ISO Bailees Customers Coverage Form

ISO BAILEES CUSTOMERS COVERAGE FORM ANALYSIS

(April 2024)

 

Introduction

Policy Construction

IH DS 85–Bailees Customers Declarations

IH 00 85–Bailees Customers Coverage Form Analysis

Introduction

A. Coverage

   Covered Property

   Property Not Covered

   Covered Causes of Loss

   Additional Coverages

B. Exclusions

C. Limits of Insurance

D. Deductible

E. Additional Conditions

F. Definitions

Endorsements

Underwriting Considerations

INTRODUCTION

The Insurance Services Office (ISO) Bailees Customers Coverage Form insures the property of customers in the bailee’s care, custody, or control. Bailees accept property from customers to provide a service to them. This creates a bailment because both the customer and the bailee expect to benefit from the transaction. Examples of services with bailment exposure are dry cleaning and laundry establishments, shoe repair shops, appliance repair businesses, and rug and carpet cleaning operations.

Bailees Customers coverage insures the customers’ property. The bailee is liable if its negligence causes or results in damage to the bailed property. However, coverage also applies in cases where loss or damage occurs because of circumstances beyond the bailee's control and for which it is not negligent. This is to maintain the customer’s goodwill.

POLICY CONSTRUCTION

Bailees Customers Coverage requires at least the following six forms:

Related Article: IL 00 17–Common Policy Conditions Analysis

Related Article: CM 00 01–Commercial Inland Marine Conditions

IH DS 85–BAILEES CUSTOMERS DECLARATIONS

The advisory Bailees Customers Declarations does not have spaces for the named insured, its mailing address and other named insured information, the policy period, or the description of the insured business. That information is on the Common Policy Declarations. IH DS 85 contains the following information:

Insurance Company and Producer Name

The name of the insurance company that provides the coverage and the name of the agent or broker that produces the business are entered in the spaces provided.

Limits of Insurance

This section has spaces to enter the following limits of insurance:

The address must be listed, and a limit that applies to that specific address entered.

The address must be listed, and a limit that applies to that specific address entered.

A limit for property in transit must be entered.

The address must be listed, and a limit that applies to that specific address entered.

This is the catastrophe limit. It is the most paid in a single occurrence, regardless of the number of locations involved or items in transit damaged.

Deductible

This section has a space to enter the amount of deductible that applies.

Rates and Premiums

Only the premium is entered when coverage is written on a non-reporting basis.

The following is entered when coverage is written on a reporting basis:

Special Provisions

Any special provisions are entered in the space provided.

IH 00 85–BAILEES CUSTOMERS COVERAGE FORM ANALYSIS

This analysis is of the 12 13 edition. Changes from the previous edition are in bold print.

Introduction

This section encourages carefully reading the entire coverage form to determine what is covered, what is not covered, rights, and duties. It defines we, us, and our as the insurance company that provides this insurance coverage. It also defines you and your as the named insured on the declarations. The reader is also pointed to the Definitions section because certain words or terms used in the form have a more broadened or restricted meaning.

A. Coverage

The insurance company pays for direct physical loss or damage to covered property, but only when that loss is from a covered cause of loss.

1. Covered Property

Covered property is personal property owned by others that is in the named insured's care, custody, or control.

2. Property Not Covered

The following described property is excluded:

a. Accounts, bills, currency, documents, records, deeds, evidence of debt, money, notes, securities, or stamps

Note: This property is primarily money or substitutes for money. It should be insured under commercial crime coverage forms.

Related Article: Commercial Crime Coverage Analysis

b. Animals, birds, or fish

c. Automobiles, motor trucks, trailers or other vehicles licensed for road use and used to transport property or persons.

Notes:

This means that such non-licensed items are covered property, even though they are built for road use.

Licensed vehicles are more properly covered under commercial auto or motor carrier coverage forms and policies.

Related Article: CA 00 01–Business Auto Coverage Form Analysis

d. Aircraft or watercraft

e. Furs, fur garments, or fur-trimmed garments

Example: Jim and Tammy took a number of their winter garments to Kwick Kleen Laundry for laundering and dry cleaning. Several of Tammy's garments were furs or had fur trim on the collar and cuffs. A small fire caused by an electrical short-circuit started in one of the dry-cleaning machines and damaged several articles in it, including Tammy's furs and fur-trimmed garments. The damage to those garments was not covered.

Note: This property is common and usual to retail fur businesses and high-end department stores. Furriers Block and Furriers Customers coverage forms and policies should be used to cover this property.

Related Articles:

Furriers Block Policy

Furriers Customers Custody Policy

ISO Furriers Block Coverage Form

ISO Furriers Customers Coverage Form

f. Jewelry, watches, precious stones, semiprecious stones, bullion, gold, silver, platinum, and other precious metals or alloys

Note: These types of property are common and usual to retail jewelry businesses, jewelry manufacturers, and wholesale jewelry operations. Jewelers Block coverage forms and policies should be used to cover this property.

Related Articles:

ISO Jewelers Block Coverage Form

Jewelers Block Policy

AAIS Jewelry Dealers Coverage

ISO Jewelers Block Coverage Form

g. Property in the custody of another bailee, except for the following:

h. Waterborne property

There is an exception. Property on ferries that operate on navigable waters of the Continental United States, other than to and from Alaska, is covered.

i. Property the named insured accepts for storage and for which it issues a storage receipt is not covered. There is an exception. When a limit on the declarations is entered for property in storage at your premises, and the loss or damage occurs at the address listed on the declarations coverage, it applies only if the named insured issued a storage receipt for that property.

Example: Martha stored her winter clothes at Action Dry Cleaners. A fire occurred at Action, and smoke damaged all of the clothes stored. Martha could not produce her receipt, but Action had a copy of it, and Martha was reimbursed for the value of her ruined clothing because the storage location was listed and a limit entered for the coverage.

j. Property that is shipped by mail

k. Contraband. Any property that is illegal to own or that is in illegal trade or transportation is not covered.

3. Covered Causes of Loss

Covered causes of loss is direct physical loss or damage to covered property, except as limited or excluded.

4. Additional Coverages

a. Misidentification of Property

The insurance company pays when a covered cause of loss results in covered property being misidentified, and this misidentification results in customers’ property sustaining loss or damage.

This additional coverage does not increase the limit of insurance.

Example: Vandals break into Davis Dry Cleaners and Power Laundry and remove the store copy of the numbered receipt attached to each batch of dry cleaning and laundry. Customer orders are based on the number on these receipts and not on the customers’ names. Mary presents her numbered receipt to pick up her cleaning. The number cannot be matched to the property, so Mary selects a variety of items, pays for the cleaning, and leaves. John arrives and requests his property. He searches (as did Mary) but cannot find any of his items. The clerk suspects that Mary might have taken John’s items, but he cannot verify it. This coverage pays for John’s items that Mary may or may not have taken.

b. Debris Removal

The insurance company pays to remove the debris of covered property from a covered loss at a described premises. The expenses must be reported to the insurance company in writing within 180 days of the date of loss. The most paid is 25% of the sum of the following:

Payments under this Additional Coverage do not increase the limit of insurance that applies. However, the insurance company pays an additional $5,000 in any one occurrence in case of either of the following:

This additional coverage does not apply to costs to extract pollutants from land or water or remove, restore, or replace polluted land or water.

c. Pollutant Clean Up and Removal

The insurance company pays to clean up pollutants because of an event caused by or resulted from a covered cause of loss occurring during the policy period. The most paid is $10,000 as an aggregate amount during each separate 12-month policy period. The expenses are paid only if they are reported to the insurance company in writing within 180 days of the date of loss.

This coverage does not apply to costs to evaluate the presence or consequences of pollutants. However, it does pay for testing done as part of the covered extraction process from either land or water.

This limit is an additional amount of insurance.

d. Preservation of Property

Covered property may need to be moved from an insured location to prevent damage by a covered cause of loss. When this occurs, the insurance company pays for any direct loss or damage such property sustains during the move. Coverage also applies at the location where the property is stored for up to 30 days after the date it was moved there and for the return transit.

This additional coverage does not increase the limit of insurance.

Notes: There are several important points to consider:

The property removed must be moved back to the covered location, or the temporary location must be added to the policy within 30 days from the date of the move. Otherwise, all coverage ends after 30 days.

Note: There is no statement as to whether coverage at the safe location continues after the end of the policy period if it occurs less than 30 days from the date of the move.

 

Example: Kevin’s policy expires on 1/1/2024, is renewed and will expire 1/1/2025. On 12/21/2024, in anticipation of the wildfires in his area, he loaded his client’s property into a truck and headed to a safe storage location. On 1/3/2025, the fire is under control, and he can return his client’s property back to his store. Unfortunately, his truck flips on the return trip, ruining all of the clothes. Who would cover this loss? The prior policy under Preservation of Property or the renewal policy under the Transit coverage and subject to its limit? Because it seems ambiguous, there is a good argument for the Preservation of Property coverage from the prior policy covering the loss.

B. Exclusions

1. Primary Exclusions

The first group of exclusions applies whether the loss event results in widespread damage or affects a significant geographical area and is essentially absolute. Subject to specific exceptions, each is totally excluded, regardless of any other cause or event contributing 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 results from any of these events.

Related article: Concurrent Causation and Anti-concurrent Causation Clauses–A Discussion

a. Ordinance or Law (12 13 words added)

This exclusion applies to enforcing or complying with any law or ordinance regulating how property can be constructed, used, or repaired or requires a property to be torn down. The exclusion also applies to any associated debris removal.

This exclusion applies even if the loss or damage is from a law or ordinance that must be enforced despite the fact that the property was not damaged or when a law or ordinance is enforced during the constructing, repairing, renovating, remodeling, or demolishing of property following its physical loss or damage.

b. Governmental Action

This exclusion applies to the legal and authorized seizure or destruction of property by a government entity’s order. There is one exception. Loss or damage that is caused when the governmental entity orders property to be destroyed is covered if used as a method to prevent a fire from spreading is covered. However, this exception applies only if the fire being contained would have been a covered fire under this coverage form.

c. Nuclear Hazard

Nuclear reaction, radiation, or radioactive contamination is not covered. There is an exception. If a fire results from the nuclear reaction, radiation or radioactive contamination there is coverage for the direct loss or damage caused by that fire.

d. War and Military Action

This exclusion lists three specific warlike activities.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or that result 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. Theft from an unattended vehicle

This is loss due to theft from an unattended vehicle. There are two exceptions.

Example: Zachary was told to always close and lock the van’s doors when making deliveries. He forgot to lock the van when he went into a client’s office to deliver and pick up cleaning. When he returned to it, a full rack of processed uniforms was gone. The theft was not covered because the van had not been locked.

b. Delay, loss of use, and loss of market

These are consequential or indirect losses that develop as a result of a direct loss or damage.

c. Unexplained disappearance

When covered property is gone, and there is no obvious cause or explanation of what happened to it.

d. Shortage found upon taking inventory

Any loss discovered as a result of an inventory shortage, and there is no explanation as to what happened to the property, similar to the unexplained disappearance. This is sometimes referred to as "inventory shrinkage.”

e. Dishonest or criminal acts (12 13 changes)

Any dishonest or criminal acts that the named insured, its partners, employees, temporary employees, leased workers, officers, directors, trustees, authorized representatives, or members and managers of a limited liability company commit. Theft is one of those dishonesty acts.

Such acts committed by anyone with an interest in the property, their employees, temporary employees, leased workers, or authorized representatives who act alone or who act in collusion with other parties or with each other are also excluded. This exclusion applies 24 hours a day/7 days a week.

There is one exception. Acts of destruction by the named insured’s employees, temporary employees, leased workers, or authorized representatives are covered, but theft by any of them continues not to be covered.

The 12 13 edition removed the part of the exclusion in the previous edition that applied to dishonest or criminal acts committed by anyone entrusted with the property for any reason.

f. Pollution

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

g. Processing or work upon the property

Loss or damage caused by or that results from the actual processing or work being done on covered property. There is an exception. When the processing or work being done results in a fire or explosion coverage applies to the loss or damage that fire or explosion causes but only if the fire or explosion are considered covered causes of loss under this coverage form.

h. Artificially generated electrical, magnetic, or electromagnetic energy

Loss or damage that is caused by or that results from artificially generated electrical, magnetic, or electromagnetic energy damaging, disturbing, disrupting, or interfering with any of the following:

Examples of this excluded energy are electrical current, charges a magnetic or electromagnetic field produces, and microwaves, but it is not limited to just these. There are two exceptions:

i. Voluntary parting

The named insured or anyone else entrusted with the property being tricked or deceived into giving that property away.

j. Unauthorized instructions

When covered property is transferred to another person or place because unauthorized instructions were received to do so.

k. Neglect

Neglect on an insured’s part to take reasonable measures to preserve and protect covered property from subsequent damage during and after the time of loss.

 

Example: Let’s use Zachary again. Zachary is much more careful a month after the previous uninsured theft. He goes to a restaurant that is the first stop on the day’s route. He makes sure to lock his Sunshine Cleaners Van before taking in the clean aprons and tablecloths. Unfortunately, he is kept waiting for nearly 20 minutes because a shift manager cannot find his key to a closet where the dirty linen is kept. Zachary comes out to find that thieves pried open the van’s doors with crowbars. Half of the van’s cleaned items were stolen. Upset, Zachary goes back in the restaurant and phones Sunshine to tell them about the loss. The restaurant manager gives Zachary a free breakfast when he hears of the break-in. When Zachary returns to the van, the rest of the cleaned items are gone. That part of the loss is not covered because Zachary did not take any steps to protect the rest of his goods.

l. Cost to research

All costs to research, replace, or restore converted data, programs, or instructions used in any data processing operation. The cost of the materials on which the data is recorded is also excluded.

m. Theft (12 13 addition)

Theft by any person the named insured entrusts covered property to for any reason, whether they act alone or act in collusion with any other party. This exclusion applies 24 hours a day/7 days a week. There is one exception. Covered property in a carrier for hire’s care, custody, or control is not subject to this exclusion.

3. Other Exclusions

This group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. In every case, if loss or damage by a covered cause of loss occurs as a result of one of these excluded events, coverage applies to the loss or damage the resulting covered cause of loss causes. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Weather conditions

Loss or damage to covered property that weather conditions cause. This exclusion applies only if the weather conditions contribute in any way to a cause or event that involves the following 1. Primary Exclusions to produce the loss or damage:

·         a. Ordinance or Law

·         b. Governmental Action

·         c. Nuclear Hazard

·         d. War and Military Action

b. Acts or decisions

Acts or decisions any person, group, organization, or government entity makes that result in loss or damage. Failing to act or to make decisions is also excluded.

c. Wear and tear

Loss or damage that is due to ordinary use that occurs naturally.

d. Any quality in the property

These are any traits in the property that cause it to destroy or damage itself.

Note: An example is a loss or damage caused by hidden or latent defects in the property.

e. Mechanical breakdown

Loss or damage that is caused by or that results from machines, tools, or mechanisms failing to operate or to function properly.

f. Insects, vermin, or rodents

Loss or damage to covered property when caused by or that results from insects, vermin, or rodents.

Note: Some examples are damage from mice, rats, cockroaches, squirrels, beavers, spiders, ants, centipedes, and ticks. Each is characterized by destructive habits that cause damage, such as gnawing and nibbling.

C. Limits of Insurance

The limit of insurance on the declarations is the most that will be paid for loss or damage in a single occurrence.

D. Deductible

The deductible on the declarations must be exceeded before the insurance company pays anything. Once the deductible is satisfied, the insurance company will pay up to the limit of the insurance that applies. The deductible applies on a per occurrence basis.

There is one exception. Property in transit is not subject to the deductible.

E. Additional Conditions

1. Valuation

This condition replaces the Valuation General Condition in the Commercial Inland Marine Conditions.

The value is the least of the following amounts:

The value above is modified in the following two ways:

The valuation of an item is based on its value as of the time of the loss or damage.

2. Other Conditions

These conditions apply in addition to the Commercial Inland Marine Conditions and the Common Policy Conditions.

a. Coverage Territory

The coverage territory is the United States of America, its territories and possessions, Puerto Rico, and Canada. This includes property that is shipped by air within and between these points.

b. Adjustment of Loss by You

The insurance company allows the named insured to settle with the damaged property’s owner when the loss or damage in an occurrence is $500 or less. The named insured operates as the insurance company’s agent at this point and must comply with all policy provisions with respect to any loss settlement. When the named insured chooses to handle adjustments, it must promptly send the insurance company properly completed loss forms that the company provides. The insurance company must reimburse the insured for such payments within 30 days after it receives the required loss forms.

Example: The owner of Fannie's Footwear and Shoe Repair dislikes having to deal with insurance company delays in adjusting and paying covered loss settlements almost as much as she dislikes handling any more paperwork than her business requires. However, she values her customers, their repeat business, and the new customers they refer to her. Fannie finds out she can settle and pay small claims on her own, and she jumps at the opportunity because this is another way she can better serve her customers despite the additional paperwork.

F. Definitions

There are three definitions.

1. Pollutants

These are irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste of a solid, liquid, gaseous, or thermal nature. Waste includes property to be disposed of and property to be recycled, reconditioned, or reclaimed.

2. Specified causes of loss

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

Sinkhole collapse is the earth’s surface suddenly settling or collapsing into an underground opening created by water acting on limestone or some other rock formation. It does not include either the cost to fill sinkholes or the land that collapses or sinks into the voids.

Falling objects do not include loss to personal property stored in the open. It also covers damage to the interior of buildings or personal property that is stored in buildings by a falling object only if a falling object first breaches the building's exterior.

3. Water damage

Water damage occurs when part of a system of appliance holding water or steam cracks or breaks resulting in an accidental discharge or leakage of water or steam.

ENDORSEMENTS

ISO has not developed any specific endorsements for exclusive use with the Bailees Customers Coverage Form. However, there are three general-purpose inland marine endorsements that may be used.

IH 99 11–Gross Receipts Reporting Form

This endorsement is used to convert the coverage to a daily, weekly, monthly, quarterly, or policy year reporting form.

IH 99 19–Additional Covered Property

This endorsement is used to include coverage for types of property the coverage form excludes.

IH 99 20–Additional Property Not Covered

This endorsement is used to exclude certain types of property the coverage form insures.

UNDERWRITING CONSIDERATIONS

Bailment is the delivery of property by one party to another for some specific purpose. The parties to the bailment are the property owner (the bailor) and the party that receives the property to perform a service (the bailee).

Of the three kinds of bailment, two do not involve exchanging money and are considered gratuitous or reciprocal, similar to how neighbors share property. The third involves some service or work done in exchange for money and is the only one that bailees coverage insures.

Examples of potential bailment situations:

·         Jack asks Jill to care for his dogs and clean up after them while he is gone on vacation. In this situation, there is no business relationship, even though Jill has care, custody, and control of Jack’s house. In this case, Jack is the bailor and is the only one who benefits, so this is not a bailment.

·         Moe borrows his neighbor’s (Larry) lawn mower. Moe is the bailee, and Larry is the bailor. Moe is the only person who benefits from this transaction. There is no business relationship, and no money is exchanged, so this is not considered a bailment.

·         Whitney takes her fashionable cocktail dress to Star Power Dry Cleaners. She leaves the dress, expecting it to be cleaned and available for pick-up by Friday, the date on her receipt. The receipt also indicates that she must pay $24.95 when she returns to pick up the cleaned dress. This situation is an insurable bailment. In exchange for Whitney’s promise to pay the $24.95 dry cleaning fee, Star Power accepts her dress with the promise to clean it and have it ready for her by Friday. This is a bailment transaction because of the relationship between the parties and the fact that money was exchanged for the services rendered.

This is a bailees customers coverage form, and the exposure goes beyond covering only situations when the bailee is negligent. Bailees Customers coverage applies to loss or damage to property of others, regardless of the bailee’s negligence. As a result, this coverage should be underwritten as a broadened commercial property coverage form. Underwriting should focus on the traditional exposures of Construction, Occupancy, Protection, and Exposure as well as addressing previous loss history and management background.

Related Article: ISO Commercial Property Program Underwriting Considerations

Unique aspects of bailee customers coverage is the transit and off premises exposure, the potential for misidentification, and calculating the actual exposure.

If there is a transit exposure, the maximum value of property transported in a single vehicle must be determined. Rural and suburban deliveries are less hazardous than urban deliveries because of the easier access to specific buildings. This means drivers are away from their vehicles for a shorter period of time.

The named insured may agree to provide services that a vendor must handle. A dry cleaner may accept leather and fur items and then send them to a specialist for the actual processing. The named insured should obtain a certificate of insurance from the vendor in case an accident occurs at the vendor’s location. The transit exposure in this situation is also higher because of the value of the items.

Receipts and backup receipts are very important because they are the documents used to present claims and are important to prevent situations that involve misdelivery.

A given risk should be carefully evaluated for its potential exposure at any one time and at any one location. For a dry cleaner, value estimates can be made based on the average and maximum number of bundles of laundry or dry cleaning it receives each day or week. A further estimate should be made as to the average value per bundle. Another method is to determine the exposure by developing an estimate based on the average value of each article. Estimating such values is always difficult because these values vary depending on the nature of the clientele.