Many people are familiar with the term “underinsured.” You have no doubt read stories about personal loss and tragedy that occur in the aftermath of a wildfire or hurricane. Following such events, many businesses and homeowners are surprised and distressed to learn they do not have enough insurance to rebuild, repair or replace their property.
Reasonable estimates of the amount of insurance they need, together with stories of personal loss following catastrophes, lead most people to focus on their property-insurance limits in an attempt to protect them from an uninsured or underinsured loss. While consideration of property-insurance coverage is important for self-storage operators, perhaps the biggest threat of underinsurance facing them is claims from customers for the loss, damage or wrongful sale of stored property.
While the self-storage industry has worked hard to separate itself from and defend against responsibility for loss or damage to customers’ stored property, legal insulation is not always foolproof. If a customer believes your negligence contributed to the loss or damage to his property, you may be held legally liable for its value. If you make a mistake in the legal process of conducting a lien sale, you may be held liable for the value of the property that was sold.
Your liability for customers’ property loss under these two circumstances is not provided for by the general or business-liability coverage of your insurance. But it is often offered to self-storage operations under separate coverages called customers’-goods legal liability and sale-and-disposal legal liability. Such types of insurance are unique to self-storage and found in the property and liability insurance policies sold by companies that have tailored their programs for your business.
The Right Coverage Limits
In today’s litigious environment, where even a slip-and-fall injury can lead to a high award in a courtroom, most operators are very conscious of their business-liability coverage limits. Even owners of what might be considered a small self-storage operation routinely request limits of $500,000 or $1 million. However, customers’ goods legalliability coverage and sale-and-disposal legal-liability coverage are subject to their own policy limits. The basic coverage for the first starts at $25,000, while coverage for the latter usually starts at $10,000.
Your self-storage policy may only provide the basic limits for these specialty coverages; or coverage for these legal-liability exposures may only be provided by your election for an additional premium. Perhaps because these unique coverages are subject to separate limits, their purpose is misunderstood. Or perhaps because the potential size of a legal-liability claim has not been considered or has been underestimated, the policy limits for these types of losses are often left at a low level, if they are, indeed, purchased at all. This can be a very expensive mistake.
If a claim is made against you by one customer whose property is damaged because of a deferred maintenance problem, such as a worn roof that allows rain to damage the contents of his unit, a policy limit of $25,000 would likely be adequate. But if claims from many tenants are brought against you because of a serious loss, such as a fire caused by defectively installed or incorrectly repaired wiring, $25,000 will probably not be sufficient.
If you are found responsible through some negligence that contributes to or causes the destruction of property of many customers simultaneously, you need enough insurance to settle their claims against you. If you are held responsible for a fire that destroyed 100 storage units, and the average claim per unit was $2,500, you would want your customers’-goods legal-liability coverage limit to be at least $250,000.
The estimated loss due to your liability from an improper sale or disposal of customers’ stored property is very different from the loss you might give to your customers’-goods legal-liability exposure. If your tenant believes you did not follow the letter of the law as required by the self-storage statute or lien law in your state, you can be held responsible for the value of the property that has been wrongfully sold or destroyed; attorneys’ fees the customer incurs in pursuing his claim; and even damages for emotional distress.
The value of stored property involved in a legal dispute as determined by a court or jury often bears little resemblance to the proceeds of an auction sale of that same property. A tenant’s legal fees can exceed the value of the property loss. And for a real wake-up call, you might want to consider that, in 1997, $500,000 for emotional distress in addition to $80,000 in property value was awarded to a self-storage tenant in California for conversion of his stored property (Gonzales v. Personal Storage Inc., 56 Cal. App. 4th 464). While a sale-and-disposal claim may involve only one or a few units, the cost to settle that claim can easily exceed the basic limit for sale-and-disposal legal-liability coverage of $10,000 offered by most companies that specialize in self-storage insurance.
Do the Math
The result of underinsuring your legal-liability exposures is very much like discovering your property-insurance coverage limits are too low to replace your personal property. The difference comes out of your pocket. However, unlike property insurance, the cost to increase your liability coverage does not increase in direct proportion to your limits.
While the premium to insure your storage buildings would increase twofold if you were to double the property-insurance limit, the incremental rate for each thousand dollars of liability insurance decreases with higher limits of coverage. The basic coverage limits of $25,000 for customers’- goods legal liability and $10,000 for sale-and-disposal legal liability can be increased by a factor of 10 to $250,000 and $100,000 respectively, while the premium for these coverages would increase by a factor of about two.
Considering the potential for a large legal-liability claim and the relatively low cost to make substantial increases to your insurance protection, the cost of underinsuring your legal-liability exposure is quite high. Even if your insurance coverage is not up for review and renewal right now, you may want to take a look at this area of protection. If you think you may be underinsured or uninsured for these risks, speak with your agent or insurance company about pricing of higher limits and your peace of mind.
Scott Lancaster started his insurance career in 1976 as a licensed insurance agent and broker in California. He is now the regulatory compliance officer for Deans & Homer, where he joined as a commercial lines property and casualty underwriter in 1985 and has worked in the self-storage division since 1993. Deans & Homer has been providing insurance products designed to respond to the unique risks of the self-storage industry since 1974. For more information, call 800.847.9999 or visit www.self-storage-insurance.com.