People look forward to buying insurance about as much as visiting the dentist. With both, however, prevention is the key to minimizing unexpected costs and rude awakenings later on.
Insurance is usually bought because banks require it. Even those who could pay cash to replace lost or damaged property are subject to unexpected and costly lawsuits. Anyone can sue in our country, so it’s a good idea to have property insurance as well as liability insurance to protect your assets.
As a storage operator, you’ll need to make three major decisions regarding insurance:
- Agent or broker and company
- Types and amounts of coverage
- Protection for tenants’ stored property
First, do you know the difference between an agent and a broker? Generally, an agent works for a specific insurance company. As a company representative, your agent is the one you’d turn to in an emergency or a loss—the person who’d guide you through the claims process.
A broker works on your behalf to get you the best coverage from a number of companies. This person is someone you trust to find the right insurance at the best price. The storage industry has certain unique exposures to loss that other businesses don’t, losses that may not be covered in a standard insurance policy. Unless an agent or broker is familiar with self-storage, specific exposures could be overlooked.
How do you find someone who is well versed in storage insurance? Begin by looking for those who support the industry by advertising in industry magazines and exhibiting at national and regional conferences. Meeting company representatives face-to-face is a great opportunity to gauge their experience.
Once you narrow down the field to a few companies, find out how many storage clients they have. Ask for referrals and follow up with a phone call.
The strength of your insurance company can be checked through the A.M. Best Co., which publishes financial rating standards of the insurance industry. Select only companies with a B+ or better. Lenders sometimes require even higher ratings. The bottom line is you want a company that will be around long enough to pay your claims and meet its obligations under your policy.
Another factor is the degree of specialization in the self-storage industry. Although our country boasts approximately 1,200 property and casualty insurance companies, only a handful specialize in self-storage.
Real and Personal Property. Do you understand the differences between real and personal property? Real property includes buildings and property permanently attached to your building, such as signs and the foundation. Personal property belongs to the business: maintenance equipment, computers, shelving units in the retail areas, etc.
The valuation of your property—real and personal—is a big factor in determining coverage. An adequate amount of insurance reflects the replacement cost of storage structures but includes more than the value of the buildings themselves. It must be sufficient to cover any losses: debris removal, building permits and replacement of telecommunications and safety equipment, etc.
Most storage policies have separate limits of liability for the building and its contents. Also, check with your agent or broker to make sure you have an inflation-guard endorsement to protect against normal increases in property costs. Be aware, your coverage may not provide additional payments for building costs affected by materials scarcity or an abnormal rise in replacement or construction prices.
Customer Goods Legal Liability. This coverage is unique to the storage industry. As a storage operator, you rent space to tenants but don’t take possession of their property as a warehouseman would. Your tenant lease lists a number of circumstances or events to eliminate you from liability. These are known as “exculpatory clauses,” but they may not always stand up in court.
If an employee damages or steals tenants’ property, this coverage protects you. It can also help when a leaky roof is not repaired quickly and rainwater damages a tenant’s property.
Sale and Disposal Liability. This covers liability that may be incurred due to the improper conduct of a lien sale. All states and many jurisdictions have laws stipulating what must be done to legally dispose of a delinquent tenant’s property.
For example, laws dictate the exact number of days necessary for mailing the notice to the tenant. When operators sell the contents of a unit without following the law precisely, they may be subject to a suit from the tenant.
Business Income Coverage. Typical commercial insurance reimburses the operator for direct loss of his building and its contents. However, the storage operator faces other exposures such as a loss of rental income due to fire, wind or other insured peril. After suffering a serious loss, some storage operators face decreased earnings that might not be covered by a standard commercialproperty policy.
Profits may be lost, but certain expenses continue to be incurred, such as taxes, debt service, maintenance expenses, advertising and fixed charges for services and utilities. In fact, an operator’s credit may be affected when earnings are reduced for a protracted period.
Business-income coverage must be part of your policy for this extra protection. Coverage begins at the time of loss and usually continues only until the storage facility is repaired or rebuilt and returned to operation. In the meantime, many tenants may store elsewhere, forcing the facility to return to lease-up mode.
Look for coverage with an “extended period of indemnity” endorsement to provide coverage after the facility reopens. Lease-ups may take longer than anticipated; your policy should take into consideration the time it takes for a facility in your area to attract new rentals.
Employee Dishonesty Coverage. This standard part of the commercial policy will protect you in the event of a loss. Temptations are everywhere. Site managers and their employees often work under little supervision, with access to tenant and facility property. In addition to insurance, financial audits are recommended on a regular basis. Employee background checks are also a good idea.
Flood Coverage. Floods occur more often than you might think. A storage site does not have to be near a body of water to flood. Several inches of rain in a short time may cause flooding, even in areas not prone to it.
Federal Disaster Assistance is available only when the president declares a major disaster, but less than 50 percent of all floods qualify. The assistance is regarded as a loan, repayable with interest.
Flood coverage is not part of a standard commercial policy. It must be purchased separately, usually through the Federal National Flood Insurance Program. Ask your agent or broker if he can provide this coverage. The policy may cost less than the interest on a federal assistance loan.
Tenant insurance is a type of protection often overlooked by storage operators as a way to reduce liability. You want to have as many insured tenants as possible. Renters with their own coverage first look to their insurance company for payment after a loss, making it less likely you’ll face a liability lawsuit.
You’ll have two methods of providing tenants with insurance: mail order and pay-with-rent. Mail order relies on tenants to order, pay and keep policies current. This method is rarely used and doesn’t measure up as valid risk management.
Pay-with-rent—or point-of-lease—insurance programs are offered when the lease is signed; premiums are collected along with rent payment. When premiums are paid at the facility, coverage is immediate. The customer has the convenience of writing only one check, and the operator has a paper trail proving the insurance was offered.
Your tenants’ property should be protected against the most common causes of loss at a facility. In fact, many standard leases require tenants to have insurance on stored goods. The right insurance protects your property, your tenants’ belongings and more . . . insuring property while ensuring peace of mind.
Chuck Slagle has been with Bader Co. for eight years working with self-storage owners and operators to provide both tenant and commercial insurance. He has more than 30 years experience in the insurance industry. For more information, call 888.223.3726.