of lading that is temporarily held at the insured's warehouse or that makes a temporary stop at the warehouse while on its way to a permanent location. The item about property in storage space is interesting; one would think that a warehouse operators liability insurance policy is written for property in a storage space. However, this item refers to a self-storage situation, wherein the insured owns a self-storage facility and simply rents space to someone. In such a situation, the renter (or lessee) has control over the stored goods and can remove the goods or store more goods at will. The warehouse operator does not have the care, custody, and control over the stored goods upon which this legal liability coverage form is built. Finally, the property not covered section of the policy reminds insureds that, for property to be covered, a warehouse receipt has to be issued.
Coverage Extensions
The following Coverage Extensions indicate an applicable “limit”. This “limit” may also be shown on the “schedule of coverages”. If a different “limit” is indicated on the “schedule of coverages”, that “limit” will apply instead of the “limit” shown below. However, if no “limit” is indicated for a Coverage Extension, coverage is provided up to the full “limit” for the applicable covered property unless a different “limit” is indicated on the “schedule of coverages”.
Unless otherwise indicated, the coverages provided below are part of and not in addition to the applicable “limit” for coverage described under Property Covered. The “limit” provided under a Coverage Extension cannot be combined or added to the “limit” for any other Coverage Extension or Supplemental Coverage including a Coverage Extension or Supplemental Coverage that is added to this policy by endorsement.
If coinsurance provisions are part of this policy, the following coverage extensions are not subject to and not considered in applying coinsurance conditions.
1. Debris Removal
a. ”We” pay the cost to remove the debris of covered property that is caused by a covered peril.
b. This coverage does not include costs to:
1) extract “pollutants” from land or water; or
2) remove, restore, or replace polluted land or water.
c. ”We” do not pay any more under this coverage than 25% of the amount “we” pay for the direct physical loss. “We” will not pay more for loss to property and debris removal combined than the “limit” for the damaged property.
d. ”We” pay up to an additional $5,000 for debris removal expense when the debris removal expense exceeds 25% of the amount “we” pay for direct physical loss or when the loss to property and debris removal combined exceeds the “limit” for the damaged property.
e. ”We” do not pay any expenses unless they are reported to “us” in writing within 180 days from the date of direct physical loss to covered property.
2. Defense Costs
a. ”We” have the option to defend any “suit” brought against “you” as a result of damage to covered property caused by a covered loss. “We” may investigate and settle a claim or “suit”.
b. ”We” do not have to provide a defense after “we” have paid the “limit” as a result of a judgment or written settlement.
c. ”You” must not:
1) admit liability for a loss, settle a claim, or incur expense without “our” written consent; or
2) interfere with “our” negotiation for a settlement.
d. ”We” will pay the following additional expenses associated with any “suit” “we” defend:
1) expenses which “we” incur while investigating and defending the “suit”;
2) actual loss of “your” salary, up to $250 per day, for “your” time spent away from work at “our” request;
3) expenses that “you” incur at “our” request;
4) all costs that “you” are required to pay as a result of any “suit” “we” defend;
5) interest that accrues after entry of a judgment, until “we” tender, deposit in court, or pay “our” part of the judgment;
6) interest that is awarded against “you” before the entry of a judgment. If “we” make an offer to settle the “suit”, “we” will not pay any interest that accrues after the offer to settle; and
7) cost of a bond for the release of attachments. “We” are not required to furnish a bond itself.
No deductible applies.
3. Emergency Removal
a. “We” cover any direct physical loss to covered property while it is being moved or being stored to prevent a loss caused by a covered peril.
b. This coverage applies for up to 365 days after the property is first moved. Also, this coverage does not extend past the date on which this policy expires.
4. Fraud and Deceit
a. “We” cover theft of covered property when “you”, “your” agents, customers, or consignees are fraudulently induced to part with the covered property:
1) to persons who falsely represent themselves as the proper persons to receive the property;
2) by the acceptance of fraudulent bills of lading or shipping receipts; or
3) as a result of or directly related to the use of any electronic data processing hardware or software.
b. The most “we” pay in any one occurrence for theft of covered property under this Coverage Extension is $1,000.
Analysis
The primary point to make about these coverage extensions is that, unless otherwise indicated, the coverages provided are part of and not in addition to the applicable limit for coverage as described under the property covered section of the policy.
The warehouse operators liability policy will pay for debris removal to a certain extent. The debris has to be caused by a covered peril. For example, if a fire destroyed the covered location, the cost of removing the charred remains of the covered property would be paid; on the other hand, if the covered property was damaged by rodents, this cause of loss is excluded and the debris removal coverage is not applicable. And, the cost to remove pollutants is not covered by this policy.
The limit of coverage here is 25 percent of the amount paid for the direct loss; so, if a fire destroys covered property to the tune of $20,000, the insured has $5,000 available for debris removal. Now, the total amount paid for loss to property and debris removal combined is not supposed to exceed the declared limit for the damaged property. But, in an exception to the rule, the insurer agrees to pay up to $5,000 should the amount of loss to property and debris removal combined exceed the stated limit for the damaged property; this $5,000 is also available if the debris removal expense exceeds 25 percent of the amount paid for direct loss. Some examples: the stated limit of coverage for an item stored in the insured's warehouse is $20,000; a fire destroys the item totally, so the insurer will pay $20,000 for the loss; the cost of removing the burned item is $8,000; the insured has $5,000 available for the debris removal costs since the total paid for loss to property and debris removal combined exceeds the limit for the damaged property. If the amount paid for the damage to the covered property was only $13,000, and the debris removal expense was $5,000, the insured would get the entire $18,000 claim paid: $13,000 for the loss to covered property; $3,050 (25 percent of the amount paid for direct loss); and $1,950 paid from the $5,000 amount that is available to the insured since the debris removal expense exceeds 25 percent of the covered property loss payment. The bottom line here is that the insured should be aware of the process involved in establishing a debris removal amount. This amount is not supposed to exceed 25 percent of the amount paid for the direct loss, but it can under certain circumstances.
The defense costs section of IM 7650 makes the point that the insurer has the option (not the duty) to defend the insured in any lawsuit brought against the insured, and of course, the insurer reserves to itself the right to settle any claim or lawsuit (without any prior approval by the insured). The defense offered by the insurer ends after the limit of insurance has been paid as a result of a judgment or a written settlement. The insured has the duty to not admit liability or settle a claim or incur any expenses without the written consent of the insurer and an additional duty to not interfere with the negotiations for a settlement. In other words, the insurer is in charge of the settlement process and the insured has no say in the matter.
The covered expenses under this portion of the policy resemble the supplementary payments clauses of the CGL form. And this policy notes that no deductible applies to the covered expenses.
The warehouse operators policy usually does not extend coverage to property in transit. However, if the property is being moved to prevent a loss — for example, if a fire breaks out in the warehouse and the stored goods are moved to prevent their being burned — and the goods are damaged while being moved, this additional coverage will cover that loss. The coverage is for up to 365 days after the property is first moved.
The last coverage extension pertains to coverage for fraud and deceit. Loss of covered property due to fraud and deceit is covered but only up to $1,000 in any one occurrence.
Supplemental Coverages
The following Supplemental Coverages indicate an applicable “limit”. This “limit” may also be shown on the “schedule of coverages”. If a different “limit” is indicated on the “schedule of coverages”, that “limit” will apply instead of the “limit” shown below. However, if no “limit” is indicated for a Supplemental Coverage, coverage is provided up to the full “limit” for the applicable covered property unless a different “limit” is indicated on the “schedule of coverages”.
Unless otherwise indicated, a “limit” for a Supplemental Coverage provided below is separate from, and not part of, the applicable “limit” for coverage described under Property Covered.
The “limit” available for coverage described under a Supplemental Coverage:
a. is the only “limit” available for the described coverage; and
b. is not the sum of the “limit” indicated for a Supplemental Coverage and the “limit” for coverage described under Property Covered.
The “limit” provided under a Supplemental Coverage cannot be combined or added to the “limit” for any other Supplemental Coverage or Coverage Extension including a Supplemental Coverage or Coverage Extension that is added to this policy by endorsement.
If coinsurance provisions are part of this policy, the following supplemental coverages are not subject to and not considered in applying coinsurance conditions.
1. Earned Warehouse Charges
a. “We” pay warehouse charges that are due “you” and that become uncollectible as a result of a direct physical loss to covered property caused by a covered peril.
b. The most “we” pay in any one occurrence for all uncollectible earned warehouse charges is $5,000.
2. Newly Acquired Warehouse
a. “We” cover direct physical loss caused by a covered peril to covered property at a warehouse that “you” acquire during the policy period.
b. This coverage applies for up to 60 days from the date “you” acquire the warehouse or until “you” report the acquired warehouse to “us”, whichever occurs first. However, this coverage does not go beyond the end of the policy period.
c. The most “we” pay in any one occurrence for covered property at a warehouse that “you” acquire is $50,000.
d. “You” must pay any additional premium due from the date “you” acquire the warehouse.
3. Pollutant Cleanup and Removal
a. “We” pay “your” expense to extract “pollutants” from land or water if the discharge, dispersal, seepage, migration, release, or escape of the “pollutants” is caused by a covered peril that occurs during the policy period.
b. The expenses to extract “pollutants” are paid only if they are reported to “us” in writing within 180 days from the date the covered peril occurs.
c. “We” do not pay the cost of testing, evaluating, observing, or recording the existence, level, or effects of “pollutants”. However, “we” pay the cost of testing which is necessary for the extraction of “pollutants” from land or water.
d. The most “we” pay for each location is $10,000 for the sum of all such expenses arising out of a covered peril occurring during each separate 12-month period of this policy.
4. Rewards
a. “We” pay a reward for information that leads to a conviction for:
1) arson;
2) theft; or
3) vandalism.
The conviction must involve a covered loss caused by arson, theft, or vandalism.
b. The most “we” pay in any one occurrence for a reward for information is $1,000.
c. The amount “we” pay is not increased by the number of persons involved in providing the information.
Analysis
These four supplemental coverages offered by IM 7650 have prescribed limits that will be paid by the insurer, prescribed either in this section of the policy or in the schedule of coverages; these limits are not part of the applicable limit for coverage described under property covered. Also, the supplemental coverages are not subject to any coinsurance conditions that are in the policy.
The earned warehouse charges that the insurer will pay are those that the insured is due but cannot collect. The newly acquired warehouse supplemental coverage applies to a loss to covered property that the insured may suffer while the property is at a warehouse that insured acquires during the policy period. This coverage is limited to $50,000 and also has a time limitation. The pollutant cleanup coverage also has a time limitation and a financial limit, as well as a limitation based on where the pollutants are discharged (land or water), and based on how the pollutants are discharged (caused by a covered peril). The rewards supplemental coverage applies only to a conviction for three specified crimes and totals $1,000.
Perils Covered
“We” cover risks of direct physical loss unless the loss is limited or caused by a peril that is excluded.
Analysis
This clause is simply declaring that the coverage under the warehouse operators policy is open perils coverage. Also, the loss to covered property has to be direct and not consequential.
Perils Excluded
1. ”We” do not pay for loss or damage caused directly or indirectly by one or more of the following excluded causes or events. Such loss or damage is excluded regardless of other causes or events that contribute to or aggravate the loss, whether such causes or events act to produce the loss before, at the same time as, or after the excluded causes or events.
a. Civil Authority — “We” do not pay for loss caused by order of any civil authority, including seizure, confiscation, destruction, or quarantine of property.
”We” do cover loss resulting from acts of destruction by the civil authority to prevent the spread of fire, unless the fire is caused by a peril excluded under this coverage.
b. Nuclear Hazard — “We” do not pay for loss caused by or resulting from a nuclear reaction, nuclear radiation, or radioactive contamination (whether controlled or uncontrolled; whether caused by natural, accidental, or artificial means). Loss caused by nuclear hazard is not considered loss caused by fire, explosion, or smoke. Direct loss by fire resulting from the nuclear hazard is covered.
c. War and Military Action — “We” do not pay for loss caused by:
(1) war, including undeclared war or civil war; or
(2) a warlike act by a military force, including action taken to prevent or defend against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or
(3) insurrection, rebellion, revolution, or unlawful seizure of power including action taken by governmental authority to prevent or defend against any of these.
With regard to any action that comes within the “terms” of this exclusion and involves nuclear reaction, nuclear radiation, or radioactive contamination, this War and Military Action Exclusion will apply in place of the Nuclear Hazard Exclusion.
Analysis
There is nothing out of the ordinary here. These are standard exclusions on most insurance policies due to their inherent characteristics and special nature. The clause does attempt to add concurrent causation language to these particular exclusions. For more information on concurrent causation, see Concurrent Causation.
2. ”We” do not pay for loss or damage that is caused by or results from one or more of the following:
a. Animals and Fumigation–”We” do not pay for loss caused by or resulting from:
1) insects, rodents, or other animals; and
2) fumigation or spraying for insects, rodents, and other animals.
b. Contamination or Deterioration — “We” do not pay for loss caused by contamination or deterioration including corrosion; decay; fungus; mildew; mold; rot; rust; or any quality, fault, or weakness in the covered property that causes it to damage or destroy itself.
c. Cancellation of Lease–”We” do not pay for loss caused by or resulting from cancellation, suspension, or lapse of any lease, contract, or order.
d. Criminal, Fraudulent, or Dishonest Acts — “We” do not pay for loss caused by or resulting from criminal, fraudulent, dishonest, or illegal acts committed alone or in collusion with another by:
(1) ”you”;
(2) others who have an interest in the property;
(3) others to whom “you” entrust the property;
(4) ”your” partners, officers, directors, trustees, or joint venturers, or “your” members or managers if “you” are a limited liability company; or
(5) the employees or agents of (1), (2), (3), or (4) above, whether or not they are at work.
This exclusion does not apply to acts of destruction by “your” employees, but “we” do not pay for theft by employees.
e. Loss of Use — “We” do not pay for loss caused by or resulting from loss of use, delay, or loss of market.
f. Missing Property — “We” do not pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property.
g. Pollutants — “We” do not pay for loss caused by or resulting from release, discharge, seepage, migration, dispersal, or escape of “pollutants” unless the release, discharge, seepage, migration, dispersal, or escape is caused by a “specified peril”; or except as specifically provided under the Supplemental Coverages, Pollutant Cleanup and Removal. “We” do pay for any resulting loss caused by a “specified peril”.
h. Processing, Work, and Packaging — “We” do not pay for loss caused by processing of or work upon the covered property including packaging or repackaging.
i. Spoilage — “We” do not cover loss to “perishable stock” caused by “spoilage”. But, if “spoilage” results in a “specified peril”, “we” do cover the loss or damage caused by that “specified peril”.
j. Temperature/Humidity — “We” do not pay for loss caused by dryness, dampness, humidity, or changes in or extremes of temperature.
k. Voluntary Parting — Except as provided under Coverage Extensions, Fraud and Deceit, “we” do not pay for loss caused by or resulting from voluntary parting with title to or possession of any property because of any fraudulent scheme, trick, or false pretense.
l. Wear and Tear — “We” do not pay for loss caused by wear and tear, marring, or scratching.
Analysis
Exclusions b. and l. are not out of the ordinary; they simply reflect a normal disinclination to insure damage done over a period of time by the natural ravages of time.
Exclusion d. is interesting in that acts of destruction by the named insured's employees are covered. If the employee steals a customer's goods, the loss is not covered by this policy; but, if the employee burns the goods or smashes them to bits, the loss is covered. Note that if the named insured or his partners were to burn the goods or smash them, the policy excludes such loss.
The coverage under the warehouse operators liability policy is for “risks of direct physical loss”. Exclusion e. emphasizes this in that loss of use is excluded; physical loss, here, does not include loss of use.
Mysterious disappearance of goods is not covered. Exclusion f. makes the point that physical evidence that shows what happened to the covered property is required for coverage to apply. For example, a fire that destroys covered property is physical evidence of a loss; on the other hand, a shortage of property discovered upon taking inventory is not a covered loss since there is no evidence to show what happened to the property.
The pollution exclusion is limited in that if the escape of the pollutants is caused by a peril specified on the policy, the resulting loss or damage is covered; the perils specified are listed in the definitions section of the policy and include aircraft, explosion, fire, hail, sonic boom, vandalism, and water damage, among other things. As an example, if an explosion occurs at the insured's warehouse and this causes stored fuel or lubricants to seep into covered property, the damage to the covered property is covered. On the other hand, if the fuel or lubricants seep out of their respective containers because of deterioration of their packaging, the resultant pollution damage to covered property is excluded.
Speaking of packaging, if the covered property is being repackaged or worked upon, any resulting damage is not covered. The question here is, if the insured is moving the covered property around, does that constitute “work upon” the property? Would the insurer deny coverage to covered property if the insured accidentally dropped it while moving it around the warehouse? Probably not. The insurer could make a case that work was being done to the property in that it was being moved for business purposes. However, the insured can make just as strong a case that the “work upon” exclusion is meant to deal with the packaging and repackaging process and not with the simple moving of property around a warehouse; the former being a once-in-awhile activity, the latter being a normal everyday business activity of a warehouse. With such ambiguity embedded in the wording of this exclusion, the insured would get the benefit of the doubt.
Exclusion j. addresses loss caused by changes in or extremes of temperature. Exclusion i. also touches on loss due to a detrimental change in the physical state of perishable stock, such as thawing of frozen foods, warming of refrigerated goods, or solidification of liquid material.
Exclusion k. is a reminder to the insured to enforce sensible business practices. The insured should not be lackadaisical in the handling of customers' property, giving it over to anyone who shows up to ask for it. The stored property is described on the warehouse receipt, and that receipt should have information on the customer so that proper identification can be established before the property is handed over. It is true that the insured could part with some property due to a trick or false pretense; such losses happen. But, a voluntary parting loss is one that can be controlled and prevented by careful and normal business practices on the part of the insured, and this exclusion is meant to drive that point home.
What Must Be Done In Case Of Loss
1. Notice — In case of loss, “you” must:
a. give “us” or “our” agent prompt notice including a description of the property involved (“we” may request written notice); and
b. give notice to the police when the act that causes the loss is a crime.
2. You Must Protect Property — “You” must take all reasonable steps to protect covered property at and after an insured loss to avoid further loss. “We” do pay the reasonable costs incurred by “you” for necessary repairs or emergency measures performed solely to protect covered property from further damage by a peril insured against if a peril insured against has already caused a loss to covered property. “You” must keep an accurate record of such costs. “Our” payment of reasonable costs does not increase the “limit”. “We” do not pay for such repairs or emergency measures performed on property which has not been damaged by a peril insured against. This does not increase “our” limit.
3. Proof of Loss — “You” must send “us”, within 60 days after “our” request, a signed, sworn proof of loss. This must include the following information:
a. the time, place, and circumstances of the loss;
b. other policies of insurance that may cover the loss;
c. ”your” interest and the interests of all others in the property involved, including all mortgages and liens;
d. changes in title of the covered property during the policy period; and
e. estimates, specifications, inventories, and other reasonable information that “we” may require to settle the loss.
4. Examination — “You” must submit to examination under oath in matters connected with the loss as often as “we” reasonably request and give “us” sworn statements of the answers. If more than one person is examined, “we” have the right to examine and receive statements separately and not in the presence of others.
5. Warehouse receipt — “You” must provide “us” with “your” copy of the “warehouse receipt” that “you” issued for the property that was involved in the loss.
6. Records — “You” must produce records, including tax returns and bank microfilms of all cancelled checks relating to value, loss, and expense and permit copies and extracts to be made of them as often as “we” reasonably request.
7. Damaged Property — If the damaged and undamaged property is in “your” care, custody, and control “you” must exhibit the damaged and undamaged property as often as “we” reasonably request and allow “us” to inspect or take samples of the property.
8. Volunteer Payments — “You” must not, except at “your” own expense, voluntarily make any payments, assume any obligations, pay or offer any rewards, or incur any other expenses except as respects protecting property from further damage.
9. Abandonment — “You” may not abandon the property to “us” without “our” written consent.
10. Cooperation — “You” must cooperate with “us” in performing all acts required by this policy.
Analysis
These duties of the insured in case of loss are not unusual or hard to understand. Some comments are warranted.
After there has been a loss, the named insured must take steps to protect covered property from further loss. The insurer promises to pay reasonable costs incurred by the insured for necessary repairs or measures performed to protect the property from further loss, with “reasonable” being the operative word. And, the protective measures must be done with an eye toward protecting the property from a peril that is insured against under the terms of this policy. For example, if an explosion occurs and damages covered property, the insured can spend money to have the remaining covered property moved or to have protective barriers put up to prevent another explosion from damaging the remaining covered property. On the other hand, if the covered property is damaged by rodents, the policy does not pay for the remaining property to be moved or for fumigation efforts to get rid of the rodents before more damage is done because rodent damage is not an insured peril.
The insurer goes on to declare that payment for repairs or emergency measures “does not increase our limit”; conversely, the insurer does not say that such payments decrease the limit either. So, the insured is left wondering, perhaps, how the repair payments affect the amount available for payment of losses. Based on the wording in the clause, the insured can reasonably assume that repair payments are separate from the loss payments and that if the insurer pays for repair or protective measures, the amount of coverage that is stated in the declarations for covered property remains intact.
The insured should note that, in case of a loss, he or she must send notice to the insurer along with proof of loss, a copy of the warehouse receipt, and records relating to value and expense so that the insurer has concrete evidence upon which to base a loss payment. The insurer also has retained the right to inspect the damaged property if it chooses to do so.
As with other insurance policies, this one puts the insured on notice not to voluntarily make any payments or assume any obligations. Violation of this provision may prejudice the position of the insurer and hinder the investigation of the loss. The insurer could then claim the insured breached the terms of the insurance contract, thus making the contract voidable.
Valuation
1. Actual Cash Value — The value of covered property is based on the actual cash value at the time of loss (with a deduction for depreciation).
2. Pair or Set—The value of a lost or damaged article which is part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. The loss is not considered a total loss of the pair or set.
3. Loss to Parts—The value of a lost or damaged part of an item that consists of several parts when it is complete is based on the value of only the lost or damaged part or the cost to repair or replace it.
Analysis
This clause notifies the insured that covered property is valued at time of loss on an actual cash value basis as opposed to replacement cost. The value of a loss to a pair or set and the value of a loss to part of an item are also spelled out for the insured.
How Much We Pay
1. Insurable Interest — “We” do not cover more than “your” insurable interest in any property.
2. Deductible — “We” pay only that part of “your” loss over the deductible amount indicated on the “schedule of coverages” in any one occurrence.
”We” may pay all or a portion of the deductible amount to settle a loss or “suit”. If “we” do pay all or a portion of the deductible amount, “you” must promptly reimburse “us” for the amount “we” paid.
3. Loss Settlement Terms — Subject to paragraphs 1., 2., 4., and 5. under How Much We Pay, “we” pay the lesser of:
a. the amount determined under Valuation;
b. the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable; or
c. the “limit” that applies to the covered property.
The amount “we” pay will not exceed the amount of “your” liability that is stated in the “warehouse receipt”.
In no event, will “we” pay more than the catastrophe “limit” indicated on the “schedule of coverages” regardless if a loss involves one or more warehouse locations.
4. Insurance Under More Than One Coverage — If more than one coverage of this policy insures the same loss, “we” pay no more than the actual claim, loss, or damage sustained.
5. Insurance Under More Than One Policy — “You” may have another policy subject to the same “terms” as this policy. If “you” do, “we” will pay “our” share of the covered loss. “Our” share is the proportion that the applicable “limit” under this policy bears to the “limit” of all policies covering on the same basis.
If there is another policy covering the same loss, other than that described above, “we” pay only for the amount of covered loss in excess of the amount due from that other policy, whether “you” can collect on it or not. But “we” do not pay more than the applicable “limit”.
Analysis
There are several items for the insured to note in this section of the policy.
The insurer declares that it will not pay an amount for a loss to property in excess of the named insured' insurable interest in that property. The insured should also note that the limit stated in the declarations is not necessarily the amount that will always be paid when a loss occurs. The insurer has declared that it will pay the lesser of the actual cash value of the covered property, the cost to repair or replace the property, or the stated limit. So, for example, if the declared limit is $3,000 but the actual cash value of the property at the time of loss is $2,000, the insurer will pay the $2,000 figure.
This section of the policy also establishes the payment process when other insurance is involved. If there is another policy written on the same terms as this warehouse operators liability coverage form, the payment for the loss is on a pro-rata basis. If there is another policy covering the same loss, but not subject to the same terms as this policy, this warehouse operators liability policy acts as an excess policy; this is true regardless of whether the named insured can collect on the other policy.
Loss Payment
1. Our Options — In the event of loss covered by this coverage form, “we” have the following options:
a. pay the value of the lost or damaged property;
b. pay the cost of repairing or replacing the lost or damaged property;
c. rebuild, repair or replace the property with other property of equivalent kind and quality, to the extent practicable, within a reasonable time; or
d. take all or any part of the damaged property at the agreed or appraised value.
”We” must give “you” notice of “our” intent to rebuild, repair, or replace within 30 days after receipt of a duly executed proof of loss.
2. Your Losses
a. “We” adjust all losses with “you”. Payment will be made to “you” unless another loss payee is named in the policy.
b. An insured loss will be payable 30 days after:
1) a satisfactory proof of loss is received and the amount of the loss has been established either by written agreement with “you” or the filing of an appraisal award with “us”.
3. Property of Others
a. Losses to property of others may be adjusted with and paid to:
1) “you” on behalf of the owner; or
2) The owner.
b. If “we” pay the owner, “we” do not have to pay “you”. “We” may also choose to defend any suits brought by the owners at “our” expense.
Analysis
This section of the policy reinforces the loss settlement declarations by the insurer as to how much it will pay in the event of loss; the options listed for loss payment coincide with the statement that, after a loss, the insurer will pay the lesser of the amount determined under valuation, the cost to repair or replace, or the agreed or appraised value. The insurer sets a thirty day time limit for itself for the payment of loss, but the insured should not think that thirty days after a loss has occurred, he or she will receive a payment. The thirty day limit starts to run after a satisfactory proof of loss has been received by the insurer or after a final judgment award has been entered, and not after a loss has occurred.
Other Conditions
1. Appraisal — If “you” and “we” do not agree on the amount of the loss or the value of covered property, either party may demand that these amounts be determined by appraisal.
If either makes a written demand for appraisal, each will select a competent, independent appraiser and notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers will then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, “you” or “we” can ask a judge of a court of record in the state where the property is located to select an umpire.
The appraisers will then determine and state separately the amount of each loss.
The appraisers will also determine the value of covered property items at the time of the loss, if requested.
If the appraisers submit a written report of any agreement to “us”, the amount agreed upon will be the amount of the loss. If the appraisers fail to agree within a reasonable time, they will submit only their differences to the umpire. Written agreement so itemized and signed by any two of these three sets the amount of the loss.
Each appraiser will be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire will be paid equally by “you” and “us”.
2. Bankruptcy of an Insured—Bankruptcy or insolvency of an insured does not relieve “us” of “our” obligations under this coverage.
3. Benefit to Others—Insurance under this coverage will not directly or indirectly benefit anyone having custody of “your” property.
4. Conformity With Statute — When a condition of this coverage is in conflict with an applicable law, that condition is amended to conform to that law.
5. Estates — This provision applies only if the insured is an individual.
On “your” death, “we” cover the following as an insured: the person who has custody of “your” property until a legal representative is qualified and appointed; or “your” legal representative.
This person or organization is an insured only with respect to property covered by this coverage. This coverage does not extend past the policy period indicated on the declarations.
6. Misrepresentations, Concealment, or Fraud — This coverage is void as to “you” and any other insured if, before or after a loss:
a. ”you” or any other insured have willfully concealed or misrepresented:
(1) a material fact or circumstance that relates to this insurance or the subject thereof; or
(2) ”your” interest herein; or
b. there has been fraud or false swearing by “you” or any other insured with regard to a matter that relates to this insurance or the subject thereof.
7. Policy Period — “We” pay for a covered loss that occurs during the policy period.
8. Recoveries — If “we” pay for a loss and lost or damaged property is recovered, or payment is made by those responsible for the loss, the following provisions apply:
a. ”you” must notify “us” promptly if “you” recover property or receive payment;
b. ”we” must notify “you” promptly if “we” recover property or receive payment;
c. any recovery expenses incurred by either are reimbursed first;
d. “you” may keep the recovered property but “you” must refund to “us” the amount of the claim paid or any lesser amount to which “we” agree; and
e. if the claim paid is less than the agreed loss due to a deductible or other limiting “terms” of this policy, any recovery will be pro rated between “you” and “us” based on “our” respective interest in the loss.
9. Restoration of Limits — A loss “we” pay under this coverage does not reduce the applicable “limits”.
10. Subrogation — If “we” pay for a loss, “we” may require “you” to assign to “us” “your” right of recovery against others. “You” must do all that is necessary to secure “our” rights. “We” do not pay for a loss if “you” impair this right to recover.
”You” may waive “your” right to recover from others in writing before a loss occurs.
11. Suit Against Us — No “suit” may be brought against “us” unless:
a. all of the “terms” of this coverage have been complied with; and
b. the amount of the insured's liability has been determined by:
1) a final judgment against an insured as a result of a trial; or
2) a written agreement by the insured, the claimant, and “us”.
No person has a right under this coverage to join “us” or implead “us” in actions that are brought to determine an insured's liability.
12. Territorial Limits — “We” cover property while it is in the United States of America, its territories and possessions, Canada, and Puerto Rico.
Analysis
The appraisal condition of this policy declares that either party may demand that an appraisal be done. This may seem fair to both the insured and the insurer, but there may be some state or states that decree that state law prohibits provisions in an insurance policy under which either the insured or the insurer may demand or require an appraisal; in such states, the process may have to be agreed upon by both parties to the insurance contract. An insured should be aware of his or her own state ruling on this subject. In any case, this appraisal clause in the warehouse operators liability policy does impose time limits on the process, limits which both the insured and the insurer should remember.
The clause dealing with legal representatives of a deceased insured states that the clause applies only if the insured is an individual. This is logical since a corporation or a partnership can not die, but very few other insurance policies make the point so explicitly.
The misrepresentation, concealment, or fraud provision applies to each and every insured even if the act is done by only one of the insureds.
The policy period clause shows that the warehouse operators liability policy is an occurrence type policy as opposed to a claims-made form.
The restoration of limits provision declares that the amount of coverage listed on the declarations will not be decreased each time a payment for a loss is made. If the limit is $20,000, that is the amount available for payment of every loss during the policy period, no matter how many losses are incurred.
The subrogation clause allows the insured to waive the right to recover from others if such action is done in writing and before a loss occurs; the insurer would still pay for a loss under these circumstances. However, after a loss occurs, it is too late for the insured to waive a right of recovery (even if the insured wants to do so for sound business reasons) and then expect a payment from the insurer for the loss.
Note that the territorial limits for the policy do not include Mexico.