Consignment Insurance

Consignment insurance is coverage that protects goods while they are in the possession of a consignee but legally owned by the consignor. Because consignment arrangements separate physical custody from legal title, standard property insurance held by either party may not automatically cover the consigned inventory in the event of theft, fire, or damage. Consignment insurance fills that gap by defining exactly which party's policy responds when a loss occurs during the consignment period.

Without it, a loss of consigned goods can trigger disputes over who bears the financial hit.

Why Consignment Goods Are an Insurance Gap

The consignee holds the goods physically but does not own them. The consignee's standard business property insurance typically covers only property the insured owns or has a financial interest in. Consigned goods the consignee is holding as a custodian may fall outside that coverage automatically.

The consignor owns the goods but does not hold them physically. The consignor's property insurance usually covers owned goods at the consignor's location. Once goods leave the consignor's premises, coverage may lapse or become limited depending on the policy's off-premises provision.

Two Approaches to Covering Consignment Inventory

Consignors and consignees handle this insurance gap in two primary ways, both of which should be addressed explicitly in the consignment agreement before goods change hands.

The Consignor Extends Coverage to Off-Premises Goods

Many commercial property policies include an off-premises extension or a "property in transit" provision that covers owned goods while held by third parties. The consignor confirms with their insurer that consigned goods at the consignee's location fall within this extended coverage. If coverage is insufficient, the consignor purchases a floater policy or inland marine coverage that follows the goods to any covered location.

The Consignee Obtains Bailee's Coverage

A consignee who regularly holds third-party goods may purchase bailee's insurance, sometimes called bailee's customers insurance. This type of policy covers losses to goods in the consignee's possession that belong to customers or suppliers. Art galleries, dry cleaners, jewelry retailers, and warehouses commonly carry bailee's coverage for exactly this reason.

What Consignment Insurance Typically Covers

Coverage varies by policy, but standard consignment insurance protects against these risks:

• Fire and smoke damage at the consignee's location
• Theft and burglary, whether by a third party or, in some policies, by the consignee's employees
• Vandalism and malicious damage
• Transit losses during shipment from the consignor to the consignee and back
• Water damage from sprinkler systems or leaking pipes

Consignment insurance policies typically exclude losses caused by the consignee's negligence in some cases, normal wear and tear, inherent defects in the goods, and losses that occur after the consignment agreement has expired without renewal.

What the Consignment Agreement Should Say About Insurance

A well-drafted consignment agreement specifies which party is responsible for obtaining insurance, the minimum coverage amount required, and the requirement to name the other party as an additional insured or loss payee. It should also require both parties to provide proof of coverage before goods are transferred and to notify each other promptly if coverage lapses or is reduced.

Leaving insurance obligations undefined is one of the most common and costly mistakes in consignment arrangements. When a loss occurs and neither party has adequate coverage, the dispute over liability can cost more in legal fees than the value of the lost goods.

Sources

• https://www.iii.org/article/business-property-insurance
• https://www.sba.gov/business-guide/manage-your-business/get-business-insurance