It may not appear so at first glance, but an auto mechanic, dry cleaner and furniture restoration company all have something in common: Each of these diverse businesses temporarily assumes control and takes possession of customers' property as part of their day-to-day functions.
Another thing these businesses should have in common is the need for a bailee's insurance policy to protect them and their customers against losses stemming from damage to or destruction of that property.
Bailee's insurance, sometimes referred to as bailee's liability coverage or bailee's customer insurance, helps pay the costs to repair or replace the damaged or destroyed property.
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How Bailee's Insurance Works
People trust many types of businesses with their property every day. Any type of this kind of transaction is called a bailment.
If your business regularly takes possession of your customers' property (holding it in bailment) and is being compensated to do so, you are responsible for returning the property in the same condition as you received it. If not, you are liable for any costs associated with repairing or replacing the property.
Say a customer drops off a suit to be cleaned at your dry cleaners shop and the suit is stolen. Let's say this particular suit is valued at $10,000. That is an expensive risk exposure that is almost always excluded from your general liability insurance policy, since the suit does not belong to you or your business.
Now, let's add the cost of that suit to the total value of all the suits, shirts, slacks, dresses and gowns waiting at the cleaners to be picked up by their rightful owners. A single fire could wipe out everything, with cumulative losses of anywhere from several hundred thousand dollars to $1 million.
While your property insurance will help you replace any equipment and buildings damaged by the blaze, it will not help you and your customers replace their ruined belongings. Only a bailee's insurance policy can do that.
Along with theft and fire protection, good bailee's insurance policy coverage should also include protection from:
- Water/flood damage
- Wind damage
A typical bailee's insurance policy excludes losses stemming from rodents or insects, so that dry cleaner should take care to keep the moths away from their customers' clothing.
Types of Businesses That May Need Bailee's Insurance
Any company that regularly stores, repairs or refurbishes property belonging to its customers should carefully consider adding bailee's coverage to their insurance package. Common types of businesses that hold property in bailment include:
- Computer repair shops
- Banks (safe deposit boxes are another form of bailment)
- Storage units
- Auto mechanics
- Restoration and refurbishing companies
- Watch/ and lock repair shops
- Any business offering valet services
These types of businesses carry several forms of insurance, but only a bailee's policy will protect them from costs stemming from damage to or loss of a customer's property.
Other liability insurance policies may cover the business if the item is damaged due to the owner or employee's negligence, but any other event, such as fire, extreme weather or burglary, are exempted from general liability, property and even warehouse insurance policies.
How to Avoid Risks Covered by Bailee's Insurance
Some businesses try to avoid being liable for their customers' property by having them sign liability waivers on condition of assuming possession of the item or items. However, these contracts do not hold up in court if the property is damaged in any event, except for negligence.
Such agreements may be useful if the item is damaged by an employee during the course of storing or repairing the property, but if it is ruined by fire, theft or water damage, the courts do not accept these signed disclaimers. The business is still liable for the costs.
A better way to reduce your risk exposure is to:
- Develop a fire prevention plan that includes working extinguishers, sprinkler systems and smoke alarms.
- Equip your business with anti-theft equipment such as burglar alarms and video surveillance.
- Properly maintain water pipes and electrical systems.
- Store any hazardous materials securely and away from customers' property.
Cost and Types of Bailee's Insurance Coverage
As with any insurance policy, the cost of your bailee's coverage will depend on the options you choose and the value of the property you need to protect. There are three main levels of bailee's insurance:
- Unlimited bailee: With this coverage, you do not have to provide an accurate estimate of your customers’ property. This covers you regardless of the value, and is beneficial if you are unable to estimate accurately. However, if it is possible to calculate the inventory of customers' property held by your business, it may be a good idea to purchase a bailee's insurance policy in which the premium is based on a percentage of the total value to avoid overpaying. These policies typically provide a benefit with a dollar cap, ranging from $1 million to $5 million.
- Damage in process: This covers you in the event someone makes a mistake when repairing or storing your customers' property. If your employee stores a client’s goods at the wrong temperature and they are damaged because of this, bailee's insurance will cover you.
- Mysterious disappearance: If you misplace your client’s property, this insurance will cover you.
You may be able to add bailee's coverage to your existing insurance package as an extension, or you may need a separate policy, depending on the value of property you assume possession of and whether you simply store the items or work on them in some way.
Finding the Right Bailee's Insurance for Your Business
It's always important to compare bailee's insurance policies from several different companies before deciding which coverage to buy. Knowledgeable, experienced and independent insurance agents can help.
These agents have spent years assisting businesses in navigating the different coverage options. They can find multiple quotes from a variety of carriers, enabling you to choose the bailee's insurance policy that is best for your particular needs at the most affordable rates.
Contact an independent agent who can answer any questions you may have and help protect your business with the right bailee's coverage.