November 2008 | Commentary | Risks and Rewards

Signed, Sealed, Delivered...But to Whom?

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Q: I am a warehouse operator. An insurance company recently refused to provide me with coverage for the wrongful delivery of goods stored in my warehouse, citing the Uniform Commercial Code as the reason. Can you explain the problem?

A: The Uniform Commercial Code (UCC) is a body of law that has been accepted, with some modifications, by virtually all U.S. states. It codifies certain bodies of established legal principles pertaining to the sale of goods, commercial paper, and other uniform concepts.

Your insurance company's concern probably arises from the terms of Article 7 of the UCC, which specifically address warehouse receipts, bills of lading, and other documents of title.

When goods are placed into storage at a warehouse facility, the warehouse operator typically issues a receipt that serves as proof that its holder owns the goods. This receipt is, essentially, a document of title. When the owner retrieves the goods, he surrenders the receipt, and the warehouseman releases the goods to him.

Under the UCC, a warehouseman can issue a receipt with a statement that the goods will be delivered to the bearer, to a specified person, or to a specified person or his "order." This practice is similar to the concept used in writing checks.

If a check is issued to "cash," it is a "bearer" instrument, and any person can negotiate it. If it is issued to a specific person, only that person can negotiate it. If, as is normally the case, the check is issued to the "order" of a person, then it can be negotiated to any number of successive holders until it is finally cashed.

Look at your checkbook. Your checks are pre-printed with the words "payable to the order of," with a blank to fill in. This allows you to issue your check to another person who has the liberty to have it cashed by a third party, who in turn can go to yet another party, until the check is returned to your bank for payment. Warehousemen's receipts work in a similar way.

THE ROLE OF RECEIPTS

If a warehouseman issues a receipt stating that the goods will be delivered to a specific receiver, only that receiver is entitled to the goods. If he issues the receipt to a specified person "or his order," then the receipt becomes a negotiable document that the owner can use to sell the goods.

Once the goods are purchased, the new owner can sell them to another party, or present the receipt to the warehouseman for delivery of the goods.

Problems arise when the warehouseman mistakenly releases the goods to someone other than the owner or purchaser of the goods. When this happens, the goods have been neither lost nor damaged. The warehouseman has committed a professional error. The UCC permits a warehouseman to place a limitation of liability on his receipt for lost or damaged goods. But, where no loss or damage occurs, he may be liable for the full value.

TAKE COVER

Insurance policies differ as to the cover they provide for warehoused goods. A typical warehouseman's legal liability policy insures an operator for loss or damage caused by his failure to exercise due care. A property policy (such as cargo) covers the goods directly for loss and damage, irrespective of the warehouseman's actions.

Neither policy covers a loss caused by delivering goods to the wrong party, because the goods are neither lost nor damaged. This professional liability situation must be insured through a coverage extension on your warehouseman's legal liability policy, or through a separate errors and omissions policy.

The difference between a claim for loss or damage and one for professional liability can be substantial. Protect your exposure properly.

Have a liability question or concern? I will try to help. Please send your questions to me via e-mail at dan.negron@thomasmiller.com.

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