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THE GROWING HAZARDS AND LIABILITY IN THE

CONDUCT OF SAFE DEPOSIT BUSINESS

STANDARDS OF CONSTRUCTION AND SERVICE

WALDRON H. RAND, JR.,

Vice-President, Commonwealth Trust Company of Boston

T

HERE has been a steady increase in the hazards and liabilities of the Safe Deposit business. Much of this has been unavoidable. The Safe Deposit Business is one of about fifty years' growth, and in that time it has expanded tremendously. Back in the old days, the first thought was to use every precaution to make the vault strong and secure against forcible entrance, and the vaults that were then built were built regardless of expense. They stand some of them at the present time, a monument to the integrity and courage of their builders and also a standard of vault construction that it would have been wise if the present day had more religiously followed.

As the public gained confidence in the safe deposit companies and began to realize the increased safety to their possessions, their valuables, their securities, in depositing same in a properly built, organized and maintained safe deposit vault, as the business grew, there came forward as there comes forward in all business, the competitive feature. I think it is to this spirit of competition, which induced many banks to open safe deposit departments without sufficient investigation as to the cost of construction and the overhead expenses of maintenance, that we owe much of our present day trouble and worry. This factor, and also the great increase in the number of persons owning securities of a nature negotiable by delivery, such as Liberty Bonds, has brought the question more and more acutely to the front.

Taking Stock of Safe Deposit Equipment Steadily, as the safe deposit business has grown, the vaults have become more and more subject to attack, both during closed hours and during the open or business hours. This has made it particularly necessary at the present time for all bankers who have to do with the Safe Deposit Business to stop and to take stock of the equipment they

are doing the business with and the grade of service and protection they are offering their customers. It is a most important matter for present discussion. I do not believe that the majority of the bankers of this country begin to realize the hazards, and risks and responsibilities entailed in the conduct of a safe deposit vault. Perhaps the best way will be to spend the time allotted to us in first considering roughly what the hazards and liabilities are what the risks and responsibilities-and then in discussing briefly the methods of reducing or minimizing these.

All these risks and responsibilities are based on the duty of safe deposit departments to their boxholders to furnish the highest grade of protection. If we consider briefly what this duty is we will gain a practical viewpoint from which to define these responsibilities. The hazard is always grounded in a claim of loss by a customer. These claims fall under three headings-the claim arising in an actual loss, the claim arising in an honestly believed loss, but where in fact there is no loss attributable to the safe deposit company, and the claim arising in a plain frameup, a blackmail attempt to bluff a bank into some settlement to avoid the threatened publicity. The defense against such class of claim is the same. It is in brief an anticipatory defense, that is, a defense centered in the maintenance of the highest standard of vault construction and of service construction and maintenance— the cause of practically all the risks and hazards of the safe deposit business and at the same time where properly standardized, the main line of defense against any claim of loss by a customer. Just what is this required grade or standard of construction and maintenance?

Legal Obligations

Everyone, I assume, understands that a

bank is not an insurer or guarantor of the safety of the contents of its safe deposit vault. The safe deposit law of the different States as to the duty of safe deposit vaults to their customers is not the same by any means; but it may fairly be said that the prevailing law of the United States as to the legal duty of a bank engaged in the business of renting safe deposit boxes is that such bank is required to use that degree of care in the safe keeping of the property deposited therein which is demanded from a bailee for hire in the keeping of valuable property. The highest standard of care is required of such bailee. In a certain Federal case dealing with this subject the court said: "Persons-depositing valuable articles with them (safe deposit vaults) expect that such measure will be taken as will-secure the property from burglars outside and from thieves withinand also that they will employ fit men, both in ability and integrity, for the discharge of their duties. An omission of such measures would in most cases be deemed culpable negligence so gross as to amount to a breach of good faith, and constitute a fraud upon the depositor."

So you see that a bank conducting a safe deposit department is legally liable for loss sustained by a customer arising out of any failure on the part of the bank,

1. To use the highest standard of safe and vault construction. This, of course, includes the type of keys, locks, burglar alarms and the like.

2. To maintain the highest standard of service and of protective efficiency in the conduct of the business, both during closed hours and open hours.

Is this standard of safe and vault construction and of maintenance being maintained throughout the country? If not, it is perfectly obvious that there is existing in these localities where such standards are not being maintained a constant condition of risk and hazard, not only to the bank that is failing in this duty to its customers, but to all banking interests of the locality.

Standard of Safe and Vault Construction First, as to the standard of safe and vault construction, can we state what this standard is in general terms? I hardly think SO. It would be easy enough to state what constitutes proper vault construction in any specified case, but the problems of vault construction vary so greatly with the locality in which the bank is engaged in business that no one general rule can be followed.

A bank, for example, located in the midst of the big city has far different problems of construction from a bank located in a small suburban town or country village. Yet it must be constantly borne in mind that each one of these problems is definite and ascertainable, and each problem is of prime importance not alone to the suburban or city bank involved, but in fact to the entire banking community.

If a bank from motives of false economy, through a desire to save a few dollars, constructs a safe deposit vault for customers that is not of sufficient strength and this fact becomes known to the public through some loss, the effect is similar to the throwing of a stone into the middle of a calm pool of water. The ripples of distrust spread steadily and in ever-increasing circles from the point of disturbance until the whole banking pool suffers somewhat from the commotion thus aroused. It is of mutual interest to all bankers that a correct standard of construction prevail in the safe deposit business.

Proper Standard of Service

Turning to the second division of the safe deposit business, namely maintenance (the duty of maintaining a proper standard of service) we find that here also there is far too apt to be a failure to maintain such standard. Correct identification of customers the constant watching of customers while in the vault and on the premisesproper restrictions as to the place of examining contents of safe deposit boxes-the leaving of keys by the customers in the lock-the proper care and custody of the keys of unoccupied boxes and the proper method of delivery of same to new customers when the safe is rented-the keeping of proper written records of ownership and access the installation and maintenance of suitable burglar alarm systems-above all the choice and training of an efficient personnel of vault attendants-all these are details of management that will certainly be exhaustively inquired into in the event of a claim of loss by a customer.

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nor will, be excused from having a knowledge of how a vault should be constructed and how it should be run. The ignorance lies to a degree in the blind disregard of the liabilities of the risks, which a bank runs in conducting a safe deposit department merely as a convenience for depositors, furnished, without prior investigation as to costs of construction and maintenance and along lines of false economy. Yet this cause of ignorance ought not at the present time to exist either. We have had instances with-in recent years of the fatal blow that a legal attack upon a safe deposit vault carries against both vault and parent bank. Such an attack is in all such cases sure to be a deadly one and fatal to the continued existence of the bank itself unless the evidence discloses a proper vault construction and a proper system of management by a force of properly paid and properly trained officers and employees.

Questionable Methods of Protection

You cannot avoid such a threat by incorporating your vault as an independent corporation. This step has, to be sure, certain advantages; (for example, in liquidation and where stockholders are assessable under under State or Federal law) but the force of the blow is against the public credit, the reputation, and the standing of the bank more even than against the dollars and cents of its assets.

Nor can a banker, as some are attempting to do at the present time, protect himself, his stockholders and his bank by insurance. In the first place no insurance that is written covers the most probable sources of liability, and in the second place insurance in all probability cannot be paid until legal liability is established, and legal liability can only be established by court proceedings with the inevitable accompanying disclosure of the type of construction, the grade of service; in fact, all the important items and details of the vault management and equipment.

No, the only way of minimizing this risk is to face the situation squarely, to have your safe deposit vault of proper construction and surrounded by all approved modern safeguards, and to conduct the business of safe deposit with an efficient and trained personnel in a manner approved by present day safe deposit associations. Too many banks have grown into the custom of conducting a safe deposit department merely as an adjunct to their business, installed for

its supposed advertising value, and upon which, naturally, as little money is to be spent as possible. This has been the history in several cases of recent legal proceedings, and in each case it has been an exceedingly humiliating and costly history as retailed to the public by way of the press-costly not only to the bank involved but also to the entire banking community. And repeating myself, I wish again to emphasize the fact that this latter phase is a very real one-namely, the loss to general banking in credit, standing and prestige, when any one bank is publicly exposed as being remiss in its duty to its customers.

Making Department Self Supporting

One great error in the establishment and maintenance of safe deposit departments, and one which has been the cause of unsatisfactory conditions of maintenance and equipment, is the failure to make the safe deposit department self-supporting; that is the failure to provide adequate receipts by charging customers a sufficient rental for their boxes. There is a tendency to beg this question, to' charge off the expenses of the vaults to advertising. This is not only unnecessary, but it is very serious in its effect on the morals and the standards of maintenance in such departments. Moreover, the sad fact about it is that it is unnecessary. No one is going to look for a cheap bargain in safe deposit rental when the matter involved is the safe custody of his or her entire worldly wealth and savings. The hiring of a safe deposit box is a striking exception to the economic law of barter and trade. No one of average intelligence wants anything but the very best, and the price-within reasonable limits-becomes practically immaterial. This has been illustrated time and time again within the last two or three years where banks have deliberately raised the price of thei: safe deposit boxes. In each case the loss of customers because of such advance in price has turned out to be practically nil.

The safe deposit business has grown to large proportions. The only way is to standardize it just as so many other departments of banking are now standardized. The proper committee of the American Bankers' Association should be instructed to investigate and report facts necessary for a standardization of construction, equipment and maintenance. The report of such a committee would furnish the banking world with a standard to which all safe deposit departments could be held.

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