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Bailee’s Liability Insurance Policy

Jagan - September 29, 2017 - 0 comments

Introduction: We recently had an opportunity to discuss on Bailee liability policy with Mr Dennis Lim & Mr Donald Ng of Amspex Insurance Brokers1. Although, we have not been involved in claims under a “pure” Bailee liability policy, given that Transport liability policies also cover bailment on terms, it is our view that the Bailee cover should be subsumed in the Transport liability policy. However, since there are two policies available in Singapore/South East Asia for transport operators (Transport liability and Bailee liability), we are writing this article to consider the differences between them.

  1. Bailment describes a legal relationship in common law where physical possession of personal property or a chattel, is transferred from one person (the “Bailor”) to another person (the “Bailee”) who subsequently has possession but not title of the property. It arises when a person gives property to someone else for safekeeping, storage or transportation. Bailment allows for a cause of action which is independent of contract or tort. The main advantage of pursuing a party under Bailment (instead of contract or tort) is that if the cargo is damaged whilst under the care and custody of the Bailee, then he/she is presumed to be responsible for the loss unless he/she can prove that the loss or damaged was not caused by his/her negligence. 
  2. A transport operator (NVOCC, Freight Forwarder, Terminal Operator, Haulier, etc) may carry out the transportation by themselves or sub-contract either part or all the carriage to another sub-contractor (The Transport Operator would act either as a Bailee or a Quasi-bailee2 while the sub-contractor would be acting as a Sub-Bailee). Contractual principles are paramount in relation to both storage and carriage of goods. These relationships are essentially contractual in nature and therefore contractual legal principles would operate to regulate the rights and obligations of the parties. This being the case, you would invariably find a Bailee/Quasi-bailee (Transport Operator) contracting on terms entitling them to sub-contract the carriage and to exclude and / or limit liability for loss and / or damage to cargo. The Privy Council in The Pioneer Container3 considered the scope of sub-bailment on terms and held that provided the contract between the Bailor and Bailee permits the Bailee to sub-contract wholly or partly with a Sub-bailee without any limitation, the Sub-bailee would be entitled to defend any claims raised against them by the Bailor based on their (Sub-bailee’s) contract with the Bailee. The difference between Sub-bailment and Quasi-bailment appears to be that in a Sub-bailment, the original Bailee vacates possession in favour of a successor Bailee whereas in Quasi-bailment, the person entitled to take possession never actually takes possession and instead sub-contracts it to a third person (actual Bailee). It is therefore submitted that a Quasi-bailee is a better risk than a pure Bailee in that there is always an opportunity for recovery / indemnity by the Quasi-bailee against the actual Bailee (unless this right is excluded in the contract between the Quasi-bailee and the actual / Sub-bailee).
  3. Upon review of the Bailee liability policy wordings provided to us, we note the following:
    1. The coverage of the Bailee liability policy is restricted to the period the cargo is under the physical custody of either the Insured or their agents in warehouse / vehicles being either owned or operated by the Insured. In the circumstances, if the Insured were to act as a Quasi-bailee (i.e. sub-contract without owning / operating any of the assets used for the operations), the cover would not respond to deal with any losses.
    2. The cover provided includes Carrier’s (haulier) and Warehouseman’s (warehouse operator) liability if specified in the schedule and which is for accidental physical loss of or damage to property of others whilst under the Insured’s control.
    3. The policy excludes claims for:
      1. dangerous cargo (explosives, corrosive, toxic or highly flammable goods or materials or other property which present a comparable degree of risk or hazard), high value cargo, any loss due to documentation error (errors and omissions / professional indemnity), infidelity of the insured’s employee, theft, etc. (some of these risks can be covered under various extensions under a Transport liability policy).
      2. Mysterious / unexplained shortages: It is not uncommon for warehouse operator to discover losses during inventory check / stock taking and which could be covered under a Transport liability policy subject to conditions.
      3. The other main exclusion under a bailee policy is losses arising from theft or pilferage and for which again cover is available under the transport liability class (the requirement under the Transport liability policy is usually demanding especially for high worth / value goods).
    4. A general requirement of the Bailee liability policy is that the Insured should contract on standard conditions of contract which have been submitted to the insurers (There is no specific requirement for incorporating the Singapore Logistics Standard Trading Conditions and therefore incorporation of the Insured’s standard conditions of contract should suffice provided the Insurers are advised of the same. We would assume that the Insurers would consider the exposure based on these standard conditions of contract. If there are no standard conditions of contract incorporated, then the exposure to the Insured would be based on “full value” of the cargo being stored and/or transported).
  4. The major difference between a Transport and Bailee liability policy (although as mentioned above, the Bailee liability policy cover is subsumed in a Transport liability policy) is that on its own, the Bailee liability policy is restrictive as it is meant only to cater for physical loss or damage whilst under the physical custody of the Insured. It does not cover any consequential, mis-delivery, errors and omissions, pollution claims, etc. It therefore appears to us that subject to the General Conditions of Carriage (as mentioned in 3 d above) of the Insured expressly excluding such claims with their clients, the coverage provided by the Bailee liability policy should be sufficient to deal with claims arising from the Insured’s role as a Bailee. However, should claimants pursue for claims that are not covered under the policy (irrespective of them being excluded under the General Conditions of Carriage), the costs of defending the claim would have to be dealt by the Insured themselves (as these would be excluded under the Bailee liability policy).
  5. A transport operator should consider seeking the cover best suited for their needs. e.g. if the transport operator is not dealing with dangerous / high value cargo, then the risks of pollution / theft may be remote such that seeking coverage of such items may be of no additional benefit. In this regard, a risk survey together with review of the contractual provisions would assist the transport operator to decide on whether they should consider either a restrictive cover provided under the Bailee liability policy or a wider cover provided under the Transport liability policy. We believe both these products have a need and the challenge is always to ensure that it is fit for the need.
  6. In conclusion:
    1. While the cover provided in a Bailee liability policy is also provided in a Transport liability policy, transport operators may consider this restrictive cover should this be sufficient for their needs.
    2. Any risk transfer mechanism such as insurance should be undertaken after considering the exposure together with the risk transfer mechanism’s available.

1 Amspex Insurance Brokers are a Singapore based Insurance brokerage who are involved in marine class of business amongst others. We thank them for providing us policy wordings of a few Bailee Liability policies which are issued in the Singapore local market. We also thank them for answering our queries on the coverage.

2 In the book Principles of English Commercial Law, Quasi Bailment is defined in 7.85 as “This anomalous form of bailment arises where a person who is entitled to take possession of another’s goods chooses to delegate the assumption of possession to a third person without taking possession personally. If the delegation is unauthorised the person making the delegation owes to the bailor a strict liability similar to that of a deviating bailee. If it is authorised, the person making the delegation remains answerable for the defaults of the third person, in much the same way as a normal bailee who sub-bails with authority. He is also liable for any resulting loss or damage if he appointed the possessor negligently or contrary to instructions. He probably does not, however, carry the same burden of proof as a normal bailee, so that fault must be positively proved; the lack of possession makes this aspect of the bailee’s liablity inapposite. The third person who get possession (‘the quasi-bailee’) owes the normal common law duties of a bailee to the original bailor unless the original bailor has consented to the quai-bailment on exculpatory terms”.

3 The Pioneer Container – see a Case Note on Sub-bailment on Terms by Martin Davies

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