Hi, I'm Lillian Coulson, and I'm pleased to introduce today's webinar, Bailey 101, hosted by Inland Marine Underwriters Association. Please be aware of the IMUA statement. I'm pleased to introduce today's presenter, Karen Retsuzko. With over 25 years of industry experience, Karen is Roanoke Claims Services Assistant Vice President of Professional Liability Claims in Chicago, Illinois. She is responsible for adjusting complex shippers' interests, non-vessel operating common carrier legal liability, air legal liability, warehouse legal liability, and motor truck cargo claims. Karen attends numerous mediations and has extensive experience with depositions. Among her many memberships, Karen is a member of the Claims and Litigation Management Alliance and on the Alternative Dispute Resolution Subcommittee, as well as the Insurance Fraud Committee. Roanoke Claims Services is a division of Roanoke Insurance Group, Incorporated. It specializes in insurance and bond solutions for international trade and transportation. Roanoke is a subsidiary of Munich Re, as well as an affiliate of Munich Re Syndicate, and is the North American primary insurer for marine insurance and custom bonds for this worldwide organization. We're very happy to have Karen with our IMUA audience today to present on Bailey Insurance. Welcome, Karen. Thanks, Olaine. I appreciate that introduction. Hello, everyone, and thank you for attending this webinar. Before we begin, I have a short poll question I want to ask everyone to get an idea of what your experience level is. That poll question is, do you know or understand the difference between first-party coverage and third-party Bailey coverage? Please click on your answer at this time. I'll give you all another couple seconds here to answer before I broadcast the results. Okay. Great. Looks like a good percentage of people are aware of the difference, know the difference between the two. They're sometimes complicated concepts to understand. I won't go into detail too much here in this presentation about the difference, but I will touch base on that. Let's begin. So the presentation is really just going to touch on the basics of Bayley coverage, first and third party coverage, like I just mentioned. I'll talk a little bit about conditions and exclusions. While I'm not an underwriter myself, I can, you know, give you some basics as to what an underwriter might look for, what maybe you would look for as an adjuster in handling claims. I'll also provide you with some claim examples from experience that I've had over the years. Let's start with just sort of a basic, what is a Bayley? So if I was going to give you the legal definition of a Bayley, it would be an individual or entity having possession of another person's property under bailment. This seems like a pretty easy concept. So a bailor is the party who owns or has title to the property, while the Bayley is the party who receives custody of the property, of course. Let's talk about some responsibilities of a Bayley. So legally, they're obligated to act according to the terms of bailment. So, you know, I ask you to hold my property for 30 days. I expect you to receive it in good condition and give it back to me in good condition. I expect you to use reasonable care when you're storing the property, such as, an example, you don't want to put temperature-controlled cargo, obviously, in an un-temperature-controlled environment, or you wouldn't want to stack heavy cargo on top of lighter or much more fragile cargo. Don't make unauthorized use of property. So you wouldn't want to let an employee take someone else's property outside the building or home for use. Obviously, you would want to return the property, and you don't want to mix or part with property. Just a couple pictures. Obviously, the top one is what you should not do with fragile cargo, and then the second one, I put this in here because I thought it was a really good example of what a clean, neat warehouse looks like. There's enough space to move cargo around. The stacking looks pretty neat. They've got this, you know, little platform or mat to roll stuff on to protect cargo that's being moved around the warehouse. So the difference, of course, between first- and third-party coverage. The first-party coverage provides coverage on an all-risk basis. The third-party coverage typically involves warehouse terms and conditions or contracts that may limit liability. So you'd have to look at those terms and conditions closely to see what may or may not be covered or what the bailey may or may not be responsible for in the terms of their bailment. Second-party is obviously much broader coverage with less limitations than there would be if there was third-party coverage. So there's a few underwriting considerations we should look at, and the first thing is the age of the warehouse. Obviously, the older the warehouse, maybe the higher risk it is. You know, a newer warehouse maybe has better building material use, as an example. Is it a secure warehouse? Does it have locks and cameras, other guards? That's important to know. If you're holding cargo that's worth a lot of money, you would obviously want to make sure that your warehouse is equipped with security cameras. What is the value of the property being stored? That's important, obviously, to know. If you have a policy limit of, let's say, $8 million, but you're storing cargo in your warehouse that's worth $3 million, you may not have limits sufficient to cover that with your storing. So you'd want to make sure that your limit is sufficient to cover the value of the goods being stored. Another kind of important thing to realize is that often, more often than not these days, parties are entering into contracts. At least that's been my experience. And a lot of times, those contract terms are pretty broad. You want to make sure how many contracts a warehouse has for how many customers and what the contracts obligate them to do as far as performance is concerned. I have a poll question here that I'd like to ask people again. This is just, do you contract terms broad in the scope of a Bailey's liability? And that poll question will come up in a second here, and I'll give you guys some time to answer that question. Give it just another few seconds here. And I'm going to go ahead and broadcast the results. This is sort of a trick question in that, yes, it can limit it or it may limit it. It depends. A bailee may want to limit his terms and conditions. He may want to hold firm on that in contract terms. Where a shipper may want that broadened, but the parties obviously have to agree to those contract terms. So it could be broader. It could be limited. It depends on the customer and what terms were agreed to. What terms and conditions apply, if any? Ideally, a warehouse operator is going to have terms and conditions of service. If they're not entering into contracts, if this is a third-party liability situation, you're going to want to make sure that they have terms and conditions that limit liability. That talks about time frames in which claims need to be reported. It would also discuss payment terms. Probably there will be a lien of goods clause within those terms and conditions as well, among other terms and conditions. Some more underwriting considerations. What's the loss experience? Obviously, somebody with a high loss ratio may not be the best risk. Is the warehouse in a known high crime area? That's kind of a self-explanatory one. I mean, there are locations in the country that obviously make a risk less attractive due to where the location is. Is the warehouse in a flood zone? Certainly, underwriters would want to know that as well. Just no different than you would your own home if you were in a flood zone. Does the policy provide coverage for defense costs? This is an important question. You would want to know if defense costs are included in the policy limits. That is, is it a depleting policy limit? Meaning, is the policy limit reduced by the amount that is spent in legal fees? Legal fees can add up in a hurry. So if you had a low policy limit of, let's say, $100,000 and you had a claim that came in for maybe $100,000, for maybe that same amount, your legal fees, you could add up to $20,000, $30,000, $40,000 pretty quickly. So all of a sudden, that $100,000 limit becomes $60,000 if you've spent $40,000 in expenses. So it would be important to know if those defense costs are included, as well as to know if there's first dollar defense provided. Sometimes policies require that your deductible be paid before defense costs are paid. Some conditions of the policy to consider are things like debris removal. A lot of policies include coverage for debris removal, but it may be limited. They may cap the limit with a sublimit of maybe $25,000 or $10,000. Sometimes costs incurred to clean up spills or a mess that's in the warehouse gets costly pretty quickly. Does coinsurance apply? So you might want to consider that if you've underinsured a shipment or a shipment's been underinsured and the value is much higher than what it was actually reported, does coinsurance apply? Will it be a claim payment reduced by that value that it was underinsured? Is the valuation actual cash value or replacement costs for first party coverage? Does the policy have an aggregate limit or a per occurrence limit? For example, you have an aggregate limit of $500,000 in a year. You have a loss that equals $300,000 and another in the same year for $350,000. So your total claims equal $650,000. The policy aggregate is $500,000 so that would be the most that would be paid in a policy year. So again, you just want to make sure that your aggregate limit is sufficient to cover the goods that are being stored. There's some exclusions that you'd want to consider as well. Such things as mysterious disappearance. I mean, I'm involved in a claim right now with mysterious disappearance. Mysterious disappearance involving cargo that was in a warehouse and it had been there for a long time and they had an employee that was in management and he was leaving the business and he took his clients with him. And during the course of taking those clients with him, while my investigation is not complete, we believe that that employee took this customer's goods with him. But we have no record of that happening. There's no record of it being taken out of the warehouse and the only records we have is that the cargo is still in the warehouse. So at the moment, it's a mysterious disappearance because it's simply missing. Nobody knows where it is. Another exclusion to consider would be delay or loss of market, loss of use. That's excluded on most policies. I think you're all probably aware of that. Vermin, wear, tear, gradual deterioration. Cargo that's left outside or unattended. I think people forget about this in warehouse policies a lot. It's there for obvious reasons. You don't want to store cargo outside that may be subject to the elements of the weather or theft if you're in an unattended yard and it's just sitting out there for everybody to see. So there's reasons why that exclusion there is in most warehouse policies. Dishonest acts. If you have an employee who's dishonest, obviously that would be excluded under the policy as well. I have a short video before I go through some plain examples that I thought might be interesting to go over and just to kind of kick it off. We'll get that going here. It's pretty short, but I think it gives a good idea of maybe what not to do in a warehouse. And you see these two forklift drivers, who really shouldn't be in this close proximity to one another. And because they were so close, real quickly you saw this brief. You saw this forklift carrying it, and there goes this box turning over on its side. You can see that on the left-hand side of your screen there. This warehouse, to me, looks sort of like a mess. It's not clean. It's not neat. There's not a lot of space to maneuver around. You have two people driving forklifts that are far too close in proximity to one another. So this is maybe a what not to do from a risk management standpoint, as far as operating a warehouse is concerned. That's a pretty big piece of equipment, too. I should say high value. That was some computer equipment. So once it tips over on its side like that, that almost instantly becomes a total loss. Yes, you can test it and maybe salvage some pieces and parts, but computer equipment being sensitive in nature, usually that becomes a total loss, with salvage being just the parts only. I'm going to move on to a couple of claims. So this first claim is spoilage. And so with spoilage, you see rusting in cans, and you see sometimes bulging in cans. I don't know if you can really see it in this video. You can sort of see. I'll draw it out here for you, just to give you kind of an idea. Let's see if I can do this here. You can see just a little bit of bulging right here. So these were pretty old looking cans, is what I would say. And this claim went on for kind of a while, because we had to test the product to see if they were spoiled or they did. The inspection revealed that the damage was a result, at the end of the day, of product expiration, which I thought was kind of funny. So we had a claimant who was reporting damage to peaches where the peaches had spoiled. So while there certainly is bulging to the cans, and there is, of course, some indication that there was damage, what we're talking about here is cargo that you couldn't sell in the first place, because it had already expired. The bacteria grew in it. And what happens when the bacteria grows is exactly what you see here, the bulging of the cans. The claim was ultimately declined, because the loss was not related to any negligence on the part of the bailing. He obviously hadn't done anything wrong with this cargo. It was stored in the proper environment. It just simply was the fact that the cargo was spoiled. I'm going to move on a little bit to the next claim example. And this was a very expensive claim. As you could see, the cargo that was stored on these racks, which mostly consisted of computer equipment, fell under the weight of the cargo on the racks. It is possible there was some issue with the racking system itself, in that it might not have been structurally sound. But a forklift driver hit the rack, which resulted in it collapsing. So the combination, the weight, the hitting of it by the forklift driver, and it really caused very significant damage. If you look at the second slide, you get a better idea here of the leaning. This is what the forklift driver ultimately drove into. I don't know if you could see that color. Maybe I can change the color of this a little bit so we can see it a little better here. But it's a pretty big claim. You'll see from, we'll talk about it a little bit here in detail, the racking system had this distribution of weight issue. So when they hit it, it fell, as I mentioned to you before. And the value of this cargo is in excess of $600,000. Kind of doesn't look like it from the slides. If you look back at the first one, you wouldn't think that maybe there's $600,000 worth of cargo there. But because it was computer equipment, that's where it became so expensive. The bailey in this claim entered into a contract with the property owner with an agreement to increase their liability. This is an example of when you enter into contract terms, you need to be very aware that your exposure is that much greater. If you limit terms to, let's say, $0.50 a pound, this claim would not have been, of course, anywhere near $600,000. It might have been more in the area of $10,000 based on the weight, as an example. But because they entered into this contract, this claim became a $600,000 claim with very limited salvage. It started out about $800,000. That was some testing, some repairs, some replacement, a combination of things to settle this claim. It became $600,000. There was some salvage value for some of the equipment. But it was very, very costly. Vanishing Act. I talked a little bit about this particular claim. This is the loss that involves this recording studio. I mentioned it's cargo that's just missing. I think what's important for a warehouse operator to make sure is that they have really good records, that they keep an accurate description of the cargo that's being stored. Ideally, when stuff is moved around, a lot of times in warehouses, cargo is moved from one location to another. They should keep an accurate record of when it's been moved and where it's been moved to. In this case, that didn't happen. They had stored it there for several years, and not at any time were there records to indicate where in the warehouse did it have been stored. We knew what warehouse location it was, but we didn't know exactly where it was. And that's something else from an underwriting standpoint. Obviously, you want to make sure, I'm sorry, claim standpoint is you want to make sure that the loss that you're adjusting, where the loss occurs, is named on the policy. So warehouse form might include several locations. Or maybe it even includes, which the broadest of forms would include, the unnamed location, so that cargo that's stored in any unnamed location would be covered there as well. I want to talk a little bit about the difference between first and third party, if I could go back to that a bit. So first party coverage, obviously, is the broadest of the forms. And it's the easiest to adjust at the end of the day. You have customers who are going to receive, typically, full payment for their cargo, assuming there are no exclusions in the policy that would apply, versus the third party claim, wherein terms and conditions would be important. If you have a warehouse operator who is operating without terms and conditions of service, they likely would be held to full liability. So as an underwriter, while you might intend to limit liability and offer a policy that's limited in liability, if they don't have terms and conditions, there would be no limitation that would apply. Yes, they have to act in certain ways, and act reasonable, and don't mix or part with property, and all those things that I mentioned before. But really, the essential thing for third party coverage is to ensure that a warehouse operator has terms and conditions in place. Ideally, those terms and conditions would be signed and acknowledged by every customer. I always tell people to include those in links and signature lines. So let's say Bailey submits a quote to a customer. And in that quote, I would provide the link to their terms and conditions. Everything's electronic this day. So if they put a link to the terms and conditions that connect them to those noted on their website, that would be great. A spot for them to check off, kind of like we do polling here, sort of in a way. Yes, I've acknowledged it. Or like your iPhone, when you update your iPhone, it asks you to acknowledge the terms and conditions. This would be the same thing. It would pop up to acknowledge that you've received them, you've read them, and you agree with them. And you click that little check mark. That way, it eliminates the problems that you encounter between cargo owners who are expecting, let's say, to receive full payment for cargo that's damaged by a forklift, when maybe the limitation is $0.50 per pound. The other common problem I experience in claims are customer service issues. So you have a warehouse man who is not insuring cargo or arranging insurance for their customer. Or it's not first party coverage. It's third party coverage. But it's his very good customer. And he wants to make his very good customer whole. So to make his customer whole, he wants the insurance company to respond and pay a claim in full. Unfortunately, if he is operating using terms and conditions, and they're readily available, they're online, they're in his quote, maybe they're even on the back of his invoice, which they should be. And I'll talk more about the invoice in a minute. At the end of the day, the most the insurance company will do is respond to the extent that he is legally liable to pay. If he wants to pay his customer beyond that limitation, that would be his business decision to do. And a Bailey can do that. It's just something that would be outside policy terms and conditions. One thing that they would not want to do, of course, a Bailey would never want to admit liability. Admitting liability would void any terms and conditions that a Bailey has, or defenses that might be available to them is once they admit liability, those kind of go out the window. Getting back to invoices, I do run into this a lot. So if a Bailey issues an invoice for services rendered, they will often email that invoice or it's sent electronically. Well, the problem is if the invoice itself, if you have a paper copy, the backside of that paper copy will have all the terms and conditions. But if you're emailing it to somebody, sending it electronically, if there's no place for them to have acknowledged receipt of those terms and conditions, and they never see them because they're never getting the paper copy, those terms and conditions may not apply. I'm not saying they won't apply. Each situation is a little different. Depends what else they have. Again, do they have them on their website? Do they have them referenced in a quote? But ideally, if you're sending that electronically, you will have sort of the same kind of link to the terms and conditions. So that you give a customer every opportunity to review those terms and conditions. I'm going to move on to another claim example. And this one involves a time notice and a limit of liability. And this goes to the terms and conditions that I was just speaking about. So a forklift operator drops machinery while moving it within the warehouse. The warehouse issued a receipt limiting liability to the lesser of $50 per shipment, or the fees slash charges associated with the storage. In addition, the terms and conditions noted on the warehouse receipt required notice of loss to be presented within 90 days. In this particular case, the warehouse declined liability based on the failure to report the loss timely. And even if they had reported the claim timely, the liability would still be limited to the $0.50 per pound. So to me, the most important thing is making sure that those terms and conditions of warehouse operator are readily available, easy for people to see, and, you know, you don't want to look like you're hiding them. So, again, that gets back to the difference between first party and third party. You know, third party, obviously, is very limited, as I'm mentioning here. I will go on a little bit, too, about contracts. Most of the contracts I see, not all, and we pulled this earlier, but most of the contracts I see are to the benefit of the cargo owner. They're almost never to the benefit of the bailey or the warehouse operator. They're almost always to the benefit of the cargo owner. Is entering into a contract a good idea? I guess that depends on the contract terms themselves. So, you'd have to review them very carefully. What I would say about that is every warehouse operator, bailey, should submit any contract they get to their own attorney to review those terms. They do want to also send those to their insurance agent or the insurance company to take a look at the terms. While they're not attorneys themselves, you should just submit it to them to ensure whether or not there's coverage for contracts. A lot of policies will exclude contractual liability completely, and that's because the exposure is very great. Just like I mentioned in my claim involving the computer server racks that fell on its side from the forklift operator hitting it, that resulted in a very large claim. It's very difficult to make up for a $600,000 loss. I'm going to move on to another claim example here. This is a very, very interesting claim. As you can see, this is a huge, huge fire. It's just, it was enormous in magnitude. You can see by the after effects, after it was extinguished, there's virtually nothing left of this warehouse. It's just, it was completely flattened. And what I can tell you about this fire is that it spread through two buildings. And of the two buildings, 90 fire companies were involved. Ninety. I'm not sure that I've been aware of any other claim where 90 fire companies were involved. It's huge. It took nearly an entire day, 20 hours to control the fire. There were 40 investigators from various insurance companies present. I can't even imagine being one of those investigators. Our investigator said to me at the time that he, you know, was just so overwhelmed by the number of people that were present at the time, trying to look at cargo that wasn't even there. You, obviously, there's nothing left of the cargo. What's there to see? So everybody was pretty much standing outside the building, just looking at it and trying to determine whether there was anything to even look at. And at the end of the day, there really, there really wasn't. Some of the things that contributed to the reason this was such a large fire was that there were heavy winds in the area. And there was a lack of water supply to the warehouse. This was a US VA-owned building. And they used to house nuclear weapons there. And because of that, the ATF was called to investigate the fire. It's a very interesting claim, actually. So the ATF, once they came in, they took control. It sort of shut down everybody's investigation. They asked all investigators to leave while they investigated it. And they would report back to us. So once the government got involved, it was sort of hands off for everybody else. But there wasn't, at the end of the day, you could see, there wasn't really anything to even look at. It's, the stuff inside was a total loss. The exact cause of the fire, to this day, it hasn't been determined. And this was a few years ago. But it was believed to be a result of a ceiling collapse with fallen lighting that ignited the fire. This, my particular client involved here, was only storing PVC piping. So obviously, in the PVC piping, it melted. And the value of it was only $167,000. So my claim was a relatively, well, $167,000 is a lot of money. It's a relatively small amount compared to what two buildings' worth of cargo would hold. So it was incredibly interesting, probably the most interesting warehouse claim I've been involved in. Another one I'll talk about here a little bit is chemical contamination. So in this claim, a ceiling-mounted condenser unit fell in a warehouse, causing return lines to break. And that break of return lines resulted in ammonia leaking. And this ammonia leak, the building was storing frozen seafood. And because of the ammonia leak, the FDA came in and said, well, that's a total loss. Once the ammonia leak has spread through the building, we don't know if it's permeated through these packages. So what was in these individual packed boxes were frozen scallops. And other fish. And we tested some of them, which seemed to indicate that the product was okay. But the FDA would not, you know, at the time, was really resistant to let it be released. We ended up appointing an attorney who helped us get details on getting the right company involved and experts involved to test the cargo so that we could at least sell it as salvage. So the loss itself was about a million dollars. The good news is, I'm not sure if this is good news or bad news, but we ended up salvaging about three, it was either $300,000 or $400,000 worth of scallops and other fish products. And I was surprised, but certainly pleased with the outcome of that, because it was such a large claim. I was really surprised, because you think, how could this ammonia affect the fish itself? So at the end of the day, it sort of makes sense. While it's a, certainly the odor is great, the fish is packed such that it would be very difficult for anything to penetrate through the individual packing that it was in. So it's in cartons, it's in individual sealed packages, it's unwrapped all in plastic. So you had several layers. So I, you know, thought it would be very difficult to say that it was a total loss. So initially, it was a million dollars, and we ended up spending around, I think, about $600,000 altogether at the end of the day. So it wasn't too bad of a result. And in that particular claim, that was first party insurance. So that was part of the reason why the claim was so high there, too. There were no limitations of liability that applied. It was, you know, we were insuring the actual seafood owner. So the goods were being insured on an all-risk basis. It certainly makes it, as I mentioned, it makes it easier if it's all-risk for an adjuster. But from an underwriting standpoint, obviously, the risk is greater when you're agreeing to insure cargo on an all-risk basis. So getting to the conclusion of my presentation, I just wanted to let you all know that this was just intended to be a basic presentation on Bayley 101. And the important things are to know the difference between first and third party coverage, which is what I mentioned. That's obviously the greatest consideration when you're looking at a claim or a risk is what you're intending to do. So if you're intending to insure it or if you're intending to write it on liability only. And, you know, I enjoy handling claims. I like delving into the investigations and looking into the extent of liability. And I find it very interesting. And I hope that you all do, too. I have some time for some questions, if anyone has any. I think, Lillian, we'll pull up the screen that will allow you to enter in your questions. Yes, we're doing that right now. Thank you for an excellent and insightful presentation, Karen. At this time, Karen will take questions. To ask a question, simply type it in the Q&A box. And then click the balloon icon next to it to submit the question. And we'll receive it momentarily. We'll wait a few moments for questions to come in. Here's the first question. Will a warehouse legal liability policy provide coverage where a warehouse operator has agreed to assume liability for a customer's goods beyond the standard of reasonable care? Okay, that's a good question. So, if you've agreed as a warehouse operator to assume a liability beyond what would be normal and customary, typically the policy would not respond. If, as the underwriter, you agreed to write the contract that was written, and you've agreed to extend the contractual liability to cover something beyond reasonable care, then yes, you would. But on a whole, you wouldn't want, you probably wouldn't be covering beyond reasonable care. Thank you very much. And we have another question. When you were talking about the fish, how did you salvage the fish? Yeah, everybody wants to know that question. And I mean, I have to say, I do feel like we sort of, I was surprised. I truly was surprised. We had a really good expert, and because we had a really good expert with really good testing results, that allowed us to take the fish out to bid. And if we hadn't gotten those experts, you know, we definitely would not have been able to salvage the fish. It was really because of the expert and his knowledge of food products. And he was a chemist at the end of the day. He's the one that really helped us to be able to salvage the cargo. It was a great result. It costs a little bit of money to get an expert. As you may know, at times, you have to spend money to get a result like this. And while it's not always the best thing to do, sometimes you do want to spend the money so that you get the right result and, you know, you get a result like this. It's worth whatever you spent. I don't remember the dollar amount, what he charged. Maybe it was $5,000. I'm not sure. But it was certainly well worth it. And that's, by the way, that's still in the recovery process. It's a fairly old claim. But, you know, there is somebody who owns the building who may have some responsibility for the leak. It was an old condenser that likely hadn't been maintained. I'm not involved in that part of the process. But that is still in process. Thank you. Okay, that's all the questions that we have. Karen, thank you. Great. I appreciate everybody taking the time out of their day to attend the webinar. Yes, and thank you so much for presenting for us. Thank you also to our attendees for your participation and your interesting questions. All of our attendees will receive a survey via email. When you have a moment, please take some time to respond to the survey. Your feedback will assist us in planning future professional development programs. This ends today's webinar. Enjoy the rest of the day.

webinar

Karen Retsuzko

Bayley Insurance

coverage

contract terms

liabilities

documentation

marine insurance