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Words matter.   

When used correctly, they precisely define a company’s legal obligations, leaving no room for interpretation. But not all contracts are well-drafted.  Read the agreement thoroughly and question whether you fully understand your duties. 

A poorly worded agreement can result in a business assuming more liability than originally intended.  Nothing is more disheartening than learning that parts of your contract are void or your rights are limited because you failed to comprehend the terms.  

Contracts can deliver unintended consequences after Inland Marine claims occur.  This is particularly the case when providing insurance for the transportation/storage and construction industries.  It’s critical to understand all parties’ obligations when storing property and leasing/renting contractor’s equipment. 

Degree of Care

Under the US Uniform Commercial Code (UCC), a warehouse operator assumes responsibility for the materials they store for a fee.  The customer surrenders their goods to the warehouse operator for a period of time, after which the goods are then returned to the customer. The degree of care the warehouse operator accepts can vary drastically from legal liability bailment as prescribed by the Uniform Commercial Code to where the warehouse operator accepts and agrees to be responsible for all risks and damages.  

Warehouse Legal Liability Insurance is a third-party coverage that the warehouse operator secures to protect their liability when they are negligent for damage to property of others in their possession and store for a fee.

Examples of negligence are not maintaining the building, complying with safety codes, and taking appropriate action to avoid damage to the property subject to weather extremes. In one case of negligence, the warehouse did not move goods stored on the first floor out of harm’s way when a hurricane hit. The first floor of the warehouse had flooded numerous times in the past.  The court found the warehouse operator negligent.

Let’s look at the following excerpt from a contract provided by the American Warehouseman’s Association (AWA):

LIABILITY AND LIMITATION OF DAMAGES 

(a) Warehouse shall not be liable for any loss or damage to goods tendered, stored or handled however caused unless such loss or damage resulted from the failure by warehouse to exercise such care about them as reasonably careful person would exercise under like circumstances and warehouse is not liable for damages which could not have been avoided by the exercise of such care.

(b) Goods are not insured by warehouse against loss or damage however caused.

(c) The depositor declares that damages are limited to $0.10 per pound, provided, provided in section 1 be increased upon depositor’s written request on part or all the goods hereunder in which event an additional monthly charge will be made based upon such increased valuation.

(d) Where loss or damage occurs to tendered, stored or handled goods, for which warehouse is not liable, the depositor shall be responsible for the cost of removing and disposing of such goods and the cost of any environmental cleanup and site remediation resulting from the loss or damage to the goods.

According to this agreement, the warehouse operator expressly informs the owner of the goods that they are NOT liable for loss unless it resulted in their failure to exercise reasonable care. This is very important.  The language shifts the responsibility to legal liability and removes any responsibility for damages due to acts of God or natural catastrophes (over which the warehouse operator has little control).  The warehouse operator also expressly informs the owner that the goods are NOT insured on a first-party basis, but for legal liability only.  

 

A poorly worded agreement can result in a business assuming more liability than originally intended.

Also, according to this agreement, the warehouse operator expressly states a released value of liability of $.10 per pound in the event it’s determined they are negligent for loss or damage.

The insured needs to read the contract to verify the payment terms.  In some instances, an agreement may limit the amount per pound or a multiple of the storage charge. Warehouse operators might also implement a limitation on a per-pallet or per-unit basis. 

Contractors Equipment Lease and Rental Contracts

Contractors usually don’t own all the equipment they use.  That’s why we developed Contractor’s Equipment Coverage Solutions, which automatically includes an additional coverage sublimit for borrowed, leased or rented equipment.  

When renting contractor’s equipment, you need to sign an agreement that specifies your legal liability, furnish a certificate of insurance, and add the rental company as a loss payee to your insurance policy.  Nearly all rental agreements contain an indemnification clause or a “hold harmless” clause. Generally, the liability lies with the contractor renting the equipment.  Unless otherwise specified, you are responsible for everything that occurs – including acts of God. These terms may be negotiable.

Just because a business has Property or Contractor’s Equipment insurance, it can’t assume it has coverage for leased or rented equipment.  Often coverage for leased or rented equipment is provided by endorsement to such policy forms.  Most products provide risks of direct physical loss or damage coverage, a.k.a. a special policy form.  There are exclusions, including when a business is tricked or induced to part with the property voluntarily.  Some coverage forms provide a sublimit for this exposure, however, such as Contractors Equipment Coverage Solutions. 

Other nuances to look for when entering into a rental or leasing agreement:  

  • No limitations for use. A company may need to use the equipment on the water or partially underground.  Make sure that those operations are not excluded. 
  • Out-of-pocket expenses. This is usually a percentage of the damage or a dollar amount, whichever is less. This is the equivalent to a deductible on an insurance policy. 
  • Damage waiver.  If you don’t have insurance, the rental company will require you to buy a damage waiver.  Typically, this coverage is far less broad than what an insurance policy provides. Usually it’s written on a specified perils basis, e.g. fire, theft, and overturn. Some clauses might work to your disadvantage.

Strongly Worded, Legally Enforceable

Beyond the fundamentals addressed above is a maze of complexity arising out of government regulations, burden of proof, and changing liability relationships.  Consult with your broker and legal counsel, but also take the time to read contract itself, as the words matter.  This small investment of your time can make all the difference.

 

About the Authors

Mike Perrotti, CPCU, AMIM is SVP, National Inland Marine Practice Leader for XL Catlin.  He can be reach at +1 212 915 6956 or mike.perrotti@xlcatlin.com.  Alexander McGinley is Vice President and Underwriting Manager for North America Marine at XL Catlin. Contact Alexander at 860-709-3695 or alexander.mcginley@xlcatlin.com.

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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

US- and Canada-Issued Insurance Policies

In the US, the AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of AXA XL.
US domiciled insurance policies can be written by the following AXA XL surplus lines insurers: XL Catlin Insurance Company UK Limited, Syndicates managed by Catlin Underwriting Agencies Limited and Indian Harbor Insurance Company. Enquires from US residents should be directed to a local insurance agent or broker permitted to write business in the relevant state.