AAIS Warehouse Legal Liability Coverage Form

AAIS WAREHOUSE LEGAL LIABILITY COVERAGE FORM ANALYSIS

(February 2024)

 

Introduction

Eligibility

Policy Construction

IM 7655–Schedule of Coverages–Warehouse Legal Liability

IM 7650–Warehouse Legal Liability Coverage Analysis

   Agreement

   Definitions

   Coverage

   Property Covered

   Property Not Covered

   Coverage Extensions

   Supplemental Coverages

   Perils Covered

   Perils Excluded

   What Must Be Done in Case of Loss

   Valuation

   How Much We Pay

   Loss Payment

   Other Conditions

Endorsements and Schedules

Underwriting Considerations

INTRODUCTION

The American Association of Insurance Services (AAIS) warehouse legal liability coverage insures warehouse owners' or operators' liability for loss or damage to goods their customers store in their warehouses. They can be public, private, bonded, and specialized warehouses. Because this is liability coverage, the insurance company also defends against suits brought for damages.

The warehouse receipt is a vital part of this coverage. It is the storage agreement between the property owner and the warehouse operator. It provides the foundation for the liability that the warehouse owner or operator assumes for loss or damage to property of others it stores. In addition, the Uniform Commercial Code (UCC) provides the standards for warehouse operator’s liability. The combination of the UCC requirements and the warehouse receipt provide the legal framework that determines the named insured's liability for property stored.

ELIGIBILITY

Any commercial warehouse operation that stores property of others for a fee and issues a warehouse receipt subject to requirements of the Uniform Commercial Code is eligible. Because of these requirements, mini-warehouse operations and self-storage facilities are not eligible for this coverage.

POLICY CONSTRUCTION

AAIS Warehouse Legal Liability Coverage requires at least these four forms:

IM 7655–SCHEDULE OF COVERAGES–WAREHOUSE LEGAL LIABILITY (01 12 changes)

This Schedule of Coverages is used with IM 7650–Warehouse Legal Liability Coverage. IM 7655 contains the following information:

Policy Number (01 12 addition)

The 01 12 edition added a space to enter the policy number.

Catastrophe Limit

The Catastrophe Limit is the most paid for loss in a single occurrence.

Warehouse Limits

The 01 12 edition added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

The warehouse numbers, addresses or descriptions, and limits of insurance are entered in the spaces provided. IM 7673–Additional Warehouse Schedule–Warehouse Legal Liability is used to list additional warehouses.

Coverage Extensions

The 01 12 edition added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

The limits on the Schedule of Coverages for the following coverages apply to all covered locations:

The limit is $5,000 unless a different limit is entered.

There is no limit in the coverage form. As a result, policy limits apply, but defense costs reduce the amount available to pay for the loss. A limit entered restricts the amount of defense costs coverage available. The previous edition had the word “covered” in the space provided. The 01 12 edition has the words “See Form” in that space.

This applies for ten days unless a different number of days is entered.

The limit is $50,000 unless a different limit is entered.

Supplemental Coverages

Each of these coverages provides additional limits of coverage or additional coverage. Required entries vary by type of coverage.

The limit is $5,000 unless a different limit is entered.

The limit is $50,000 unless a different limit is entered.

The limit is $10,000 unless a different limit is entered.

The limit is $1,000 unless a different limit is entered.

Deductible

A deductible amount must be entered in the space provided.

Additional Information (01 12 change)

This section of the schedule of coverages lists endorsements and forms included when the policy is issued.

The previous edition referred to this section as Optional Coverages and Endorsements.

IM 7650–WAREHOUSE LEGAL LIABILITY COVERAGE FORM ANALYSIS

This analysis is of the 04 04 edition.

Agreement

The insurance company agrees to provide the coverage described in the coverage form and in the schedule of coverages and in return, the named insured pays the premium. This agreement is subject to all of the policy’s terms, conditions, endorsements, and definitions.

Definitions

Defined terms are used throughout the coverage form. It is very important to review these because coverage can be restricted or broadened in this section. Fifteen terms are defined:

1. You and your

The party(ies) named on the declarations as the insured.

2. We, us and our

The insurance company that has agreed to provide the coverage.

3. Earth movement

Earthquake, landslide, mudflow, mudslide, mine subsidence, sinking, rising, or shifting of earth or any other movement or vibration of the earth’s surface. The only exception is for sinkhole collapse.

4. Flood

Flood is flood, but it is also surface water, waves, tidal water, or overflow of bodies of water. Spray of any of these is also flood when driven by the wind or when not.

5. Limit

The amount of coverage that applies to the insured property.

6. Perishable stock

Property that must be stored or maintained under specific controlled conditions. If the controlled conditions change, the property is subject to loss or damage.

Note: Common controlled conditions include heating, refrigeration, and humidity control but are not limited to just these.

7. Pollutant

This is a broad and expansive term. It is solids, liquids, thermal or radioactive contaminants, and irritants. It includes, but is not limited to, acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Waste includes materials intended for recycling, reclamation, and reconditioning, as well as for disposal. Visible and invisible electrical or magnetic emissions and sound emissions are also considered pollutants.

8. Schedule of coverages

Any page that is labeled as such and contains coverage information. Declarations or supplemental declarations are also included in this definition.

9. Sinkhole collapse

The earth’s surface suddenly settling or collapsing into an underground opening by water acting on limestone or some other rock formation. Neither the value of the collapsing land nor the cost to fill the sinkhole is considered sinkhole collapse.

10. Specified perils

The named perils of aircraft, civil commotion, explosion, falling objects, fire, hail, fire extinguishing equipment leakage, lightning, riot, sinkhole collapse, smoke, sonic boom, vandalism, vehicles, volcanic action, water damage, the weight of sleet, snow or ice and windstorm. Two terms need further explanation.

Falling objects does not include loss to personal property stored in the open. Damage to the interior of buildings or personal property stored in buildings by a falling object applies only when the falling object first breaches the building's exterior.

The cracking or breaking of part of a system or appliance that holds water or steam causing sudden or accidental discharge or leakage of water or steam is considered water damage.

11. Spoilage

A negative change in the physical condition of perishable stock. Frozen goods thawing, refrigerated property warming, and liquids solidifying are examples of spoilage, but this definition is not limited to just these.

12. Suit

A judicial proceeding. Required arbitration proceedings that take place to determine liability and damages to covered property of others that were in the named insured's care, custody, or control are also considered a suit.

13. Terms

All policy provisions, limitations, exclusions, conditions, and definitions that apply to this coverage.

14. Volcanic action

An airborne volcanic blast or shock waves, ash, dust, and particulate matter. The cost to remove dust, ash, or particulate matter that has not directly damaged covered property is not volcanic action. Lava flow is also considered volcanic action.

15. Warehouse receipt

The document the named insured issues to the customer to acknowledge that the named insured is holding property of the customer. The receipt describes the property being stored in the warehouse and provides information on the weight, number of units, or other measure of the quantity or amount stored and the amount of liability the named insured assumes.

Note: This receipt is vital for coverage, so it should be treated as valuable paper. Without a receipt, the customer has no coverage if a loss should occur.

Coverage

1. Legal Liability Coverage

Loss to covered property in the named insured’s care, custody, and control is covered, but only if the named insured is legally liable for that loss. Coverage is limited to only the obligation for which the named insured is legally liable as a warehouse operator, as explained in the warehouse receipt that the named insured issued for the property.

Example: Joe Customer sues Grateful Receiver for $50,000 because the painting he entrusted to Grateful was damaged.

Scenario 1: Joe Customer cannot produce a warehouse receipt for the painting. There is no coverage.

Scenario 2: Joe Customer produces the receipt, but the legal liability is $5,000 based on the receipt. Coverage is limited to $5,000 because that is Grateful Receiver’s legal liability.

Scenario 3: Joe Customer damaged the painting as he moved it from the warehouse to his truck. Coverage does not apply because the painting was not in Grateful’s care at the time of loss.

2. We Do Not Cover

If the named insured violates laws or regulations concerning appropriate claims handling procedures, that insurance company is not responsible for any costs, expenses, fees, fines, penalties, or similar damages imposed on the named insured.

Property Covered

Coverage applies to the property described below, subject to any exclusions or limitations.

1. Coverage

Direct physical loss by a covered peril to property of others is covered when that property is stored at the named insured's warehouse.

2. Coverage Limitations

The covered property must be in a warehouse listed and described on the schedule of coverages or within 100 feet of it. The named insured must have issued a warehouse receipt for that property in which the property was described.

Property Not Covered

Twelve specific types of property are excluded:

1. Aircraft or Watercraft

Aircraft and watercraft are not covered.

2. Art

Any and all objects of art are not covered. Examples are paintings and statuary, but this item is not limited to only these.

3. Assumed Liability

When the named insured assumes liability for property that goes beyond what the law requires, all coverage for that property is removed.

Note: The named insured can assume any degree of liability it wants, but doing so does not broaden the scope of coverage provided. In addition, by assuming the broadened liability, all coverage for the property, even the legal obligation is eliminated.

Example: Micah and Jessica negotiated a change in the warehouse receipt so that Micah assumed liability starting when he picked up Jessica’s containers, while transporting them, and while they were in his warehouse. Because of the alteration to the receipt, Micah has no coverage under this coverage form for any damage to Jessica’s property.

 

4. Contraband

Property that is illegal to possess is not covered. Property that is legal to possess but is being used as part of an illegal trade or transported illegally is also not covered.

Example: Mike’s Warehouse issues a receipt to Convenience Company for a large amount of liquor. A fire loss occurs, and the liquor is destroyed. The loss investigation reveals that the liquor had been smuggled into the country. Convenience Company’s loss is not paid, and Convenience Company’s president is arrested later.

 

5. Furs

Any garment that includes any amount of fur is not covered. The fur owner should secure coverage under a Furriers Customers Coverage Form.

Related Article: ISO Furriers Customers Coverage Form

6. Jewelry, Stones, and Metals

Jewelry of every type and description, precious and semi-precious stones, gold, silver, platinum, and other precious metals and alloys are not covered.

7. Live Animals

This is an absolute exclusion. Live animals are excluded under all circumstances.

Note: This is a departure from most coverage forms that exclude animals except for the animal's death or necessary destruction of the animal that results from a covered peril. This exclusion does not have an exception, so there is no coverage for live animals.

8. Money and Securities

A number of types of property are not covered under this item. Accounts, bills, currency, food stamps, evidence of debt, lottery tickets not held for sale, and money, notes, or securities are all not covered.

9. Property You Own, Lease, or Rent

This coverage form is not intended to provide coverage for property of the named insureds.

10. Property in Transit,

Property in transit is excluded even when considered storage-in-transit and is under a bill of lading.

Note: Storage-in-transit is when property is temporarily stored as it awaits the next leg of its travel.

11. Property in Storage Space

Property of others kept in a space leased from the named insured.

Note: This differs from property under warehouse receipt because the named insured takes control of property when issuing a receipt. It does not take control of any property when it supplies a space for lease.

12. Property Not Under a Warehouse Receipt

Coverage applies only to property for which a warehouse receipt has been issued. If no warehouse receipt is produced, there is no coverage.

Coverage Extensions

Provisions That Apply To Coverage Extensions

There are four coverage extensions. The limit for each is either the limit on the schedule of coverages or the default limit included in the coverage form. These limits are part of the applicable limit for covered property and not in addition to it unless otherwise indicated. These limits are not added to or combined with limits for any other coverage extension or supplemental coverage and are not subject to any coinsurance provisions that apply elsewhere in the coverage form.

1. Debris Removal

When a covered peril damages or destroys covered property, the cost to remove any created debris is covered under this extension.

Debris removal does not include any costs for removing, restoring, or replacing polluted land or water or extracting pollutants.

There are two parts to the Limit section. The first is restricting any debris removal payment to no more than 25% of the amount paid for the actual direct physical loss. The second part is that when the debris removal and the physical damage loss are added together, no more than the limit of insurance is paid.

An additional $5,000 (or a higher amount entered on the schedule of coverages) is available if the debris removal expense is more than 25% of the loss amount or if the combined cost of loss and debris removal is more than the limit of insurance for the covered property.

The named insured must report debris removal expenses to the insurance company within 180 days of the loss date in order for this coverage extension to apply.

2. Defense Costs

Note: This coverage form provides third-party coverage for the benefit of the named insured. Because of this, the insurance company takes control of the loss and negotiates with the third party that sustained damage. This section explains how the insurance company and the named insured are to work together on any such claim.

The insurance company decides when to defend suits brought against the named insured that result from covered loss or damage to covered property. This is not the decision of the named insured. This means that the insurance company is in control of the investigation and how suits or claims are handled.

Once the insurance company has paid out its limits based on a judgment or written settlement, the insurance company is no longer under an obligation to defend the named insured.

The named insured’s only involvement in the claim is to act within the written approval of the insurance company.

Once the insurance company agrees to defend a suit, it also agrees to pay seven specific expenses related to it. These expenses are not part of the limit of insurance, and no deductible applies to any of them:

3. Emergency Removal

This covers direct physical loss to covered property moved or stored to avoid loss or damage from an impending covered peril. The loss can occur while in transit to the sanctuary location or while being stored there. This coverage is unique because the property that is being moved is not subject to any exclusion while in transit or at a sanctuary location. However, the reason for moving the property must be due to a covered peril.

Coverage applies for up to 365 days after the property is first moved but does not extend past the policy’s expiration date.

Note: Coverage does not extend past the expiration date, which means if the insured has property at a sanctuary location when coverage renews, the sanctuary location must be listed as a premises, or coverage no longer applies.

4. Fraud and Deceit

When covered property is willingly given to another person, even by trick or device, coverage is excluded. This extension provides a limited amount of coverage for such a situation. When the named insured, its agents, consignees, or customers give covered property away taken in any of the following circumstances, and it is ultimately stolen, a limited amount of coverage is provided:

The most paid in a single occurrence is $50,000, but the limit can be increased.

Note: This is a sub-limit. If the property limit at the location is less than $1,000, the property limit caps the amount available. While the limit can be increased, it remains a sub-limit to the property limit.

Supplemental Coverages

Provisions That Apply To Supplemental Coverages

There are four supplemental coverages. Each has its own default limit that can be increased by entering a higher limit on the schedule of coverages. Limits for any supplemental coverage are separate from the applicable limit for covered property, not part of it.

The limit available for coverage described under a supplemental coverage is the only limit available for it. It is not the total of the limit for a supplemental coverage and the limit for covered property. The limits are not added to or combined with limits for any other supplemental coverage or coverage extension and are not subject to any coinsurance provisions that apply elsewhere in the coverage form.

1. Earned Warehouse Charges

When a covered loss occurs, the owner of the damaged property may refuse to pay its warehouse change. This supplemental coverage pays up to $5,000 in a single occurrence for such uncollectible but earned charges. This limit can be increased.

Example: Klean and Shine stored property at Barely There Warehouse. The contract called for them to pay a deposit in advance and then at six month intervals. Before it paid its six month payment, Klean and Shine inspected the property and discovered significant smoke damage. An accident investigation determined that a small fire had occurred and produced significant smoke but no actual fire damage. Klean and Shine’s property had to be destroyed, and they refused to pay for storage charges due because of Barely There’s negligence. This coverage pays for those earned charges up to $5,000.

2. Newly Acquired Warehouse

When the named insured acquires a new warehouse during the policy term, coverage is automatically provided for a maximum of 60 days. The limit is $5,000 per warehouse to allow the named insured time to report it to the insurance company. Coverage ceases when the property is reported, when the policy expires or after 60 days, whichever occurs first. This is not free coverage since additional premium for the coverage must be paid starting from the acquisition date. The $5,000 limit can be increased.

3. Pollutant Cleanup and Removal

The insurance company pays the named insured's expenses to extract pollutants from land or water if a covered peril that occurred during the policy period caused the pollutants to be released or discharged.

This is immediate coverage, so any expenses to extract pollutants are paid only when reported to the insurance company within 180 days of the date of loss.

Costs related to testing, evaluating, observing, or recording pollutants are excluded except for those costs that are part of the extraction process.

The most paid at any one location is $10,000 for all such expenses that a covered peril that occurs at that location during each separate 12-month policy period causes. This limit can be increased.

4. Rewards

A reward for information that leads to a conviction for arson, theft, or vandalism is available, but only if the conviction involves a covered loss caused by that peril. The most paid in a single occurrence for a reward of information is $1,000, regardless of the number of persons who provide the information. This limit can be increased.

Perils Covered

Coverage applies to risks of direct physical loss unless the loss is limited or caused by an excluded peril.

Perils Excluded

1. Primary Exclusions

The first group of exclusions is essentially absolute. Subject to specific exceptions, loss or damage by each is totally excluded, regardless of any other cause or event that contributes to a loss, either concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or resulting from any of these events.

Related Article: Concurrent Causation and Anti-Concurrent Causation Clauses–A Discussion

a. Civil Authority

There is no coverage for a loss that results from an order any civil or government authority issues. These orders may include seizure, confiscation, destruction, or quarantine of property, but this exclusion is not limited to only these. The only exception is when the loss or damage is caused by a civil authority destroying property to control a fire. This exception only applies if the fire results from a covered peril.

 b. Nuclear Hazard

The insurance company does not cover loss or damage caused by or resulting from any nuclear reaction, radiation, or contamination. This is absolute and applies whether or not the nuclear incident was controlled and by whatever means caused. Any loss the nuclear hazard causes is not treated as a loss that fire, explosion, or smoke causes. The only exception is when a fire results from the nuclear fire. Direct loss or damage from that fire is covered, but the damage from the nuclear hazard remains excluded.

c. War and Military Action

The insurance company does not pay for loss or damage caused by any act of war. Undeclared and civil war or warlike actions by a military force are all considered war. All actions taken to hinder or defend against an actual or expected attack by any government or sovereign authority that uses military personnel or other agents are also considered war and excluded. In addition, acts of insurrection, rebellion, revolution, or unlawful seizure of power and any action any government authority takes to prevent or defend against any such acts are excluded. If any action within the terms of this exclusion involves nuclear reaction, radiation, or contamination, this exclusion applies in place of the nuclear hazard exclusion.

Note: This means that the exception for resulting fire under the nuclear hazard is not covered when it results from war.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. Some of these exclusions have exceptions, conditions, or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Animals and Fumigation

There is no coverage for a loss that insects, rodents, and other animals cause. Coverage also does not apply when loss is caused by attempts to eliminate them through fumigation or spraying.

b. Contamination or Deterioration

Loss or damage that is caused by contamination or deterioration is excluded. This applies to corrosion, decay, fungus, mildew, mold, rot, and rust. It also applies to any quality, fault, or weakness in covered property that causes it to damage or destroy itself. This exclusion is not limited to only these described causes.

c. Cancellation of Lease

There is no coverage for loss due to a lease, contract, or order lapsing or being cancelled or suspended.

Note: There is no exception even for loss or damage to covered property by a covered peril.

d. Criminal, Fraudulent, Dishonest or Illegal Acts

Coverage does not apply to loss caused by, or that results from criminal, fraudulent, dishonest, or illegal acts that any of the following commit alone or in collusion with another:

Coverage applies if employees destroy property. It does not apply if employees steal.

Note: Crime coverages should be used to cover this type of loss. However, because the property being covered is property of others, the CR 04 01–Client’s Property will need to be attached for employee dishonesty coverage to apply.

Related Article: CR 04 01–Clients’ Property

e. Loss of Use

There is no coverage for a loss that results from delay, loss of use, or loss of market.

f. Missing Property

Unexplained or mysterious disappearance of covered property is excluded when there is no physical evidence to suggest what happened to it, and the only proof that a loss occurred is based on an audit or physical inventory. This exception is that covered property in the custody of carriers for hire is covered.

g. Pollutants

There is no coverage for loss caused by or resulting from any release, discharge, seepage, migration, dispersal, or escape of pollutants. There are three exceptions:

Example: Oil in a forklift leaks out and seeps into five different containers.

Scenario 1: The leak is due to poor maintenance by the named insured. There is no coverage.

Scenario 2: The leak is due to another forklift accidentally striking that forklift. The damage is covered because the leak is the result of a covered specified peril (vehicles).

Scenario 3: Another forklift loses traction on the oil and plows into the containers. The vehicle damage to the containers and their contents is covered, but the damage that resulted from the initial oil leak is still not covered.

h. Processing, Work and Packaging

Loss caused by the processing of, work on, or packaging or repackaging covered property is excluded. There is no exception.

Example: Warehousing Plus provides extra services as requested. Minky asks that the pallet of products Warehousing receives on her behalf be broken down, sorted, repackaged, and then stored. While Warehousing Plus employees are sorting the items, a newly trained forklift driver plows into the workspace containing the unpackaged porcelain items. There is no coverage for the damage because it occurred during processing.

i. Spoilage

Coverage does not apply when a perishable stock loss is caused by or results from spoilage.

There is an exception if spoilage results in a specified peril; any loss caused by that resulting specified peril is covered.

j. Temperature/Humidity

Any loss caused by dryness, dampness, humidity, changes in, or extremes of temperature is excluded. There is no exception.

k. Voluntary Parting

There is no coverage for loss or damage to covered property when voluntarily given to others, even if the surrender was due to a fraudulent scheme, trick, or false pretense.

There is an exception under Coverage Extension 4. Fraud or Deceit.

l. Wear and Tear

Loss caused by wear, tear, marring, or scratching is excluded.

What Must Be Done In Case Of Loss

1. Notice

The named insured must promptly notify the insurance company or its agent of a loss. The notice must include a description of the property lost or damaged. If a criminal act caused the loss, the appropriate law enforcement agency must also be notified. The insurance company has the right to require that the notice be in writing.

2. You Must Protect Property

During and after a loss, the named insured must take all reasonable steps to protect covered property from further loss. The insurance company pays reasonable costs the named insured incurs, but to do so, the named insured must maintain accurate records to substantiate the costs. Paying these costs is not in addition to the policy limits. There is no coverage for any repairs or emergency measures performed on property not already damaged by a covered peril.

Note: It is important to realize that any such costs incurred will reduce the amount available to pay the actual loss.

3. Proof of Loss

The named insured must complete and return the insurance company's prescribed proof of loss forms within 60 days after the company requests it. The information provided must include the time, place, and circumstances involved with the loss and information on any other insurance coverage that may apply. It must also include the named insured’s interest and the interest of others with respect to the property involved, including lienholders, loss payees, and mortgagees. Any changes in the title to the property during the policy period must be disclosed, in addition to providing any other reasonable information the company may require to adjust and settle the loss.

4. Examination

Examination under oath may be required in matters that relate to the loss. The insurance company may request these examinations more than once, but such requests must be reasonable. If multiple persons are examined, the company has the right to examine each individual separately.

5. Warehouse Receipt

The named insured is required to give the insurance company its copy of the warehouse receipt it issued for the property involved in a covered loss.

Example: Penelope’s Pictures used We're Number One Warehouse for years. A loss occurred at the warehouse, and some of Penelope's goods were destroyed. We're Number One and Penelope agreed that the property was there, but neither party could produce a warehouse receipt. As a result, the claim was denied.

6. Records

The named insured must produce any records related to the loss. The insurance company must be allowed to make copies and take extracts of them as often as it reasonably requests. Records include tax returns and bank microfilms of all related cancelled checks, but records are not limited to just these.

7. Damaged Property

Damaged and undamaged property must be made available for the insurance company's inspection as often as reasonably necessary. It must also be allowed to take samples of the property to the extent necessary to adjust and settle the loss.

8. Volunteer Payments

The named insured may not voluntarily make payments, assume obligations, pay or offer rewards, or incur other expenses without the insurance company's express approval. If it does, it does so at its own expense. The only exceptions are those costs incurred to protect property, as item 2. above describes.

9. Abandonment

The named insured does not have the right to turn over ownership of property to the insurance company unless that insurance company agrees to accept it. Any such agreement must be in writing.

Example: A covered fire occurred at Yearly Warehouse. Some contents were destroyed, so all clients’ containers were opened to determine potential damage. A container that belonged to The Chemical Shop contained chemicals used to create meth. They were damaged, but The Chemical Shop could not be located. Yearly wants to get rid of the chemicals and attempts to abandon them to the insurance company so it can pay the Haz-Mat disposal costs. The insurance carrier refuses to accept the abandonment, and Yearly must pay the costs to safely remove the chemicals.

10. Cooperation

The named insured must cooperate with the insurance company and perform all acts this coverage form requires.

Valuation

1. Actual Cash Value

The value of covered property is its actual cash value at the time of loss. Actual cash is replacement cost new minus depreciation.

2. Pair or Set

The value of a loss that involves damage to or loss of one part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. However, the loss of one part of a pair or set is not considered a total loss.

Note: This recognizes that the value of the whole is greater than the value of individual parts but that the remaining parts still have value as separates.

3. Loss to Parts

The value of a lost or damaged part of the property that consists of several parts is the cost to repair or replace only the lost or damaged part.

How Much We Pay

1. Insurable Interest

The insurance company does not pay more than the named insured's insurable interest in the covered property at the time of loss.

Note: This is legal liability coverage. The named insured has very little, if any, insurable interest in property of others. A condition that states that the loss is subject to the property owner’s insurable interest would be more appropriate.

2. Deductible

The insurance company pays only the amount of loss that exceeds the deductible amount on the schedule of coverages.

3. Loss Settlement Terms

a. Subject to other items in this section, the insurance company pays the least of the following:

b. The amount the company pays is capped by the amount of the named insured's liability as stated on the warehouse receipt.

c. The insurance company does not pay more than the catastrophe amount, regardless of the number of warehouse locations.

4. Insurance under More Than One Coverage

Two or more coverages in the coverage form may apply to the same loss. In that case, the insurance company does not pay more than the value of the actual claim, loss, or damage sustained.

5. Insurance under More Than One Policy

a. Proportional Share

The named insured may have other coverage subject to the same terms as this coverage form. In that case, this coverage form pays only its share of the covered loss. That share is the proportion that its limit of insurance bears to the limits of insurance of all insurance that covers on the same basis.

b. Excess Amount

There may be other coverage available to pay for the loss other than as described in 5. a. above. In that case, this coverage form pays on an excess basis. It pays only the amount of covered loss that exceeds the amount due from the other coverage, whether collectible or not. Any payment is subject to the limit of insurance that applies.

Loss Payment

1. Loss Payment Options

a. Our Options

The insurance company has the following four loss payment options if a covered loss occurs.

b. Notice of Our Intent to Rebuild, Repair, or Replace

The insurance company has an obligation to notify the named insured of its intent to rebuild, repair, or replace no later than 30 days after receiving a properly completed proof of loss.

2. Your Losses

a. Adjustment and Payment of Loss

The insurance company adjusts all losses with and pays the named insured unless another loss payee named in the policy is involved.

b. Conditions for Payment of Loss

The insurance company pays a covered loss within 30 days after receiving a properly prepared proof of loss, and the amount of loss is established. The amount of loss is determined by either a written agreement between the company and the named insured or after an appraisal award is filed with the company.

3. Property of Others

a. Adjustment and Payment of Loss to Property of Others

The insurance company has the option to adjust and pay losses that involve property of others either to the named insured acting on the property owner’s behalf or to the property owner.

b. We Do Not Have to Pay You if We Pay the Owner

The insurance company is not obligated to pay the named insured when it pays the property owner. In addition, if the property owner sues the named insured, the company has the option to defend the named insured in that suit.

Other Conditions

1. Appraisal

The insurance company and the insured may not always agree on the value of a covered claim. This condition provides one method to resolve disputed claims.

Either party can request an appraisal to determine the value of a disputed claim. Once requested, the parties have 20 days to obtain their own independent and competent appraisers and give their appraiser's name to the other party. The two appraisers then have 15 days to select a competent impartial umpire. If they cannot agree on an umpire within that time period, either can request that a judge in the court of record in the state where the property is located appoint one.

The appraisers then determine the claim’s value. They submit any differences to the umpire. Once any two of the three parties agree, the amount of loss is set.

Each party pays its own appraiser. Both parties share the umpire’s cost and other expenses equally.

2. Bankruptcy of An Insured

The insurance company's obligations under this coverage are not affected by any insured's bankruptcy or insolvency.

3. Benefit to Others

The insurance provided does not directly or indirectly benefit any party with custody of the named insured's property.

4. Conformity with Statute

Any condition in this coverage form that conflicts with any applicable law is amended to conform to that law.

5. Estates

Note: This condition only applies if the named insured is an individual.

a. Your Death

If the named insured dies, the person who has custody of the named insured's property is an insured until a qualified legal representative is appointed. The named insured’s legal representative becomes an insured once he or she is appointed. Both are insureds, but only with respect to the property this coverage form insures.

b. Policy Period is not Extended

This coverage does not extend past the policy’s expiration date.

6. Misrepresentation, Concealment, or Fraud

This coverage is void if any insured at any time willfully concealed or misrepresented a material fact that relates to the insurance provided, the property covered, or its interest in the property. It is also void if fraud or false swearing by any insured took place concerning the insurance provided or the property covered.

Note: The named insured must deal with the insurance company honestly. Its rights of recovery may be voided if it intentionally misrepresents or conceals a material fact or information. This means the insurance is treated as simply having never existed versus denying a particular claim.

7. Policy Period

Only covered losses that occur during the policy period are paid.

8. Recoveries

Paying the loss does not end the obligations of the named insured and the insurance company toward one another. Additional provisions apply if the insurance company pays a loss and the lost or damaged property is subsequently recovered, or the parties responsible for the loss pay for it.

Either party that recovers property or payment must inform the other. Recovery expenses that either party incurred are reimbursed first. If the named insured keeps the recovered property, it must refund the amount of the claim the insurance company paid unless the company agrees to a different amount. If the claim paid is less than the agreed loss due to applying a deductible or another limitation, any recovery is prorated between the named insured and the insurance company based on the company's respective interest in the loss.

9. Restoration of Limits

Payment of a claim does not reduce the limit available for future claims.

10. Subrogation

The insurance company acquires the named insured's rights of recovery from third parties after it pays a loss. The named insured must help the insurance company secure those rights. The company is not obligated to pay a loss if the named insured hinders or impairs the company's rights of subrogation. However, the named insured can agree in writing to waive recovery rights from others before a loss occurs.

11. Suit against Us

The insurance company cannot be sued by anyone for any coverage until all the terms of the coverage form have been met AND the insured's liability has been determined. The liability can be determined by either a final trial judgment or based on a written agreement between the claimant, the named insured, and the insurance company. In addition, the insurance company is not to be named as part of any actions brought to determine the named insured's liability.

Note: It is normal for a basic coverage form to be modified by mandatory state-specific endorsements that address issues related to that specific state.

12. Territorial Limits

Covered property must be located in the United States, its territories and possessions, Canada, or Puerto Rico for coverage to apply.

ENDORSEMENTS AND SCHEDULES

AAIS has developed the following endorsements and schedules for use with the Warehouse Legal Liability Coverage Form.

IM 7662–Inventory Shortage Coverage

This endorsement is needed because of the Missing Property exclusion in the coverage form. It covers the named insured's legal liability for covered property that apparently disappeared when a scheduled inventory reveals the disappearance.

IM 7663–Defense Limit Endorsement

This endorsement provides a sub-limit for defense costs. It deletes and replaces Coverage for Defense Costs with the limit for defense costs being separate from the limit for coverage described under Property Covered, not part of it. This means that the cost of defense does not deplete the limit of liability available to pay for damages, but it also limits the amount available to the insured for defense.

IM 7665–Flood and Earth Movement Exclusion

This is a restrictive endorsement. It excludes earth movement, volcanic eruption, and flood as covered perils.

IM 7666–Reporting Conditions Endorsement

This endorsement adds reporting conditions.

IM 7667–Reporting Schedule–Warehouse Legal Liability

This schedule is used with IM 7666–Reporting Conditions Endorsement. It states the reporting period, adjustment period, rates, deposit premium, and minimum premium that apply when the coverage form is amended to be on a reporting basis.

IM 7668–Leakage of Refrigerant Exclusion

This exclusion is often used with IM 7669–Cold Storage Coverage but can be used with any covered warehouse. It excludes coverage for loss or damage due to leakage of a coolant or refrigerant from a cooling or refrigeration system.

IM 7669–Cold Storage Coverage

This endorsement covers direct physical loss by spoilage to property of others consisting of perishable stock at a covered warehouse location. The Cold Storage Limit, Catastrophe Limit, and Cold Storage Deductible are entered on the endorsement schedule in the spaces provided.

IM 7671–Spoilage Coverage

This endorsement covers loss or damage that results from spoilage. The spoilage must be caused by a covered peril selected on IM 7672–Spoilage Schedule–Warehouse Legal Liability. The covered perils that can be selected are Equipment Breakdown, Refrigeration Contamination, and Power Disruption. The other causes of loss that can be selected are Refrigerant Contamination and Power Disruption.

IM 7672–Spoilage Schedule–Warehouse Legal Liability

This schedule of coverages is used with IM 7671–Spoilage Coverage. It has spaces to enter the spoilage limits, the separate spoilage deductible, any additional conditions, the insured perils that apply, and a list of covered warehouse locations.

IM 7673–Additional Warehouse Schedule–Warehouse Legal Liability

This schedule is used with IM 7655–Schedule of Coverages–Warehouse Legal Liability to list additional covered warehouses and their limits.

IM 7674–Processing Work Coverage

This endorsement is used to cover direct physical loss by a covered peril to covered property in the named insured's care, custody, or control to be assembled, packaged, repackaged, or packed. Coverage applies at warehouses listed on IM 7675–Processing Work Schedule–Warehouse Legal Liability and while in transit to and from listed warehouses.

IM 7675–Processing Work Schedule–Warehouse Legal Liability

This schedule is used with IM 7674–Processing Work Coverage to describe covered property and the location and to enter the applicable coverages, limits, and deductible.

IM 7676–Additional Covered Locations Schedule–Processing Work Coverage

This schedule is used with IM 7674–Processing Work Coverage, to list additional locations and limits.

IM 7677–Property Excluded

This endorsement is used to exclude certain property from coverage. Manufactured tobacco products, alcoholic beverages, narcotics, and prescription drugs can be selected on the endorsement schedule, but other property can also be scheduled.

Note: Some insurance companies may use additional endorsements that broaden or limit the basic coverage forms. Some examples include limited or named perils in place of all risk perils or full perils coverage instead of only legal liability coverage. Other endorsements may affect valuation, loss adjustment and reporting, adjusting, and premium payment methods.

UNDERWRITING CONSIDERATIONS

Introduction

Warehouse owners and operators are responsible for damage caused by their negligence as bailees of goods of their customers stored in their warehouses. Almost all warehouses fall into one of four categories:

In recent years, logistics has caused an evolution in traditional warehouse legal liability and transportation exposures. Logistics involves integrating transportation, storage, handling, and processing of merchandise from the point of manufacture to the final location for sale or distribution most efficiently and cost effectively. In addition, logistics has become part of the world of electronic commerce. Providers of logistical services are integrated managers of services, some or all of which may be outsourced to others.

Warehouse operators and transportation companies now provide numerous value-added functions to the traditional operations of transportation and warehousing. This includes pick up and packing services in addition to processing and cross-docking (as defined at the end of this section). All services provided for moving goods may be combined under one contract for services or bill of lading. Since liability exposures are undergoing fundamental changes as operations and services evolve, a need has developed to understand who is responsible for liability for each part of the transaction. In some cases, the Warehouse Legal Liability Coverage Form may not completely address all the exposures that logistics operations present. The language of the coverage form must be compared with the actual operations the logistics party performs and copies of their contracts obtained.

Note: Cross-docking involves unloading goods on an incoming semi-trailer truck or rail car just to re-load them onto outbound trailers or rail cars. There is little or no storage. The reason for the change is to move from one conveyance to another, to separate goods intended for different destinations, or to combine goods from different origination points. There is usually little or no warehousing. Many cross-docking operations require large staging areas where inbound goods are sorted, consolidated, and stored until the outbound shipment is loaded, complete, and ready to ship. Cross-dock distribution centers usually require less than a day to complete the staging. Distribution centers that hold goods for more than a day are considered to be warehouses. Cross-dock operations are used to decrease inventory shortages because the flow of goods between the supplier and the manufacturer is streamlined.

Underwriting Factors

Several general factors are important to effectively and successfully underwrite warehousing risks.

Warehouse Receipt

Coverage depends on the language in the warehouse receipt. These should be completed in a structured and consistent manner and follow prescribed procedures to guarantee uniformity and accuracy. There is no coverage on the merchandise stored without a warehouse receipt, and nothing should be stored without one. Receipts should be duplicated, and the duplicates stored off premises so that losses can be handled accurately and promptly if the copy kept at the warehouse location is itself lost or destroyed. Both the customer and the named insured should be able to produce their copies of the storage receipt if a loss occurs.