Insurance Overview

Amy Brown Comments
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One of the most challenging tasks associated with owning or managing a profitable self-storage business is securing proper insurance coverage. The multiple liability exposures unique to this industry create an uncommon need for adequate protection.

In addition to defending buildings and equipment against common hazards such as natural disasters and crime, you need to guard against lawsuits filed by persons who may have been injured on your premises and damage to tenants' property. You also need to protect your income against business interruptions that occur after a loss. There are many important insurance packages of which you should be aware, such as workers' compensation and flood insurance. Following is an overview of some coverage you need to adequately shield your self-storage operation.

Business Property

This coverage protects your property from direct physical loss or damage from covered causes of loss. Look for a policy that includes replacement costs on buildings and business/ personal property with no co-insurance. Most property coverage requires a deductible. Keep in mind that while a higher deductible will help keep your premium down, you want to make sure you can afford to pay the amount in the event of a loss.

Business Income

Business-income coverage, or loss-of-income insurance, is designed to minimize your risk in the event of a loss. "Loss of income" refers to the suspension of your operations by direct loss or damage. "Extra expense" refers to any extraordinary expenses you incur during the period of restoration, which begins with the date of a loss resulting from any covered cause.

As a rule of thumb, it's a good idea to secure a full 12 months of this coverage to protect against business interruptions. While it may only take three to six months to actually rebuild your business after a covered loss, you will first have to remove debris, obtain bids and building permits, and perhaps face ordinance and zoning requirements before starting.

Since most conventional coverage ends when rebuilding is complete, you should ask your insurance agent about an extended period of indemnity, which provides for loss-of-rental income during a specific period following reconstruction. While an average retail store or restaurant can begin generating profits as soon as it is reopened, self-storage facilities may take several months to generate enough new tenants to be fully profitable.

Business Liability

Owning and operating a storage facility comes with plenty of accountability. Even if you operate with the utmost care and provide the best service, a tenant can find you at fault for a personal loss. Business liability provides coverage for bodily injury and property damage that occurs on your premises and protects your facility in the event of a related lawsuit. It will usually cover damages from the suit as well as legal fees.

Depending on your needs, liability insurance can be purchased in many forms. Additional coverage available in a self-storage business policy includes:

  • Sale and Disposal—This coverage provides broad-form coverage to protect you against negligent acts that arise from the sale, removal or disposal of customers' property when reclaiming space for which rental or other charges are delinquent or unpaid.
  • Customers' Goods—This provides coverage against loss or damage to your customers' personal property, if you are legally liable. It might also provide defense and legal costs, even if the suit is groundless or fraudulent.

Flood Insurance

Self-storage insurance, like most commercial policies, does not include flood insurance; and many facility owners don't realize their standard business policy doesn't protect them until it's too late. As a matter of fact, only a small portion of businesses exposed to the risk of flood damage are insured.

Fortunately, it's easy and inexpensive to protect yourself against flood through the National Flood Insurance Program (NFIP), which is backed 100 percent by the federal government. The NFIP divides risk areas into three basic groups: low, medium and high. Less than one-third of all reported flood claims come from high-risk areas, and more than one-quarter come from low-risk areas. That's why most business-insurance expertsstrongly recommend flood insurance, even if you are at low risk.

You can get good and affordable coverage even if your facility is in the boundaries of a flood plain. It costs an average of just a few hundred dollars per year for businesses in less-hazardous areas, and the NFIP and its write-your-own servicing companies guarantee coverage for a anyone in a high-risk area.

Depending where you are, it may not be necessary to purchase flood insurance at maximum amounts. If you are outside a designated high-risk area, you can purchase partial coverage and receive an actual-cash-value payout for damages up to the purchase amount. However, if you have a lot of equity in your buildings and property, you may want to consider purchasing excess flood protection, which is available up to twice the regular limit. This extra protection may be prudent given inflation and construction costs.

Workers' Compensation

In nearly all 50 states, you are required to cover your employees for workers' compensation. Regardless, it's sensible to carry this coverage. If you fail to warn employees of any existing danger on your premises, you can be held liable for damage suits brought on by an employee under common and workers' compensation laws. Therefore, this very important coverage must be considered a mandatory part of your insurance portfolio.

Choosing the Right Company

As a responsible self-storage owner, you know securing the right insurance can help reduce operating risks and guard your assets. That's why you've evaluated your exposures and worked with an agent to choose the coverage you need to protect yourself in the event of a loss. But if you want to get the best defense, you need to do more than just choose the right insurance—you need to choose the right insurance company.

Why is this so important? If you fail to do your homework, you won't know how a particular company is going to perform until you have a loss, and by then it may be too late. You don't want to discover after a disaster that your carrier has a history of poor claims handling or its financial standing is in jeopardy. And there are other advantages to choosing the right company that can save you money and get you the specialized coverage you need.

Choosing the best insurance provider for you is easy when you have the right information. Here are the three most important things you need to know:

  • The company's financial strength
  • The company's claims performance
  • The company's specialized knowledge of your business

Financial Strength

An insurance company's financial strength reflects its ability to meet obligations to its policyholders. In fact, financial strength is the very cornerstone of the promises on which insurance companies are built. To determine if a company will be able to meet your claims, make sure it has a solid balance sheet. The easiest way to do this is to check the rating report of an independent industry analyst, such as the A.M. Best Co.

A.M. Best has been reporting on the financial condition of insurance companies since 1899 and ranks as the oldest and most experienced rating agency in the world. Its rating is assigned to every major insurer in the United States. The company carefully evaluates each provider's performance in five critical areas: profitability, leverage, liquidity, reserve adequacy and reinsurance.

Best ratings range from A++ (superior) all the way down to F (in liquidation). Although a solid rating is not an actual guarantee of a company's financial strength, it is a strong indicator that you will receive prompt and fair claims handling today and in the future.

Claims Performance

Claims performance is the make-or-break factor that separates a good insurance company from a great one. Every year, millions of business owners file insurance claims that may be subject to careless handling and needless delays. As anyone who has ever suffered a loss can tell you, the trauma of a fire or theft is stressful enough without having to worry about your insurance company's performance.

What should you expect from a reputable insurance company? Fast, fair claims handling and courteous service. First, a responsive company should contact you within 24 hours of receiving your report to begin the settlement process. Second, the company should make every attempt to dispatch a claims adjuster to inspect any property damage if necessary. Third, and most important, the company should attempt to make the claim-settling process as smooth aspossible, avoiding unnecessary questions and issuing payment without delay once coverage has been confirmed.

Specialized Knowledge of Your Business

To protect your assets, an insurance company (and its brokers and agents) should have specialized knowledge of the self-storage industry, as well as a commitment to stay abreast of industry changes through education and training. Moreover, a concerned company will also be able to recommend measures that will help you safeguard against losses.

Some insurance companies have developed specialized coverage for the self-storage industry that can actually contribute to lower premiums. A company familiar with current construction costs or with in-depth knowledge of the latest security systems, for example, can more realistically handle any claims you may have as well as provide the proper coverage. Look for a company that will work with you to reduce losses in the workplace, which can help contain your insurance costs.

Understanding and Controlling Losses

Business-liability insurance is designed to protect you against claims that someone was hurt or property was damaged on your premises. As every self-storage owner knows, recognizing and controlling liability exposures is a prime concern in today's litigious society. Merely having coverage in place is not enough. Courts are getting tough on business owners who allow hazardous conditions to exist, and judging by the awards juries sometimes hand out, no amount of protection may be enough.

The single most important key to protecting your facility against lawsuits is awareness—of your responsibilities under the law, potential hazards at your facility and your need to do everything you can to prevent accidents. Court decisions can and do favor those who take proactive steps; and in the case of a lawsuit, an ounce of prevention is definitely worth a pound of cure.

Reduce Potential Liabilities

The best way to limit your liability in advance is to identify and eliminate (or at least minimize) potential risks. Take a walk around your facility and play a game of "What if." Try to imagine what things could go wrong and what you can do to prevent them from happening. For example, you may discover a glaring hazard, such as a large pothole outside of one of your units that needs to be blocked off until it is repaired. Or you may discover a less obvious risk, like a worn or curled floor mat, which was intended to prevent slips and falls but may actually cause them.

Since slips and falls account for the vast majority of liability claims, it pays to be extra careful. Slippery floors from rain and snow are the leading cause of tenant falls. You can reduce your liability substantially when you take reasonable and prudent care to prevent accidents. Begin by keeping floors dry. In bad weather, post "Caution" signs when the floor is wet; install nonskid moisture-absorbing carpet or mats; and keep a mop and bucket handy to control runoff.

A dangerous situation can even be created in an instant by a careless employee in the normal course of his work, for example, leaving a wet floor unattended for a few moments when cleaning. Courts can and will hold management responsible for the actions of its staff in these cases. Once again, a proactive response is the key—in this case, by advising of a specific risk by posting a sign that reads "Caution! Slippery When Wet."

There are other important procedures for reducing liabilities: conducting accident-training sessions with your employees; conducting regular quality-control measures of your facilities and equipment; and keeping documented records of preventive maintenance. Hire competent employees and regularly monitor their performance. If you are not at the facility on a daily basis, make a habit of dropping by periodically without notice to spot unforeseen risks.

When an Accident Occurs

No matter how carefully laid your plans may be, accidents can and do occur. If someone on your premises should suffer an injury, take immediate action by first calling an ambulance, then document all known facts surrounding the accident to accurately reconstruct the events in case of a lawsuit. For safety's sake, be sure to get all of the following information in writing:

  • Name, address and phone number of the injured party
  • Date and time of the accident
  • Name of employees on duty and the names of any witnesses
  • Details about what caused the accident (i.e., was it caused by the customer or by a pre-existing hazardous condition?)
  • Information about when the site was last cleaned and inspected for hazards

It's also a good idea to take a picture or video of the site where the accident occurred, and to try to get a written statement from the injured party, if possible. If a trip to the hospital is necessary, call an ambulance; don't use a personal or company vehicle. You may expose yourself to a whole new set of liabilities that is much better avoided.

In the Event of a Claim

In the event of an accident, notify your insurance company immediately. Give your agent all of the information outlined above. If you are hit with a lawsuit, the number and nature of available defenses depends on the specifics of the individual suit. In an injury-related action, the underlying claims must be analyzed to determine available defense; while in negligence cases, the owner may be able to assert the claimant's degree of fault, which could reduce or even eliminate his right to recover damages. Assuming the circumstance is covered, your insurance company will come to your defense.

One final note: In today's litigious society, liability limits of $1 million should be considered a minimum. For maximum protection, look for a business-liability policy written on an occurrence basis with no aggregate limit.

Evictions and Auctions

Self-storage is a rental business, and the facility operator acts as a landlord, not a warehouseman. Unfortunately, sooner or later, every owner will be faced with the task of having to evict tenants for failure to pay rent and reclaim the storage space by removing or disposing of the tenants' property. The most common way to do this is to place a lien against the property and hold an auction.

In general, most states give self-storage operators extraordinary leverage against delinquent tenants. However, if the procedures are not followed to the letter, or if there is an error in any step of the sale-and-disposal process, an operator leaves himself vulnerable to lawsuits claiming loss or damage of stored goods. Even when the process is handled correctly, it is not uncommon for a disgruntled tenant to file a claim charging negligence.

Sale-and-disposal legal-liability insurance is a must-have coverage for all self-storage owners. It provides protection against conversion: the act of wrongfully taking, selling, using or destroying the goods of another party. Due to the diversity of goods stored and the wide range of values of the property, the penalty for conversion can be extremely high.

Recently, a self-storage operator was held liable for $250,000 in damages by a California court for the wrongful sale of a customer's goods. The court judged the storage owner's notice of intention of sale was defective, since his newspaper ad did not include the delinquent tenant's name, which was required by state law. As a result, the court ruled the operator was in violation of negligence and conversion.

Many such lawsuits are the result of trivial errors, such as reversing the numbers on an address. The chance of a mistake occurring is compounded by the fact most state statutes require that several letters of notification be mailed to tenants with delinquent accounts, and that the self-storage operator publish a legal notice in a general circulation newspaper in the judicial district where the sale will be held. There are, of course, many variations on these procedures, and each must be followed exactly to minimize the likelihood of a lawsuit.

The good news is, in many cases, litigation can be avoided. Start by familiarizing yourself with lien laws. Consult with an attorney about preparing a written procedure that outlines the exact steps for disposing of a delinquent tenant's property. Read and follow all state statutes to the letter. Always double check names and addresses; and don't make any changes to information on the rental agreement, even an obvious misspelling, unless you get a signed change-of-address card. Finally, document every step of the inventory and auction process in photographs and writing. In a lawsuit, you will have to show proof that the disposal of a delinquent tenant's goods conformed to state statutes.

If there is any reason to question the sale and disposal of a tenant's goods, don't hold the auction. Many owners prefer to let tenants retrieve their property at no charge rather than face potential liability. Be absolutely certain you have adequate insurance coverage. Sale and disposal is not normally available through regular business-insurance carriers and generally cannot be added to a standard business-owners policy. However, the coverage can be secured through insurers specializing in the self-storage industry.

Amy Brown is part of Universal Insurance Facilities Ltd., which offers a comprehensive package of coverages specifically designed to meet the needs of the self-storage industry. For more information, or to get a quick, no-obligation quote, call 800.844.2101; e-mail uif@vpico.com; visit www.vpico.com/universal.

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