Hello, and welcome to today's webinar titled Profitably Underwriting Warehouse Legal Liability. I'm Lillian Coulson, and I'm pleased to introduce today's webinar. Please be aware of the IMUA statement. It's my pleasure to introduce today's presenter, Jack Gould. Jack is Vice President of Inland Marine at AIG. He leads the national branch Inland Marine team specializing in non-admitted Inland Marine classes for wholesale brokers nationwide. Jack has spent his entire career at AIG, the last 10 years of which have been dedicated entirely to Inland Marine. Welcome, Jack. Thank you, and welcome, everybody. Are we good to go? We're good. Yep. All right. Cool. Thank you, everybody. We're just going to get right into it. We have a lot of material to cover. The slides went out. There's probably about 50 of them. We might move quickly. We'll do questions at the end. I just want to make sure this works. We're happy. We'll start there. I guess I'll start with the questions. This one is just kind of about who's in the room, and it's just whether you're an insurance carrier, broker. Okay. Okay. It seems like a real heavy underwriting crowd. All right. Let's get started. I'll do broadcast and share the results on that. Yeah, so happy underwriting press, that's cool. I really am curious who the other are, maybe we can figure that out later, but yeah, so that's great. This presentation is going to be designed for underwriters, and the topic, Profitably Underwriting Warehouse Legal, we can just call it Underwriting Warehouse Legal, which you shouldn't be doing if you're not going to try to do so profitably, but it's a pretty good class. So, warehousing, we generally know what warehousing is, this is, I believe, from the state of California, their definition, and the thing to know about warehousing is it's a very fragmented industry. The 20 largest companies control less than 30% of the market. What that means is you're going to see a lot of risks, a lot of small business risks, but there are still nationwide operations that do have quite a bit of exposure, but your average one is going to operate a single facility, 200,000 square feet, revenue about a million. Depending on your company's appetite, that may be perfect. So you can classify warehouses by their business segment, there's private warehouses, not really relevant for this class, because the definition of a private warehouse is really where the goods stored are, they're stored by the owner, so think of a distribution center for retail. There's no liability, no third party, so you're not really going to see that, that's on the property space. Public warehouses, just what they found, they will store goods of others in exchange for a charge, they will work with external folks, so that is where you're really going to see it. And then, in some cases, bonded warehouses, it's a smaller subclass, and what they do is they hold goods that are imported and work with customs, so basically they don't release the goods until the duties are cleared, much smaller subset. You can also classify warehouses by their commodities. Dry storage is just what it sounds like, it's basically anything where atmosphere and temperature and the conditions provided are not man-made outside of reasonable climate consideration. Dry storage can range from bags of sand to NFTA high commodity class, very flammables, chemicals, so you still need to dig in a lot further, but just know that that's the main component. And then, for some risk, you'll see cold storage. Cold storage is, that is a tougher class, generally, heavy in the food space, but a lot of things can be requiring cold storage, pharmaceutical is a big one. Generally, cold storage warehouses have equipment to maintain the temperature, and the temperature required is going to be specified in the contracts, generally, and then there's a subset of those cold storage that are controlled atmosphere facilities. Those are even more technical, and they can be subject to high risk, think facilities that artificially increase the level of carbon dioxide or nitrogen to prevent food spoilage, something like that. And then, you can also classify warehouses by the services they provide, storage, obviously, but very few warehouses are just warehouses these days, most of them provide some degree of processing and handling, all the way to the degree of being a 3PL. Now, that's a very big subject, the IMOA has had many great presentations at the annual meetings over the years from 3 and 4PLs, and basically, it's a company that integrates with other companies' supply chains, so whereas process and handlers may perform some sort of service, 3PLs may actually integrate with your IT, they may be handling a just-in-time delivery or actually packaging and shipping things themselves, and the thing to... So that's... It's a very large subject, but the general principle for this under warehouse legal liability is it's a sliding scale, you really gotta dig into what they're doing because everybody will call themselves a 3PL, it's the hot thing to be, or nobody's a warehouse, they're a logistics provider. But generally, once you dig into what they do, you have to know that the more they do, the more exposure they have because they are essentially giving up more liability or assuming more liability for the goods stored. So what is a bailment? That is one of the questions you're gonna have to think about. We'll go to the next slide. I think we have a poll on this. So this is from the Inland Marine tax book, a bailment exists when one person delivers... Put that right on top of the text. A bailment exists when one person delivers property to another to be held for some special purpose. The purpose may be safekeeping of the property or maybe performance of some work on the property such as cleaning, repairing, or restoring. That is from the Inland Marine textbook through the institute, so you'll see that at the end. And we have a poll going, have you ever accepted a bailment? And this is a group of underwriters, so I suspect people are pretty savvy about this, but we'll share it. Right now, with about half the votes in, it's split pretty much 50-50. And ultimately, it's a trick question because, as we go to the next slide, we'll get to that in a sec. Definition, just for the purpose of use, the bailer, the owner, the original owner of the goods, the purpose, who has legal ownership of them or the right to own them, the bailee is the person who received the goods in order to perform some service. So when we're talking about warehouse and insurance, we're talking about bailees, because they received the goods, they own them. And this was a trick question. There's two different kinds. There are multiple kinds of bailments, but there'd be bailment for the benefit of the group, bailer or bailee, bailment for the benefit of the bailer. Think when you agree to watch your neighbor's cat, or bail for the benefit of the bailee when you borrow a tool from somebody, borrow somebody's lawnmower. These are done gratuitously, as in they are not done for charge. They're out of the scope of the insurance. But anytime you've ever done that, agreed to watch your neighbor's house plan, take care of a cat, that's technically a bailment. So think about it next time somebody asks you to hold on to something, because you may owe them something, owe them a duty. But a commercial bailment is a bailment in exchange for money. And that's what we're talking about. So when you talk about bailees and bailors, the bailee owes something to the bailor, and they owe more, depending on a lot of things, frankly. So basically, the bailee accepts certain responsibilities for the safety of the property, and it may or may not be defined by the contract. A lot of this is law, or even common law, where warehouses are governed a little differently. But basically, you owe a duty of care, and we'll read another quote here. Ordinary care means such care as an ordinarily prudent person, as a class, would exercise in caring for their property under like circumstances. So you note that that's not really specific. So a lot of things affect what that duty is, how much money was charged, what are the type and nature of the goods. So think of, you know, obviously, if you're doing something for free, the standard is not very much. Those are those gratuitous bailments. If you're collecting a lot of money, there could be fair to expect a lot out of you. Type and nature of the goods, in a sense, are you storing them appropriately? You know, if you accept jewelry, are you putting it in a safe facility with guards, or are you putting it in an open lot, ditto if you're accepting frozen goods? Have you assumed liability by a contract or agreement? Did you say you would do something because you're on the hook then? And that can even be modified if you do something outside the scope. If you take something for storage and decide to help somebody out or break down a pallet to freeze some stuff up, well, you didn't agree to do that, so that puts more onus on you. If you say you're going to store it at Facility X and you store it at perfectly good Facility Y and then something happens, well, you might be exposed to more liability because you agreed it would be in X, not Y. And have they made any assertions or advertisements that imply greater duty of care? My favorite example for this is a building in Cambridge, Massachusetts. It was at one time a warehouse. I would bet money it is now condos. But right on the side of this large brick building are printed the words, fireproof. If you print fireproof on your building and there is a fire not due to negligence, where you might ordinarily assume you are not expected to indemnify the owner of the goods, well, you wrote fireproof on your building. You're on the hook. There are special cases for bailments that you deal with a lot. Common carriers are one. They're governed under the Carmack Amendment. Basically common carriers accept such a high duty of care by a statute that they essentially be an insurer for goods in their possession. So really a common carrier, if you've got goods on a truck, you don't get approved negligence. It's just damage is damage. And then unexplained damage or mysterious disappearance. Legally the standard is because the bailor has very little ability to determine what happened, the onus is on the bailee to prove that it was not caused by negligence. So it just changes the presumption of liability. And we'll see later that the forms actually deal with these conditions somewhat differently, whether through exclusions, grants, sublimates, they're not finalized on this generally. So say you don't want to be responsible for that, whether you're watching your neighbor's cat or storing their stuff, how can you constrain that liability? You can put it in a contract. You can say simply, we are not liable for X, Y, and Z. That has limits. You cannot exclude gross negligence. That is generally law in most states. You can't waive away all of your rights. That's just not a valid contract. You can post things, the opposite of the fireproof, just like you see in a parking garage where it says, we're not liable for theft or damage or stuff an unlocked vehicle, lock your car. These can constrain or limit liability, but they are not foolproof. If you commit negligence, gross negligence, if there is some condition of the facility that is just inappropriate for the storage of whatever is stored there, you can be back on the hook regardless of what you say. Something that's actually useful is limitation of value, just like you see in insurance contracts where you say, give them a small supplement and aggregate it and call it a day as opposed to excluding. If you put limits in the contract, those are generally much more enforceable than strict exclusions. However, the limits can get thrown out in the case of gross negligence. If you read the textbook, there's a million different kinds of day leads, really fewer than these days than there used to be because people don't repair things anymore, but the one we are going to talk about is warehouses and the insurance thereof. Why were we talking about availment? Kind of the definition, a warehouse operator stores property of others for compensation and as a bay lead, he can be held legally liable for loss to customer property caused by his own negligence. There is something called bailey's insurance, so what is different about that? Basically warehouse legal insurance only covers loss for which the warehouse operator is liable. Bailey's covers, when you're writing those aforementioned small businesses, generally have some element of goodwill built in where even if they are not found liable in a legal sense, there is some compensation for the owner of the goods because otherwise the bailey would be losing customers. There is a value to that. Warehouse because of the values of the goods they have, the interstate nature of the commerce, the professional nature of people who are generally storing things there, they are different. So warehouse operators is the correct term, and actually that is the more up-to-date standard of language, but it can be used interchangeably for insurance understanding. They are governed under the Uniform Commercial Code, that is the set of laws that govern interstate commerce. So under the UCC, when we use that quote, a warehouse operator is someone who is engaged in the business of storing goods for hire and their liability for the goods in their care, custody and control is essentially set according to the warehouse receipt or storage contract. So the warehouse receipt and storage contract, they are not interchangeable terms, but they will serve very similar functions. In kind of the classic era, the warehouse receipt was very standardized. You might have seen it if you were holding some classes, it was a four-page foldout that you then slip into the envelope. But basically the warehouse receipt or contract defined the terms and conditions of basically the agreement between the developer and the bailey. So the warehouse receipt, and we have a poll right here, oh, no, that's for later. But people can vote on it if they want, but that will actually come up later, I think we moved some things around. We have a whole CAT section, so we'll bring it back later. So the warehouse receipt, we'll go on to the next page, so basically section 7202 specifies nine pieces of information, we will go over all these. So basic stuff, the location of the warehouse, where the goods are stored, the date the receipt is issued to the bailer, the receipt number showing a consecutive numbering of all receipts issued by the warehouse operator, that's very old school, this is more of a computerized process right now, you're not seeing the paper common warehouse receipt, a statement indicating the individual organization to whom the goods will be delivered at the end of the storage period, that's very important because you can't just take anybody's stuff, the rate of storage and handling charges, a description of the goods and their packages, the warehouse operator's and authorizer's signature, a statement of ownership, the warehouse operator is the owner or partial owner of any goods being stored, this is because ultimately if... Well, you have two things, this could establish a lien on the goods, which we will also talk about next, or if the goods are at the warehouse operator's own, if the warehouse operator is storing their own goods in the warehouse, that is not covered under their legal liability policy, that's their property. And then a statement indicating any amount of advances made or liabilities incurred for which the warehouse operator claims a security interest, that essentially if you owe them something and they take a lien on the property, or if they agree to use the property as collateral for extending the credits to pay the lien, but that would also affect the ownership of the goods in the claim scenario. So there is no specified format, the law does not say whether it's computerized, what shape it is, and you're not seeing a common warehouse receipt very often. The receipt may contain terms limiting the liability or the contract, but just know that in that discussion about bailments and the duty of care, the same restrictions apply. And again, you can also broaden your liability in the warehouse receipt or contract if you make certain assertions. So the receipts and contracts are a very important part of underwriting warehouse legal liability. It is the most common thing to not get in a submission and have to ask for, but you absolutely need it every time, because that defines what the warehouse operator, and then therefore you, are going to be liable for. You can see a combination of the two. You may see a contract, you may see a contract with the customer and then receipts issued for individual transactions or goods going in and out of storage. You may only see a contract. Let's see if this is on here. Okay. But, so the important thing to know is that just like we talked about with unexplained loss or mysterious disappearance, where they put the onus on the bailee if those things occur, any information of those nine criteria, any of that information that is not in the warehouse receipt or the storage contract will, it essentially, it goes against the bailee. Because it reduces the information available to adjudicate the ownership of the goods in a claim scenario, that information is interpreted against the bailee. So, hopefully you want to see all of that there. There we go. All right, so cap coverage. Let's bring that whole back. Right here, for the benefit of folks in the room, it says, does warehouse legal liability insurance cover cap losses? Yes, no, or only if someone really screws up. That only if someone really screws up being a reference to the most negligent. And we'll share it because we seem pretty evenly split. And this is something that is changing about the perception of warehousing legal liability insurance. Because, historically, the answer has been no. If you write no there for most of the history of warehousing, you have been, or only if somebody really screws up, you've been absolutely correct. But as it's happening more and more, I have seen it more and more since Sandy, cap is a real consideration for warehouse legal liability. So, go to the next slide. We can move that poll on out of here. Just like we said. So, when we talk about cap coverage, we are mostly talking about flood, earth movement, and main wind storm. Hail, probably less of a concern when the stuff has a roof over it. But, historically, warehouse operators have not been found legally liable for it. Ergo, warehouse insurers have not picked up those claims. Occasionally, you would see defense costs. Because, even then, not very often. Because, you know, the rule about the four walls of the policy and the plausibility of a claim to kind of trigger defense costs. You might see something there. But, just go to the next one. However, they can be found liable. And this was always true. It just seems to happen more. If they've reached the ordinary care standard. Brian, can you close that? Yes. So, how could they reach that? If they were storing damageable goods on the ground during a flood. Happens in Sandy. Not securing the facility or moving goods when possible in a main wind storm. Because, you have advanced warning. Advanced warning implies a higher duty of care. Then, all the prior mentioned concerns. If they've advised anything. If they're doing more activity with the goods. Like, processing, packing, unpacking. That can take you into a peril you thought you were out of. But, the old wisdom still stands. Generally, the insurers are not liable. Is that good news? Well, not necessarily. Because, you're basically assuming something that you still need the courts to support. Obviously, legal environments change. Weird verdicts can happen. So, at the minimum, you're going to be roped in for defense costs. At the maximum, you may pay a claim that you didn't think you were going to have to pay. And also, going through that process can result in reputational harm. That relationship with the client. And ultimately, from a management perspective. If you are actuarially, or as a product, building a pricing scheme for this. Assuming a certain legal environment. Obviously, that's man-made. It can change. You need to build in some uncertainty for that pricing. Because, the environment can change. Laws can change. We mentioned our reputational harm. If we fight these claims, or deny them. The insured can suffer reputational harm because the insured has a customer whose goods are lost, that's probably not thrilled about it, and there is no money coming back to that customer because the insured is not found liable. So that is that element of goodwill that your standard bait leads, your dry cleaners and all that have insurance for. So they may want to be found liable. That makes it very clear because ultimately the insured is not carrying that liability themselves beyond their deductible. So more and more often, and really since Sandy, insureds are signing in their contracts with their bailors that they are explicitly liable for cap perils. This kind of solves the problem. There's no uncertainty, there's no question about duty to defend, and there's no question about the insurer's liability. So look at insurers. Insurers can do a lot of things, whether it's building specific parallel exclusions into their form or traditionally warehouse legal forms have been silent. If you do want to cover that, you can use and should use sublimates, policy period aggregates, and deductibles for these cap perils. And once that comes in, it brings in the use of modeling. So modeling, obviously, is an inexact client at best, and when you're talking about modeling warehouse legal, you're essentially stepping one degree further away from what the model has been designed to do. So it's an inexact client. And it may be inexact to the degree that you may really only want to use it for directional guidance. Obviously, if we're all underwriters in here, we're not modelers necessarily. So I would work with your teams at your companies, because that's kind of also going to be paired with your cap loads, your price loads, your capital costs. So don't go modeling everything willy-nilly. Work within your organization to figure out what is necessary and how you want to do it. But we'll talk a little later, when you talk about pricing, a key part of this is that you're going to have to create some sort of assumption scheme around how much value there is at any particular location. But I bring this up just in the bottom line. Were I managing an organization writing warehouse legal, I would not write warehouse legal without some sort of cap loading. Because historically, even if it hasn't been there, it certainly is now. And even if you read a contract for every insured, they may just sign another customer with something completely different. So there is cap in this space, not property, but it's there. The only thing you know is that the number isn't zero. So the warehouse legal liability policy, and we're going to go just through some chunks of it. For the purpose of this section, I'm using the AAIS warehouse legal liability coverage form. Warehouse legal can be written, admitted or non-admitted, it can be written using AAIS or ISO forms, or it can be written with company forms. Company forms are, as they rule, generally broader than the AAIS form, but I wouldn't necessarily assume that. But most policies will have these similar elements. So there's a coverage agreement. This is where the insurer assumes liability from the insurer. So basically, this one is rather strict. It says we cover your liability. Your legal liability for loss to cover property while in your CCC that you become legally obligated to pay as a warehouse operator under a warehouse receipt. So what that means is this is about as tight as you can get in that there's no bailment, there's no your stuff, and there has to be a receipt for every item for there to be coverage. Very standard, relatively tight. Because this is a third-party coverage, when you evaluate a warehouse legal form, you want to think about defense costs. Specifically, you want to know whether there is a duty to defend or merely an option to defend. This form merely has an option to defend, and then you want to talk about whether those losses are inside or outside of the limits. And so every form is going to be different on that aspect. So you have the insuring agreement. Now what is covered? Like we mentioned before, whether or not a warehouse receipt is required, whether written is specified, just like you see on motor truck cargo forms when the bill of lading or contract has to be written versus electronic, oral, implied, and bailie coverage, whether it's there. This, again, is a fairly tight form. You can find this on the AAIS website, and it's in its entirety, by the way. But basically, direct physical loss or damage by a covered peril, and the covered limitations specifically limit to the description of the property in the warehouse receipts. The other thing... Okay, we'll talk about perils. So a property not covered, fairly standard, but you see some ones we've highlighted, and I didn't highlight, but art, furs, jewelry, stones, and metal, live animals, money, and security. Can these things be insured? Yes. But they obviously provide more risk. They come at either a higher value or a higher susceptibility to certain perils. So you're going to want those exclusions built into the form to essentially force the insurer to disclose if they have any of those goods. So then you can underwrite against it, because otherwise, things going in and out of a warehouse change every day. So you want, at least for these baseline levels, the onus on the broker and the client to come up with that information to find coverage. Property you own, lease, or rent, you just see that there, because that is a first-party coverage, not in a space. Property in a storage space. So that is a very common exclusion for warehouse legal liability, because if you have a warehouse operator that is leasing space to others, you have very little information about what is in there, and you have very little control over it. So that's an explicit exclusion. This is why, for example, if you were renting a mini-storage or self-storage facility, you would need to address it quite differently, and from experience, those can be very difficult risks. And then property not under a warehouse receipt, you see we're at the point where this has been mentioned a third time, so it is very much in the intent of the form to narrow that coverage. So covered causes of loss. You saw that in the covered perils, or you saw that in the mention earlier, but essentially, warehouse legal liability is typically written on a special form, if we're talking ISO, or an all-risk basis, just generally meaning that anything not covered or not excluded is covered. We're not going to print the entire common exclusion section, but you'll see your war on nuclear, you'll see all that stuff, but contamination, deterioration, or latent defect, you don't want to be on the hook for that if you didn't cause the damage, processing or work upon the property, that's one that you're going to see a lot of requests if that exclusion is on the form to bring it back in. Just like with those tougher commodities, you want that exclusion there to help you determine the extent of work that the insured is doing. That's a key thing to evaluate as you pick up this liability. Inventory shortage. This is related to the mysterious disappearance. Essentially, if goods are discovered missing only at the time of inventory, that puts, A, it brings an employee theft, dishonesty, the human element procedures of the insured, but it also becomes a very difficult claim to defend because that removes the presumption. All those presumptions that would require an insured to be found negligent, to be on the hook for the damage, they go out the window when you just discover it because that's essentially mysterious disappearance. You can endorse this back on if you're providing that it is typically at a sublimit, but it may be brought back on in a very narrow way. It may only be at scheduled inventories, or you may exclude it upon delivery to the customer. Essentially, if you bring it back in, think about narrowing it. Changes are extreme in temperature and humidity. That's essentially the fourth sentence of this quote. Refrigerated storage. You may or may not want to be on refrigerated storage generally. That's a thing to think about with your company's appetite and its class. Refrigerated storage can cause very severe losses. You really need to evaluate their backup procedures, their maintenance. You'll want an adequately capitalized, insured, all the things that come in play with the maintenance and care of refrigeration equipment. Generally, if you have a loss in a refrigerated storage facility, that's something that could easily bring in a total loss to an entire segment of the building because if it fails, it fails. That is excluded by default on many forms, and you would need to endorse it back in just like reefer coverage on a trucker. Equipment breakdown right there, and then flood and earth movement, whether or not you want to address that explicitly. Some exclusion examples. We don't pay for loss. Basically, if you lose revenue because somebody can't move a customer, we do not pay for loss of use. Essentially, beyond the first party physical damage to the stuff itself, we're not going to pay your customer additional money or you because they then could not use it. Missing property, again, related to the mysterious disappearance, processing work impact, ditching, and spoilage except otherwise covered by a specified peril. There's some common coverage extensions. Preservation of properties. You may allot them, whether supplemented or not, essentially to incent them to do what is necessary to minimize or prevent a loss or prevent further damage after a loss. Pollutant cleanup and renewal, just a general stamp, typically a small aggregated supplement, and then earned charges because obviously if a customer has their stuff destroyed in a warehouse, they are not going to pay their bill. You can indemnify the insurer very commonly for burned warehouse charges. Again, usually a pretty small supplement there. Some other terms and conditions to think about in the warehouse policy. These will generally be, if you have the same form as ISO contained on the schedule, the limit structure. Some companies write per location limits without a per occurrence limit, maybe because I work at AIG, but I do disagree with that approach. I think you still should have a policy per occurrence. I tell a lot of treaties work, but obviously what we just discussed with the CAT, there is CAT in this space, so you need to cap your reliability per occurrence if you have a group of buildings. They are cost exposed. Valuation. Valuation of the goods can come in a lot of different ways. Typically it's a lesser of scenario, so you're going to be talking about the lesser of the actual contract of the contract value, the actual cash value, or the cost to repair the goods. That can be kind of removed if they have strictly established contractual liability, you can go to the simple contractual liability. And then reporting conditions, there's a couple different ways to write warehouse legal. To price scheme, you might see it might be priced against the amount of stuff, which that is typically not a reporting basis, that is typically a charge, or you would apply your rate against the limits put out by the policy. So if you have three buildings at $5 million apiece, your rate base is $15 million, you apply a rate against that. That is generally not on a reporting basis. However, if you're writing against warehouse revenues, that generally is done on a reporting basis. Those are both valid options. I think that they have their advantages and disadvantages. I think rating against limit is a very good way to estimate the actual quantity of exposure you have. You still have to do that either way, but rating against warehouse receipts can allow your premium to fluctuate with the actual exposure you incur, so there's value to that. The warehouse receipts can often stand in as a pretty good proxy for the amount of stuff they have. A lot of contracts you'll see in warehouse receipts may limit the damage to some multiple of the monthly or daily storage rate, 30 to 50. So if you have a monthly storage rate of $1, the contract would limit the value of the stuff in there to $50 if it was 50 times MSR. So that's a pretty common term to see in there, and that's something that you'll do to really back into the amount of exposure that you're rating against. Underwriting warehouse receipt liabilities, so we have another poll. I don't think it's ... Oh, there we go. So obviously, as we saw in that first poll, most of the folks here are underwriters. I apologize, I did not bring in the other on this. Okay, so we'll share these results. So pretty much almost everybody's an underwriter or an agent in here in these results, and most folks work with both retailers and wholesalers, just something I'm curious about as we go into the underwriting section. So we can move that to the side. So the broker, good inland marine brokers are essential, so that's a shout out to the 5% of the folks in the room that are brokers, thank you very much. But what I really mean in that sense is I have just found that you will have very little success in this class. In inland marine in general, if you are working with generalists, property casualty brokers, folks who don't understand the elements of the class, if you're not working with an inland marine broker, you will almost certainly not get a good submission off the bat. It may be a good risk, but you're going to have to ask for a lot, and you may have to train them. So just a shout out to brokers, you know who's good, and they're the ones you'll have success with. What do you want in a good warehouse legal liability submission? The application. You need to know who they are, what their experience, what they do, that's very important because that amplifies their liability. So the types of storage, dry, cold, climate control, bonded, and the processing activity. How long they've been doing it, which is like their experience, but revenues, so essentially their gross receipts, which again can be used as a proxy for actual exposure. Schedule locations with COPE. It's amazing, you will have to remind brokers that you need an SOV with COPE to underwrite warehouse legal, even though you're not covering the buildings, because the stuff is in the buildings. And especially if you're going to model the thing, which you're going to be making up your own values based on your assumption of values there, but you need that information to evaluate the conditions under which the goods are stored. Loss control. Loss control is very valuable in this space. This is probably the Inland Marine class where we would use it the most frequently. So getting in that facility, verifying the COPE, verifying the conditions under which things are stored, I would consider this pretty essential if you're doing cold storage to evaluate the conditions of the equipment. And also a good loss control survey will also interview the management and the employees as to the attitudes towards risk prevention, the maintenance schedule, things like that. So definitely if that's something that you can do in your organization, I highly recommend it for this class, especially because of some of the limits that you'll commonly see put up. The commodities stored. So it's a little beyond you could have a whole class on this, but look up the NFPA commodity classes, you know, one through nine, talk to your engineering or loss control staff for two reasons. One, you want to see how dangerous, not dangerous, but how dangerous the class of the goods being stored is, but also you want to verify that the conditions are such that they are appropriate for the goods being stored. You know, the classic example, you know, if they have flammables or they have aerosols or they have cages. If you have flammable goods being stored in high rack situations, are there in rack sprinklers? So the commodity and the cope kind of go hand in hand because goods don't need to just be stored in the most safe way, they need to be stored in the most appropriate way. Loss history. Obviously this tells you a lot about any insured, but specifically you're really going to want to dig in. Obviously if somebody wants to add a new coverage, you want to verify whether they've had that coverage in the past and verify whether those loss histories are apples to apples with what you'll be providing to evaluate the prior deductible, all of that. The contract to receive. This is the number one thing you won't get in a warehouse submission. Obviously the problem is you get that, you're very rarely going to get more than one or two, which is great if it's a warehouse that has a single customer, but what you really need to figure out is you need to get that contract or the receipt that they issue for storage. You also need to verify, do you use that with everybody? Do you have any special arrangements, side deals? Because they're all going to be different, right? At the very least the price or the goods identified in them will be different, but what you really want to do is you want to make sure that you are evaluating what they are actually doing. You want to price and underwrite the risk based on what they're doing, not one example for one customer that may not be representative of them as a whole. So when you're evaluating the contract, again, you could have a lawyer do a day on this. The key things you want to look at are the transfer of liability. So essentially they're at some point where responsibility for this stuff passes from the bailor to the bailee and the warehousing, and what are the conditions of that transfer of liability? It's very useful because oftentimes they can identify specific perils. A lot of times they can say, it'll literally say the word negligence in there, which means that you read the whole thing, but what that does is identify the contract where that transfer is being kept relatively tight, or the transfer, as we discussed, could be explicitly broad and say we will be responsible for returning the goods and the condition, blah, blah, blah. So just know that what the insured is giving away to their customers is what you're giving to the insured. Valuation is in there. So that's where you're going to establish the valuation of the goods. If it's not, if that is a missing thing, like we said, that goes against the warehousement. So essentially if there's no explicit provision, dollars a pound, dollars a pallet, dollars per storage unit, some multiple of monthly or daily storage rate, if that's not in there, you're probably going to be there in ACV, replacement costs, whatever. Additional useful information, that really is what you're going to want. When you look at ones that are closer, they say they're a logistics provider. You're talking about risks that are probably going to have to enumerate what services they provide and even the charges for them. That's very useful, so go through that. Ask about that either way. Make sure that they have to come to you to remove any exclusions if your form excludes them. But that stuff is valuable and it's in the contract. And then the discussion of, is that in the contract? So estimating exposure, this can be very challenging. So essentially, when you're pricing warehouse legal liability, you may get, we're a dry goods storage warehouse, we have revenues of about a million dollars a year, okay, so you have to go in there. What's the stuff? What is the valuation? If that valuation is, you know, if your revenue is a million dollars a year and you have valuation of some multiple of monthly storage rate, we'll divide that revenue by 12 and multiply by that MSR. If they say that's what it's valued at, you can use that. If they have at a dollar a pound, you can multiply that by the poundage if they simply are requesting limits, you're generally going to assume that those limits are fully exposed. But that requires you to dig into the diversity of goods that they store, the diversity of contracts that they issue, to really lock down what is there. You price against limit. Either way, whether you're using the limit or the valuation of goods, you're backing into a rate base, essentially your TID for the risk. At that point, you can apply whatever rating scheme that you've determined through your company. And a line setting, this could be a challenge because you need to look at per location and per occurrence. Typically, warehouse legal liability forms have a scheduled location basis, so you are explicitly enumerating every location and the limit for that location on the deck of the policy. You should represent the per occurrence limit as well. If you are using reporting, if you're using a reporting form, well, two things. One, whether you're reporting values or revenues, you need to know that the values and the storage are going to fluctuate over the course of the year. So when you set a per occurrence limit, generally you're going to want to make sure in the broker and the risk management function, it's going to want to make sure that they're setting an adequate limit for the maximum amount of goods at their peak season. You have to evaluate your appetite versus what we call a PML or an MFL scenario. How much risk are you as an underwriter willing to take? That's going to be based on a lot of things. It's going to be based on your treaty coverage, whether you buy reinsurance, your general limit appetite, but it also will be based on the insurer itself. We say PML, MSL. You're not necessarily always going to be having a loss prevention engineer go in and determine those in a scientific way, but you really need to evaluate both what the commodities are, flammable goods have a much higher loss scenario, even if their frequency isn't higher, their severity potential is there. But also conditions of the building itself, so think about fire division and sprinklers, whether those sprinklers will take you out of an MFL into a PML scenario, public protection class. So essentially, how much is in refrigerated storage? If the refrigerated storage goes out, how many days do you have to restore it before the goods are lost? That can be very quick, or it can be somewhat flexible, so you've just got to think about what you're willing to risk. I see somebody has raised their hand. Do we want to take a question now? We'll wait for the end for the questions, if that makes sense, or if you want to pull out a Q&A pod, we can certainly do that too. I think we're pretty close to the end, so maybe we'll just save it, but if they want to send that in, we can do that. And then reinsurance, this is a class where you're generally going to want some reinsurance protection, whether that's your company's treaty structure or using FAC. I would generally support the use of FAC in this space because of the diversity of possible contents. If you have an insured operating multiple locations, and there is one location with either limit or commodities that you are uncomfortable with, a targeted approach to keep your PML or MFL in an acceptable range would be very appropriate. Sorry, I said appropriate a lot. But really, this line setting is going to be determined also by the size of your portfolio. I would not necessarily recommend putting out high limits if we're in the position to have one loss swing a large percentage of the profitability of your book. So you've got to think about how many of these you're going to write. And you also want to think about, before you step into some of the tougher classes, if that's something you want to do from the jump, or is that something you want to do when you've built up a good cushion of premium and exposure, and that's really going to be determined by your organization's risk tolerance and tolerance for variability. Next slide. So deductible. Deductibles in the class, depending on what you're looking at, can be relatively low. If you are looking at a true dry goods operation with relatively low hazard commodities, smaller buildings, it's very common to see very light deductibles on admitted forms. However, you're going to have to evaluate both. Well, first off, you're going to have to evaluate the loss history. And that part of the loss history evaluation is going to be getting those prior year deductibles. You're going to want to back into the gross loss. So if you're presenting a different deductible than they've had historically, you're actually seeing a true apples-to-apples representation of the risk cost. But you're going to want to see frequency. Frequency in this class, unless you're dealing with a very large insurer, is not a good sign, especially if they're on a halfway decent contract. Because when you're in a class where losses are generally limited to the results of negligence, the existence of a frequent loss history implies some sort of deficiency in their procedures, training, human element protection. So I would view that that frequency would be a strike against an insurer in this case because it implies something about what they're doing. Losses are more controllable here than, for example, over-the-road BPD losses. And you're going to want to look at frequency versus severity. Warehouses, just by the nature of storing large quantities of goods together, are inherently exposed to severity. So now severity, obviously, is something that you can control through a deductible. Do you really want to? Not necessarily. Is going from five grand to 25 grand going to make a difference when there's a million dollar loss? Not really. So severity is something you're going to control through risk engineering, risk selection, risk pricing over your entire portfolio. But just note that if there are certain perils that the insurer has had a problem with in the past, or certain commodities that you are uncomfortable with, you can use a targeted higher deductible approach to control that severity. And then CAT deductibles. As we've discussed, this class includes CAT. So if you are... I prefer not to be silent on it. I prefer to use the endorsements that explicitly grant CAT limits and deductibles. If we believe that exposure is there, I'd have to read a pretty good contract and be fairly confident that it was their main contract to go silent about CAT. So if you are explicitly making that grant, you're going to explicitly want to apply appropriate CAT deductibles. And then pricing. Pricing goes hand-in-hand with what we discussed a few slides ago about evaluating the quantity of exposure. Obviously, if you are an admitted carrier and you're using your filed rates, or you're working in a state where the rates are filed, because that is not the case in all states for this class, use your filing. Otherwise, I'd like to think about a few things. And one way we kind of do it is what I call the property-style approach, which is you use those valuations, whether revenue, whether the amount of stuff, use those valuations to establish a TIV and then apply a rate to that TIV based on your evaluation of the commodity blend. So essentially, you know, if you have X and it's Y, you charge the appropriate rate for it against that. And then generally, you will apply a discount to that, and that discount because you are not offering first-party coverage. This is just my philosophy, but essentially, figure out how much you would need to cover that stuff at that valuation on a first-party basis as content, and then apply a sliding scale to that based on your evaluation of the insured contract. If it is a strict negligence-only, CAT is either excluded or you are confident enough in the wording and language, you would apply, actually, a very heavy discount. But you could read a contract and just say, especially if you have like a 3PL scenario where that, I mean, the actual operation is integrating with their customers, they could essentially be stepping in as an insurer or like a first-party owner of the goods. In that case, you can do it. That's not an uncoverable risk, but you're essentially going to be covering it as first-party content that should be pricing it as such. And then non-standard terms and conditions, basically. If you are bringing anything in, you're going to want to charge for that, and that's really what I reminded myself to mention that, you know, that's largely going to be in the refrigerated space. So rates in the refrigerated space are generally higher. Rates in the controlled atmosphere space are generally higher than that. Obviously, this can be affected by things like the size of the insured, the loss history, your evaluation of them. A large, well-capitalized insured may have a very low rate, even if they're doing a reefer storage compared to a smaller, small business dry goods warehouse. But just think, if you're bringing any broader terms and conditions, the table will be priced for them. And I believe that is it, and we can go on to questions. I highly recommend the Warehouse Legal Liability section in the inquiry textbook published by the Institute. Thank you, Jack, for an excellent, informative presentation. At this time, Jack, our presenter, will take questions. As a reminder, to ask a question, simply type it into the Q&A pod and then click the balloon icon next to it, and we'll receive it. And we already have some questions. All right, so we'll read this one. John, if the policy is written on the legal liability and the warehouse receipt is broader than legal liability, can the policy still be made to respond due to the legally obligated wording of the policy? So that's tricky because... So the warehouse receipt is between the warehouse and the owner of the goods, the bailey and the baylor. So if the warehouse receipt is broader, that is changing what legal liability is. So unless you explicitly... You'd have to write some sort of manuscript that would say they can't do that, but by having a broader contract, they're actually making that their liability, and then you're on the hook. What percentage of warehouse operators actually comply with provisions of the UCC? What percentage of trucking operators are keeping straight logs? Obviously, that's going to be part of your evaluation of the risk. But in terms of having compliance, I think that generally everything tends to be there because those conditions, those nine conditions, the warehouse receipts are generally what they need to do business, but oral contracts, not having a receipt issued for every single thing. Obviously, the further you go down the food chain to the smaller operations that are less professionalized and capitalized, there's some variability there, and that certainly could... If you're writing them, that's why you would see... That's why you generally see higher rates the smaller the insurer is, both the law of large numbers for underwriting and the fact that the larger, professionalized, some case public company operations have much stricter compliance and better IT. You mentioned using limit as a rating base. I know you've used the BPT rate and credit, as you said. Generally, that's one approach because you can treat essentially the five million as a fully exposed five million and then credit it down. However, you're going to want... Whenever you're using limit as a rate base, which is common in this space, and you'll see that expressed explicitly on the policy, you still need to do that full evaluation of this stuff in the valuation because they may... That's a line setting. They may be making some assumptions there, so I would charge against it, but I would credit... The degree to which I would credit it would be based on how much I feel it's exposed and Thank you so much for answering that question. Can you read the question before answering it, just because our attendees remotely don't see the question? Or I can do it if you'd like. Gotcha. The court has said, have you seen any increase in warehouse amount of seating coverage for warehouse legal liability law for a good amount of value-added services, hitting labeling and sampling sessions? Do you look at those differently from an underwriting perspective? Absolutely. I would say... So more and more... Like you said, very few people, and this is exaggerating, but nobody's a warehouse man anymore. Everybody's a logistics provider. Everybody is doing something. So it's very important to determine the degree to which they are doing something because the further and further away from that you get, the further and further you get away from third-party or negligence liability to almost strict liability. So you really need to evaluate the degree to which they're interacting with the insured's goods because that is changing their liability, and then that changes the degree to which you might credit it from first-party rates. And then the other thing is they change the degree to which they're exposed. Think about repacking. Even something like shrink-wrapping or repacking, cutting, that's a hot process, and you could go even further than that. So not only are they more responsible, they might actually be doing stuff that increases the chance of loss. Brian asked, is there any data available regarding the historical profitability of this product? I am not in possession of that data, but I know it does exist. I believe it is compiled by ISO, and I have seen it presented not for warehousing specifically, but warehousing with a line contained within it. So I've seen something like that at IMUAs in the past, so I know it's out there. I just don't have it. Large warehouse customers often have the facility inspected by their own risk manager. Should a fire occur at a location with inadequate sprinkler protection, would the customer acknowledge of that location? Yeah. So yes. This goes back to the old thing, like even way back in the day, you had some insured that didn't want inspections or didn't want you to inspect because they didn't want it to be discoverable. But yeah, I would say that if an insured detects a deficiency in their protection for the nature of the goods that they're storing, does not address that deficiency, suffered a loss, and that information becomes public, I would certainly say that that increases their likelihood of liability. Perhaps not in a dollar amount value, but it would certainly decrease the success of a negligence defense. Robert says, if you have an insured-using contract, is it necessary to amend the definition of warehouse receipt to include written contract? I would say yes, because, for example, that AAIS form that we had is fairly tight. I can speak to our own company form, it's not that tight on the definition of a warehouse receipt. But yeah, the first section, which I did not include in the presentation, is a definition section. So if what the insured is using falls outside the definition of a warehouse receipt, and the policy mentions warehouse receipts half a dozen times, you either need to broaden that or you are not providing adequate coverage. Hopefully that's something the broker acting as a risk manager would discover in reviewing the form. But ultimately, as an underwriter, you should also discover that, because you shouldn't be selling something that's not what it seems like. What goods are considered high-risk other than refrigerated goods? That's a good question. That's why I would think, and maybe we can set this out as an addendum to this, but the NFPA commodity classes are very good against that. A lot of times, it's exactly what you would think. So just think by peril. So for theft, jewelry, furs, cell phones, the largest warehouse legal liability loss I know of occurred in a warehouse in Miami, where the professionals operated, the thieves, not the operators. And it was, I think, something like $12 million of iPhones, the thieves broke into the facility in off hours. They certainly had an inside man, because they disabled the alarm system, went in through the roof, propelled down, let themselves out, and they actually loaded the insured's own trailers and then drove them away with their tractors. So high-value or high-target commodities are difficult. Plastics, tires, aerosols, those are difficult commodities. Also personal care products and pharmaceuticals. Pharmaceuticals, even if not refrigerated, and personal care products in general, you may come into an FDA situation where smoke damage, somebody's gonna walk in and declare the entire thing gone, which is a fun one, because even then, if you're assuming fire divisions, well, they're not smoke divisions. So use your common sense, but the NFPA commodity classes are a good guide. How would you suggest best to cover a warehouse owner who is renting out space to a shipper each month for a flat fee, yet doing all the material handling and storage for that shipper's goods within the warehouse? Well, what I would say is that perhaps, you mentioned flat fee, so that fee may not be really the best way to determine the amount of stuff there, so you're really gonna wanna dig in based on limit, based on how the contract values the goods. You're gonna wanna back in to some sort of price for the amount of stuff there, and then certainly if they're doing all the material handling, shipping, if they're doing pick and pack, break down, all that, you're gonna chart them in their first priority rate if they're doing all of that additional services for the owner of the goods. If rating is limit, how do you verify that the limit request is sufficient for the exposure throughout the year? Typically, if you are doing this on a reporting basis, you're gonna have something reported to you that's gonna be whatever you specify in your policy, so you may find some proxy for the actual amount of goods, or whether you're using the revenues for that period back in with MSR, or the limits themselves, ultimately, the adequacy of the limits provided, there's two people responsible for that, you as the underwriter for how much limit you wanna put out, but also the broker should be working with the client. If they have five million all year, but seven and a half during their busy season, the broker should be working with the client by seven and a half. If the insured is doing processing, and processing is called out in the contract slash receipt, if the legal liability policy excludes processing, will the policy still be obligated to respond? No, because that is something explicitly excluded in the policy. If an insured is doing processing, because the coverage grant is for the insured's legal liability, and then the exclusions are applied against that, it's an all risk policy, everything is covered unless it's excluded, so if there's a processing exclusion explicitly mentioned, then that processing is not covered, and that also, that insured should not buy that policy. Definitely, that's something a broker should look at. They gotta look at the form, and if they're doing processing, they shouldn't buy a form of the processing exclusion. If they're doing refrigerated storage, they should make sure to ask the atmosphere and temperature exclusion to be deleted. Thank you for a very informative Q&A session, Jack. Thank you also to our attendees for your participation and for your interesting questions. All attendees will receive an email with a link to an electronic survey. Please take a moment to respond to the survey and to provide your feedback to IMUA. This ends today's webinar. Have a great rest of the day.

Jack Gould

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underwriting

warehouse legal liability

warehouse receipts

contracts

risk assessment

commodities

bailments

insurance