Bailee coverage: insuring customers' property in your care

Bailee coverage, usually sold as a bailee's customers policy under inland marine, insures other people's property while it is in your hands for cleaning, repair, alteration, processing or similar service. If a customer's garment, laptop, watch or piece of equipment is stolen or burned while you hold it, this is the policy that pays, not your general liability or your property insurance. It comes in two basic flavors, legal liability and direct coverage, and a processing exclusion in most forms means it does not pay for mistakes made in the work itself.

A bailee is anyone who takes temporary possession of another person's property for a purpose, with the duty to return it. Dry cleaners, tailors, repair shops, jewelers, framers, upholsterers and computer repair shops are all bailees. Warehouses are too, and their exposure is covered in warehouse legal liability insurance: covering customers' stored goods.

Why the policies you already carry do not fit

The commercial general liability form excludes property in the insured's care, custody or control, so a customer's damaged item generally falls outside it; see Care, custody and control: why the CGL won't pay for property you hold and CGL exclusions: what a general liability policy does not cover. A property policy may pick up others' goods within the business personal property limit, but it follows its own causes of loss and conditions, offers limited off-premises protection, and is not built for pickup and delivery. FC&S noted in a 2012 article that a business owner's policy and the commercial property form cover customers' property in some respects, but neither gives the transit and off-premises protection that a floater offers. That gap is what bailee coverage is built to close.

Legal liability or direct: the choice that matters

A bailee is generally required to use reasonable care, as the FC&S piece notes, but customers expect their goods back in good condition and bailees often insure them against all loss rather than litigate fault. Great American, for instance, markets Bailee Legal Liability Coverage for business-to-business operations and Bailee's Customers Coverage for retail operations. Other carriers split the line in other ways, and there is no uniform terminology.

Neither form pays for consequential loss. A customer who misses an event because the garment was not ready has no claim under the policy for the missed event; only physical damage to the item counts.

What the ISO direct form says

The ISO Bailees Customers Coverage Form, IH 00 85 12 20 in its December 2020 edition, is a useful benchmark. According to FC&S's February 2023 analysis, the form works like this. Carrier forms differ.

• Covered property. Personal property of others in your care, custody or control.
• Not covered. Money and securities, animals, road vehicles that carry persons or property, aircraft and watercraft, furs and jewelry or precious metals, property held by other bailees (unless at scheduled premises or with a carrier for hire), property accepted for storage, subject to a storage limit exception, mailed property, contraband, and, new in 2020, data and media.
• Causes of loss. Open perils. Direct physical loss or damage from any cause not excluded, but no consequential loss or loss of use.
• Exclusions. Include processing or work on the property (with an exception for resulting fire or explosion), unexplained disappearance, inventory shortage, dishonest acts by the insured and its employees, pollutants, theft from unattended vehicles unless security conditions are met, nuclear hazard and war.
• Valuation. The least of actual cash value, the cost to restore the property, or the cost to replace it with substantially identical property, capped at the amount shown for each item on customer receipts. FC&S says earlier editions tied recovery to the insured's liability, and the 2020 edition removed that.
• Deductible and extensions. A standard $500 deductible, plus small additional coverages such as pollutant cleanup ($25,000 per 12 months) and newly acquired premises ($250,000 per location for 60 days).

Treat these numbers as the ISO benchmark, not a promise about your quote. Many programs use proprietary forms, and the limit and deductible vary by class.

The five gaps that cause the denials

1. Processing or work on the property. Damage from the very service you perform, such as shrinkage in cleaning, a failed repair or a scratched finish, is typically excluded except for resulting fire or explosion. That is a workmanship exposure, and it is often insured separately by an endorsement, a specialized cleaners or processors form, or professional liability. Ask for a written statement of where workmanship errors are covered.
2. Unattended vehicles. Pickup and delivery vans are common loss locations. The exclusion usually applies unless the vehicle was locked and there is visible evidence of forced entry. Drivers need rules, not hope.
3. Mysterious disappearance and shortages. If you cannot account for an item and there is no evidence of theft, the form typically does not pay. Ticket systems and tagging matter.
4. Excluded property classes. Furs and jewelry, animals, vehicles and data are outside the basic form. A jeweler needs a jewelers block; see Jewelry store insurance. A groomer or boarding kennel needs animal bailee coverage; see Pet business insurance. A repair garage needs garagekeepers coverage for customers' cars; see garage liability and garagekeepers coverage. A computer shop may need a data coverage.
5. Other bailees. If you send work to a central plant or subcontractor, the customer's goods are in someone else's custody. The ISO form addresses it only for scheduled premises or carriers for hire. Confirm that your outsourcing is covered, and that the plant carries its own bailee coverage.

Employee theft usually belongs under commercial crime insurance: what it covers and what it excludes with a clause covering customers' property, not under the bailee policy.

Setting limits and valuing claims

Estimate the most customer property you may hold on your busiest day, at every location and in every vehicle, and set the limit above that. Customers' belongings accumulate before holidays, tax season and wedding season. Valuation matters as much as the limit. Because the ISO form caps value at what the customer receipt shows, a ticket that records a declared value, a garment tag or a service description makes a claim easier and a tag-less item harder.

Cleaners often settle garment claims using a depreciation schedule called the Fair Claims Guide, which values items by remaining life expectancy. A 2007 American Dry Cleaner column said most insurers generally pay under it, and that it can leave customers dissatisfied. The column suggested that some shops pay replacement cost for valued customers. Read the policy's valuation clause before you promise a customer more than the policy pays.

A ticket disclaimer such as "not responsible for goods left over 30 days" or a posted liability cap does not reliably defeat a negligence claim, and rules for unclaimed property vary by state. Ask a lawyer who knows your state before relying on one. The workers' comp and benefits requirements by state is a starting point for state-specific rules.

A hypothetical

Say a dry cleaning and alterations shop uses a delivery van. The driver parks, locks the doors and goes inside a building to make a delivery, leaving 40 customer garments in the van. Someone smashes a window and takes them.

• Under a direct form with the standard unattended-vehicle conditions, a locked vehicle with a smashed window typically meets the visible-forced-entry test, so the loss may be covered at the lesser of actual cash value, restoration or replacement cost, capped at the receipt amount for each item.
• If the driver had left the van unsecured, the exclusion probably applies and the shop is on its own.
• If instead a customer's silk blouse shrank in cleaning, that is a processing loss, not a theft, and a different coverage must respond.

The facts are invented to illustrate the mechanics.

A buying checklist

1. List what you hold, including animals, vehicles, jewelry and data, which the basic form excludes.
2. Ask whether the policy is legal liability or direct, and which you want.
3. Request the processing or work-on-property exclusion in writing, and ask about a buyback.
4. Set limits per location, in transit and at other bailees.
5. Check valuation, the receipt cap and the deductible.
6. Review the unattended-vehicle and disappearance conditions with your drivers.
7. Compare quotes against the What business insurance do I need? and see inland marine insurance for tools, equipment and goods in transit for related floaters.

Key takeaways

• Bailee coverage insures customers' property in your care for service or repair, filling the care, custody or control gap in the CGL and the thin off-premises protection of a property policy.
• Decide between legal liability, which depends on your fault, and direct coverage, which pays for covered physical loss either way.
• The ISO form (IH 00 85 12 20) excludes processing damage, unexplained disappearance, theft from unattended vehicles without forced entry, and several property classes, so read the exclusions first.
• Use receipts that record values, set limits at your peak holdings, and pay attention to where workmanship errors, animals, jewelry and outsourced work are covered.