September 8, 2017

Limitations on limiting a warehouse’s liability: A primer in anticipation of hurricane related claim

Insurers of warehousing and storage risks understand the importance of effective limitations of liability. As the recovery from Hurricane Harvey continues, and we brace for the continuation of what is forecasted to be a particularly severe Atlantic hurricane season, it seems a good time to consider some of the common issues that impact warehouse liability in connection with hurricanes and the efforts to limit such liability in warehousing receipts and storage agreements generally.

Statutory changes since Super Storm Sandy allow greater flexibility on how liability is limited.

As we pay heed to the tragic devastation left in the wake of Hurricane Harvey and Hurricane Irma, it is not without heavy heart that we momentarily turn our attention to the more prosaic matters at hand. We do so only with the knowledge and understanding that it is expected that all of us continue to move forward and it is, of course, necessary that we do so.

The National Oceanic and Atmospheric Administration (NOAA) forecasts an above-normal hurricane season for this year.  The data predicts between 14-19 named storms, of which it is forecasted that five to nine of the named storms will be classified as hurricanes and that between two to five of those will develop into major hurricanes (a major hurricane is defined by winds which reach a speed of 111 mph and would otherwise be described as category 3, 4, or 5 on the Saffir-Simpson scale).  This means that the interests of insurers of warehousing and storage risks are likely to be affected in some fashion before this hurricane season is through.   

Hurricane season presents significant direct risks to goods in storage from wind related incidents, flooding and other water infiltration, or the indirect impact of loss of power at a warehouse on security protections and on climate controlled goods (consider as a related example the recent fire at the Arkema facility in Texas).  Whether insuring the legal liability of a warehouse or seeking subrogation from storage losses against a warehouse, understanding the scope of liability and the enforceability of attempts by a warehouse to limit its liability is critical.    

Generally, the rules relating to warehouse liability have been codified in the United States under Article 7 of the Uniform Commercial Code (the "UCC").  Since the United States is made up of 51 separate jurisdictions (the 50 states plus the federal system), historically, laws relating to contracts, bailment and warehousing were subject to potential variation across jurisdictions. The purpose of the UCC is to promote uniformity in the law among the 50 independent state jurisdictions.  While the UCC provisions adopted by each state are often the same or very similar (which promotes uniformity in the laws) there can be important differences which have substantive impacts.  This article does not focus on those differences.  For the purposes of this article we have focused on New York's version of the UCC (and it is noted that Georgia has adopted the same versions of the relevant UCC provisions discussed herein, while Florida has adopted slightly different wording in one of its provisions). While this is not a survey of the national landscape, the intention is to identify some of the important questions that drive the evaluation of warehouse liability, and those which should have application and relevance across all jurisdictions.  Obviously, any claim specific inquiry would require review of the unique facts as viewed under the applicable state law.

A warehouse is not liable for damages if it acts with due care

UCC 7-204 (a) provides that a "warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances" and "is not liable for damages that could not have been avoided by the exercise of that care."

Any assessment of whether a warehouse acted with due care will always be a fact intensive and fact specific exercise.  However, as due care pertains to a warehouseman's actions before, during, and after a hurricane, a review of the case law provides a helpful guide as to some of the objective criteria that a court might consider when determining whether or not a warehouse acted with due care. For example, in assessing due care in connection with a hurricane courts might consider: (i) did the warehouse have a written hurricane plan in place; (ii) when was the plan last updated; (iii) was the staff trained on the plan or otherwise; and (iv) how was the plan executed.  The sufficiency of the plan itself would also be of critical importance, and is something that would vary depending on the type of goods being stored (e.g. fine art, electronics, food and other commodities, chemicals, frozen goods, etc.), the location of the warehouse and its storm history.  

Considering the Act of God defense as applied to liability arising from hurricane damage

As a matter of law, a warehouse will not be held liable for any damage which is subject to the Act of God defense.  Generally, the Act of God defense applies when human activities could not have reasonably prevented the loss.  It applies to accidents that are caused directly or exclusively by natural causes and which no reasonable amount of foresight, effort or care could have been expected to prevent.  There are certainly many examples of hurricanes giving rise to the defense. 

However, even where the devastation caused by a hurricane's wind velocity, tidal surge or rain fall is unforeseeable or unprecedented on some level, whether the Act of God defense will apply will not only depend on the nature of the storm but the warehouse as well.  In other words, the same hurricane may give rise to an Act of God defense for one warehouse but not another.  This is because the requirement that human activity could not have reasonably prevented the loss is a highly fact intensive inquiry.  Some of the factors to be considered include the location of the warehouse, its elevation, its exposure, what it stores and how easy or difficult moving such goods would be (and the availability of safe space for such goods to be moved), the clarity and timing of the forecasting for the specific area, the storm history of the warehouse and the warehouse location, the relevant timeline, and the human effort that was spent to prevent the loss.    

A warehouseman's liability can be limited but the duty of care cannot be eliminated

UCC 7-204 (b) provides that "[d]amages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable." However, such limitations on liability are limited by UCC 7-202 (c), which provides that such terms must not "impair its . . . duty of care under Section 7-204. Any contrary provision is ineffective."

Exculpation clauses, that is, those that would waive all liability of a warehouse, will not be enforced.  This is not limited to clauses labeled as limitation of liability clauses.  In 2016, an appellate court in New York, ruled that a waiver of subrogation clause, which had the effect of eliminating a warehouse's liability was unenforceable because it violated UCC 7-202(c) and 7-204. 

Understanding the paperwork is important

Statutory changes since Super Storm Sandy allow greater flexibility on how liability is limited. The UCC in New York was amended in December 2014.  Before its amendment, the New York UCC required a warehouse to limit its liability “per article or item” or “per unit of weight.”  N.Y. U.C.C. § 7-204(2).  The December 2014 amendment dropped this requirement, and the official comment identifies a variety of limitations that “may be commercially appropriate,” including “per unit of weight, per package, per occurrence, or per receipt as well as limitations based upon a multiple of the storage rate.”    

The statute also requires that the client be provided an opportunity to increase the liability at the time the goods are delivered to the warehouse or within a reasonable time thereafter, or else the limitation of liability can be rendered unenforceable. See N.Y. U.C.C. 7-204(2).

As noted in the language quoted above, the limitation of liability can be set forth in a storage agreement or in a warehouse receipt.  The UCC defines a warehouse receipt as "a document of title issued by a person engaged in the business of storing goods for hire."  According to the UCC definition a document of title can include a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. 

What distinguishes a warehouse receipt by its statutory definition, therefore, is the fact that it is issued by someone engaged in the business of storing goods.  This raises the question of whether a bill of lading (a document of title) issued by a warehouse as evidence of the storage of goods at the warehouse can be considered a warehouse receipt (e.g. consider a warehouse that picks goods up and transports them to the warehouse for storage and leaves the customer with a bill of lading but no separate document denominated as a warehouse receipt).

There is no proscribed form for a warehouse receipt and courts have recognized a valid “warehouse receipt” from the combination of documents such as bills of lading, storage invoices and relevant correspondence.  While a bill of lading could form part of a warehouse receipt, whether it will limit the liability for storage risks will depend on the language in the limitation and whether it covers both storage and transit.  If the limitation language is not clear, and depending on the course of dealing between the parties, there is a risk that a court may determine that there is no limit of liability applicable to the storage – even where the warehouse may have thought that it was protecting itself with the documentation used. 

Given the NOAA forecasts for this year and recent storm events, most of the issues addressed above are likely to be faced by insurers of U.S. warehousing and storage risks in the coming months.  The above touches on some of the key questions that arise in connection with hurricane damage to stored risks, and underscores the highly fact specific nature of dealing with such issues.