By Ross Driscoll Sr., CIC, CR
Originally Published in C&R Magazine, Quarter 3, 2019
If you are a restoration contractor, every day you are taking on risk for other people’s property, even if you are not taking it to your facility. Bailees provides coverage for the care, custody and control of other people’s property in your possession. Legally, a bailment is created once you take possession of another person’s property.
Bailees is traditionally a form of inland marine insurance. Inland marine policies are a “separate bucket of money,” just like property, liability, commercial auto, workers’ compensation, pollution, umbrellas or other policy types. Inland marine coverages most often include contractors’ equipment floaters, builders’ risk policy forms, as well as bailees. A bailees claim paid out on an inland marine policy does not affect the general liability/pollution policy, as it is a separate bucket of money and is not reported on the general liability loss runs.
In recent years, TPAs, franchisors and carriers have required restorers to obtain bailees coverage — generally only $250,000. Bailees policy forms vary widely, and each policy must be read carefully. Most local agents have limited experience writing bailees but may have a wealth of experience writing equipment floaters and builders’ risk policies. At present, there are very few carriers currently writing true bailees on inland marine forms for restoration contractors.
As a result of the limited true inland marine coverage available, some of the current carriers who write restoration contractors regularly have started offering a limited bailees coverage form as a “rider” or endorsement on their general liability/pollution policies. The problem is the bailees limits on liability policies erode the limits available if and when a construction defects claim comes in years down the road. Remember, the statute of limitation in most states is seven to 10 years. A contractor may have a $1 million per occurrence and $2 million aggregate policy. As an example, if they have a $300,000 bailees loss, they would erode the limit down to $1.7 million.
These bailees riders/endorsements written with the liability carriers are usually less expensive than a separate inland marine policy that includes bailees. This is because there were no additional limits being sold.
A separate inland marine policy is a separate bucket of money and is usually a little more expensive, but you get what you pay for.
This can be dangerous for the contractor, as they planned on having those limits available for a general liability claim in the future. In addition, they have signed indemnity and hold harmless agreements with those who refer them business. They will need to pay out of their own pocket even if they do not have enough limits. Most contracts state that the contractor is still liable whether there are enough limits to satisfy the claim. In this instance, the contractor will be self-insuring part of a claim they thought they had enough coverage for.
It is also dangerous for the franchisors, TPAs and carriers, as the limits they thought their contractors who had named them as additional insureds may have been eroded by what normally would have been paid by a separate inland marine policy. These parties typically try to push risk down to their contractors, and it is only a matter of time until they figure this out. Eventually, more and more will require separate bailees limits where it is available for purchase by their members.
Traditional bailees forms, and many of the nontraditional bailees forms that are part of liability policies, provide coverage at the job site and facility. Usually, there is only coverage for the scheduled locations. The problem for the restorer is when they have property of others at locations not scheduled on the policy. Restorers need to make sure they have coverage for storage units they might rent when their warehouses are full, in transit and in temporary containers at job sites. Most policies provide no coverage for alternative locations unless they are specifically scheduled on the policy. A common issue is that no one usually picks up the phone and advises their agents that they just rented a storage unit or put a temporary container on a job site.
The most significant problem for most bailees policies is the valuation section of a policy. Most policies will have similar to the following:
The value is the least of the following amounts:
The problem in the scenario above is the ACV will almost always be the least costly valuation for claims settlement by the carrier. The following is an example:
The cost of new item purchased by the insured five years ago is $1,000. The item has now depreciated to $700. The item was damaged in the loss at the insureds location and has been restored. Now the value is $500. A loss occurs at the restoration contractor warehouse, and the item above is now worth $200, as it was damaged by smoke, water, wind or fire. The problem begins when the property owner feels their property was worth more than $200 when it went to the contractor’s warehouse. The carrier picks the least of the values above to settle the claim.
I am familiar with a recent claim for a restorer that had a warehouse burn down to the ground with restored customers’ goods inside at the time of the loss. This restorer has a claim being settled by their bailees carrier for 20 cents on the dollar. Their problem is that this is less than what the insured is legally liable for. Now, the insured is defending lawsuits from their customers. To make matters worse, they are not getting their bills paid by the insureds for the work they performed on the contents prior to the loss at their facility. One might say that the homeowner’s carriers can pay all their insureds for the loss at the plant. The problem is the carriers who pay out will surely subrogate to recover the money they are spending. This is a big problem for the restoration contractor, as they are grossly underinsured.
I have also heard about recent losses involving soft goods, where the equipment burned up with the goods in them. All these insureds were underinsured and eventually were forced to pull money out of their pockets to keep the customers happy.
There is now a solution to the problems I described above, as there is an exclusive program with an A+ XV rated inland marine carrier. They will write restoration contractors in most parts of the country subject to underwriting and rating approval by the carrier. The program is written on an admitted basis in all 50 states.
When writing a separate inland marine policy, there is a separate bucket of money available to pay these claims. These claims do not erode the general liability limits, especially for future construction defects and completed operations claims. This is good for the contractor, as they have all their liability limits intact when they need them for a liability claim. Another positive: If it is an inland marine claim, it will not be on the GL loss runs, which is where the costs need to be contained as the market firms up.
This is also good from the perspective of the TPA, or franchisor, as the contractor will have all their GL limits intact in the future for when a liability claim is presented. From my conversations with these parties over the years, I have heard that often times the carriers will expect them to step in to make something right for their insureds. The carriers do remind them of where their work is coming from and use it as leverage to get franchisors and TPAs to pick up and pay for the deficiencies of their contractor’s policies. Let’s not forget, similar to restorers, TPAs and franchisors also have to sign indemnity agreements.
This new program includes bailees coverage for any one occurrence up to the policy limits at any off-site property no matter where it is. The program can also provide up to the policy limits for transit.
Limits are available up to $10 million. Earthquake and flood are available in most parts of the country subject to underwriting approval.
Most importantly, the valuation section for a bailees loss is amended to be replacement cost (RC), as detailed below:
Replacement Cost – The value of covered property based on the ACV is deleted and replaced with the following: replacement cost without any deduction for depreciation.
Replacement Cost Limitation – The replacement cost is limited to the cost of repair or replacement with similar materials and used for the same purpose. The payment will not exceed the amount you spend to repair or replace the damaged or destroyed property.
Replacement Cost Does Not Apply Until Repair or Replacement – Replacement cost valuation does not apply until the damaged or destroyed property is repaired or replaced.
Time Limitation – You may make a claim for ACV before repair or replacement takes place, and later for the replacement cost if you notify us of your intent within 180 days after the loss.
This valuation method is just like any normal property loss where the insured is paid ACV and then receives the replacement cost funds once they replace the items. This is the valuation section, and this policy form is now available. This solution solves most of the problems and gives peace of mind for all the stakeholders involving a loss at a restorer’s own premises or another location where they have customers goods stored.
Ross Driscoll Sr., CIC, CR, is the president of National E&S Insurance Brokers Inc. He has been an insurance broker nearly 40 years and has owned insurance agencies, as well as reconstruction and restoration companies during his career. He is a licensed general, concrete and asbestos contractor in California and has been published in numerous publications. He can be reached at firstname.lastname@example.org.