Consignment – A Business Arrangement Definition
Ever coveted a name brand bag at the local consignment shop but feeling unsure about whether it’s a great buy? Here’s the thrill of the hunt explained — consignment! In the world of retail, consignment is a lucrative pathway taken by both the sellers and buyers.
TL;DR
- Consignment is a business model wherein a third party sells goods owned by someone else.
- Understanding it matters in day-to-day agency work as it pertains to the transfer of risk and ownership.
- A common pitfall is misunderstanding who owns the items sold on consignment and when the ownership changes.
- The best practice for agencies is to clearly state ownership terms in the consignment agreements.
What Is Consignment in Insurance?
To a regular Joe, consignment means that you give your things to a consignment shop, and they sell it for you. Once sold, you get your cut, and so do they. On the other hand, insurance sees consignment as an agreement where goods are sent by their owner (the consignor) to a merchant (consignee), who is authorized to sell the goods. The ownership of the goods remains with the consignor until they have been sold.
This model pops up in many areas- whether you’re selling your antique furniture through a brick-and-mortar store, or an art gallery exhibits works of art on your behalf. The owner retains ownership until the goods are sold, at which point ownership and risk of loss transfer to the buyer.
Key Related Terms to Know
- Consignor: The person or firm that owns the product or goods and consigns it to a third party for sale.
- Consignee: The retailer or third party who sells the goods on behalf of the consignor.
- Consignment Sales: Sales where the goods are out on consignment.
- Inventory on Consignment: Inventory that is in the possession of a dealer (consignee), but ownership of and title to the inventory is retained by the manufacturer (consignor).
Common Questions About Consignment
What Does Consignment Mean in the Context of Insurance?
In insurance, consignment is a business model where ownership of the goods remains with the original owner (consignor). The consignor consigns their items to a third party (consignee), which could be consignment stores, consignment shops, thrift stores, etc.
An example is a person taking their gently used items to a thrift store where it’s sold to the millennial generation looking to adopt frugal shopping habits. Throughout this process, the goods are considered to be on consignment until they’re sold. Only once they are sold does the ownership transfer to the buyer.
How Does a Consignment Agreement Benefit Over a Regular Sale?
With a regular sale, the seller assumes all risks related to inventory storage, maintaining the sales space, marketing the goods, and making the sale. However, in a consignment model, the consignor transfers these responsibilities to a third party who sells goods on their behalf.
For instance, an artist gets marketplaces to exhibit their work by signing consignment agreements with an art gallery, saving wall space at their studio and reaching broader audiences through the gallery’s retail presence. The consignor only needs to worry about the consignment payment agreements and leaving the work of selling to the consignee.
What are the Typical Terms of Consignment Agreements?
Typical consignment agreements involve details of consignment fees, commission rates, consignment period, and disclosure about who bears the responsibility if the items aren’t sold within a set period of time or if they get lost or damaged. These details often vary by the type of goods — for instance, discount stores may have very different consignment deals than high-end fashion consignment stores.
What Are Some Risks Associated with Consignment Sales?
One risk lies in the clarity of understanding ownership, safeguarding the items on consignment, and transfer of ownership once the sale is made. Miscommunication or confusion around these points can lead to disputes. Other risks involve items getting damaged or lost, or failure to sell within the agreed consignment period. All these risks can impact the revenue potential of the consignor and the consignee.
Consignment vs. Regular Sales
Scenario 1:
A consignment shop specializing in high-end fashion items signed a mutual agreement with a customer to sell their exclusive designer goodies. Due to a fire, the entire stock was destroyed. Since the items were consigned, the insurance claim had to be made by the original owners, not the shop.
Scenario 2:
An artist had displayed her works of art at an art gallery on consignment. After an unfortunate event, the art works were damaged. The claim for loss was filed by the artist as they were the legal owner of the damaged pieces.
Scenario 3:
A pet store was selling high-end pet care goods on consignment. During a routine audit, they noticed some items were missing. The claim had to be raised by the suppliers of these items, as throughout the process of selling on consignment the ownership remained with them.
Limitations and Common Mistakes
- Consignment does not apply when the consignee pays the consignor upfront for the goods; this is a regular sale.
- Associating possession with ownership is a frequent misunderstanding. Until they’re sold, items residing at a consignment shop still belong to the original owner.
- Not clearly documenting the terms of consignment, especially related to risk of damage or loss, often leads to E&O exposure.
How to Explain Consignment to Clients
For a Personal Lines client, you could explain, “Consignment is a useful way to sell items without worrying about the details. You entrust your items to a shop, they sell it, and you both share the profit.”
To a Small Business owner: “By opting for consignment, you can leverage the reach of established platforms to sell your goods while still retaining ownership until the sale is made.”
Drawing the picture for a CFO or Risk Manager: “In insurance terms, consignment refers to the business model where an item’s ownership stays with you until it’s sold by a third party, helping manage risk and cost.”