What Is Bailee Insurance and Who Needs It?

Bailee insurance addresses a specific risk for businesses that temporarily hold property belonging to others. This specialized coverage helps safeguard companies from liabilities when customer property is damaged, lost, or destroyed while in their care. This article explains bailee insurance, outlining its purpose, typical coverage, common exclusions, and how claims are processed.

Understanding Bailee Insurance

Bailee insurance protects businesses against financial losses when customer property in their possession is damaged, destroyed, or lost. This coverage is sometimes called bailee’s customer insurance. It addresses situations where a business temporarily possesses goods owned by someone else, a legal arrangement known as a bailment. In this relationship, the original owner is the “bailor,” and the business holding the property is the “bailee.”

The bailee assumes a legal obligation to exercise reasonable care over entrusted property. This duty means the bailee must safeguard the bailor’s property and return it in the same condition, accounting for normal wear and tear. Unlike general business property insurance, which covers a business’s own assets, bailee insurance specifically covers the bailee’s liability for customer property. This distinction is important because standard commercial property and general liability policies often exclude coverage for property in the business’s “care, custody, or control.”

The contractual agreement between the bailor and bailee outlines the terms and purpose of the temporary transfer of custody. This agreement can be as simple as a receipt or a ticket. If customer property is harmed while under the bailee’s care, the bailee could face legal responsibility for repair or replacement costs. Bailee insurance provides a financial safety net, ensuring the business is not solely responsible for these costs.

Businesses That Need Bailee Insurance

Many businesses regularly take temporary possession of customer property, making bailee insurance a relevant consideration for risk management. Businesses that often need bailee insurance include:
Dry cleaners, which handle garments for cleaning and restoration. If clothes are damaged or stolen, bailee insurance covers the loss.
Auto repair shops, which take temporary control of customer vehicles for maintenance. Damage to a vehicle during service could be covered.
Storage facilities and warehouses, which store a wide range of customer belongings. If a unit is burglarized or experiences a flood, bailee insurance can help cover damaged contents.
Jewelers, especially those performing repairs or appraisals, who hold valuable customer items. If a customer’s watch is damaged during repair, bailee coverage can help.
Common carriers, such as trucking companies and movers, which transport goods owned by others. This covers potential losses if goods are damaged or stolen in transit.
Other businesses, including computer repair shops, pet care businesses, and antique restorers, also routinely handle customer property and face similar liabilities.

What Bailee Insurance Covers

Bailee insurance policies cover various types of customer property while in the bailee’s temporary possession. This includes goods entrusted for repair, storage, cleaning, or transportation, whether on the bailee’s premises or in transit.

Policies generally protect against common perils that could damage or destroy property. These often include fire, lightning, theft, burglary, explosion, collision, flood, water damage, and vandalism. For instance, if a dry cleaner’s facility experiences a fire and customer garments are destroyed, bailee insurance would cover that loss.

The coverage is for the bailee’s legal liability, helping the business compensate the customer for the value of their damaged or lost property. Some policies may also cover damage that occurs during the repair process or provide coverage for items that mysteriously disappear. This ensures that if an item is damaged while being worked on, or if its whereabouts become unknown, the bailee has financial protection.

What Bailee Insurance Does Not Cover

While bailee insurance provides significant protection, policies contain specific exclusions. Losses from war, nuclear hazards, or governmental action are generally not covered. Policies also exclude damage caused by wear and tear, inherent vice, or deterioration of the property itself. For example, if an item naturally degrades over time, the insurance would not cover that loss.

Losses due to employee dishonesty are often excluded unless specifically added through an endorsement. Similarly, damage or loss stemming from the customer’s own negligence is usually not covered. Bailee insurance does not cover the bailee’s own property; it is exclusively for property belonging to others. If the bailee takes ownership of an item, it ceases to be covered under a bailee policy, as it is no longer property “of others” in their care.

How Bailee Insurance Claims Work

When a loss occurs, the business should notify its insurance provider as soon as possible. Prompt reporting is important, as policies often have specific time limits. The business must provide detailed information about the loss, including the date, time, property type, and circumstances.

Documentation is a key part of the claims process. This may include photographs of damaged property, receipts, invoices, or other proof of ownership or value for the affected items. The insurer will investigate the claim to determine the cause and extent of the damage.

The value of the lost or damaged property is determined based on the policy’s terms, which might specify actual cash value, replacement cost, or agreed value. Actual cash value accounts for depreciation, while replacement cost covers replacing the item with a new one of similar kind and quality. Agreed value is a pre-determined amount set when the policy is issued. The payout from the insurer is made to the bailee, who then uses these funds to compensate the bailor for their loss.