Insurance Insights: Key Provisions of Your Rental Agreement

Scott Lancaster Comments
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When you apply for insurance for your self-storage business, the insurer will usually ask for a copy of your current rental agreement. Why is this document part of the underwriting process, and what is the insurance company looking for? Key lease provisions reduce everyone’s level of risk. Your carrier wants to know you’ve done everything possible to protect your assets.

A well-written and clearly presented rental agreement creates a winning scenario for you as well as tenants and the insurance company. You win when your agreement addresses all of the contingencies and costs of operating the business. You win when customers understand and agree to abide by the agreement or the consequences of default. You win every time you avoid a legal dispute or insurance claim.

A good rental agreement does not ensure everyone will be satisfied in the event of an unfortunate incident. But when there are rules to follow, the outcome of the incident is clear, leaving little room for dispute or blame. The significance of the lease is perhaps best expressed in Chapter 1 of the “Rental Agreement Handbook,” published by the Self Storage Association:

A contract used by a business for large numbers of customers is really a history of previous problems, if you know how to read it. All of that “legal mumbo jumbo” is in the contract because something bad happened, and the business person it happened to went to a lawyer and said, “I don’t want this to happen again. Put it in writing, so next time I have some protection.” Sometimes that business person was someone at an insurance company. Your insurer sees more problems every year than you will see in your business lifetime. But other times, that person was someone just like you—an owner or manager who discovered that all the bases weren’t covered the way they should be.

Key Provisions

A typical rental agreement contains several key provisions designed for your protection. Some are so important that an insurance company will not insure you without them. Some work together to eliminate or contain your liability for loss or damage to property or to persons at your facility. These include:

  • Non-liability or release-of-liability provision
  • Insurance provision
  • Limitation-of-liability provision
  • Indemnity provision
  • Landlord’s lien provision

The foundation of your rental agreement is the non-liability or release-of-liability provision, which states you are not liable for loss or damage to stored property from specified and non-specified causes, including your own negligence. A carefully worded clause has proven to be effective in most states, but there are a few jurisdictions such as Illinois, Maryland, Massachusetts, Minnesota and New York in which such provisions have been unenforceable.

In some cases, the court is willing to accept a non-liability provision only when it is reinforced by an insurance provision, which requires customers to insure their stored property. The situation is further improved if you make tenant insurance readily available to customers. Courts and juries have been more likely to enforce the non-liability provision when the customer has been offered a clear and convenient method for transferring his risk.

A limitation of liability may be a separate provision or incorporated into another, such as a “use and occupancy” provision, which establishes the basic rules for how the rented space may be used. The limitation of liability puts a cap on the value of property that can be stored in the unit. The cap should recognize the average values of items typically stored at a facility. Limits of $5,000 are common. This provision gives you fallback protection if your release of liability is determined to be unenforceable and the customer failed to comply with the insurance requirement.

An indemnity provision helps protect you from liability for individuals who may be injured or those not subject to the terms and conditions of your rental agreement, such as tenants’ friends, relatives or employees who are only on site to visit or assist with a move. This clause requires customers to defend you against claims made by anyone who is injured as a result of their use or occupancy of the facility.

The self-storage lien and auction are important tools designed to redress the problem of delinquent and unpaid rents. Most states have a self-storage lien law that outlines specific requirements for notice and procedure that must be followed to legally enforce your rights.

Some states require you to address those rights in your rental agreement and even to use precise language. In any case, your insurance carrier will want to know you are familiar with your state law, that you have procedures in place to meet the requirements of the law, and you have an appropriately worded landlord’s lien provision in your agreement.

The best way to avoid legal disputes is to be clear in your rental agreement as well as your disclosure of tenant responsibility. Your attorney and national and state self-storage associations are good sources of information about the laws that affect the actual language used in your lease. The contractual provisions described here will help protect you from liability for loss, damage or wrongful sale.

As the saying goes, “forewarned is forearmed.” Steer clear of the blame game. Rather than burying important clauses in small print or glossing over them during the lease presentation, thoroughly educate customers before they sign the dotted line. Correctly handled and worded, your rental agreement can protect your business and tenants and keep your insurance company happy. Now that’s a win-win-win situation.

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 was hired 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; visit www.self-storage-insurance.com.

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