New eBay Ancillary Sparks Insurance Questions

Scott Lancaster Comments
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A new business model has appeared on the self-storage horizon: selling property for customers on eBay. Recently, I was asked to advise a self-storage owner and his agent about how our self-storage insurance policy would respond to the service.

EBay, of course, is the virtual auction house at www.ebay.com. On any given day, millions of items are offered for sale through auction-style and fixed-price trading. The process of turning white elephants to cash isn’t difficult, but some potential sellers don’t want to deal with setting up an account, listing, describing and photographing merchandise, settling accounts after the sale and shipping to the buyer.

As a result, several businesses and franchises have stepped up to provide these services in exchange for a percentage of the sales price. Some franchise operations will help you create a drop-off center to sell property for others; the cost is a not-so-modest capital investment of $40,000 to $190,000. Ouch.

Self-storage would seem to be a natural fit for eBay franchises; obviously many tenants are storing valuables they would be willing, even eager, to sell. You could provide a valuable service to them and earn additional income for your business. But the prospect of a large capital investment is daunting.

Partnership

An affordable option was recently born through a partnership between Phil French, who operates Filco Ltd. of Indianapolis, and The Online Outpost, which runs a certified eBay trading platform and offers franchise opportunities. Filco owns several self-storage facilities, which are piloting an eBay program called Addit.

For a reasonable investment of a few thousand dollars, AddIt will train your staff members to be authorized eBay trading assistants, and furnish you with marketing materials and software to facilitate transactions. French asserts that operators could make triple the profits they now see through other ancillary offerings.

The Online Outpost’s storage-business model is driven by four components, according to Aaron Mueller, developer of the AddIt program:

1. Selling items for current tenants 
2. Selling tenants’ items to help offset delinquent balances 
3. Utilizing eBay to increase revenues from unit auctions 
4. Selling items for walk-in customers 

Operators are responsible for taking pictures of the items, listing them on eBay, shipping property when it sells and paying their consignors. For its work, the storage facility will keep 33 percent of the first $600 of an item’s selling price and 25 percent of the remaining balance. Plus, it will make revenue from shipping the item.

Legal and Insurance Concerns

But what are the legal and insurance implications of such an ancillary service? Insurers and attorneys often get a bad rap for “killing” new products and business ventures. In truth, we just play defense on your behalf. So, let’s look at this new service from a defensive stance.

First, we need to recognize this is more of a supplementary than complementary service. The self-storage industry has taken great care to distance itself from accepting the risk of loss or damage to customers’ property. Facilities say they are a renter of space—not a warehouse that accepts care, custody and control of a customer’s property.

When a customer relinquishes custody of his property to a business for the performance of some specific service, a legal duty of care is created. The typical non-liability provisions of a self-storage agreement don’t apply.

Insurance policies for self-storage aren’t appropriate for an ancillary service with a voluntary bailment of customers’ property. Specialty coverage's don’t factor in a service such as eBay trading assistance. Similarly, other ancillary operations that include a voluntary bailment of property—including records storage and management, packing and shipping services, or container storage—aren’t addressed by basic self-storage insurance policies.

This doesn’t mean coverage for ancillary operations isn’t available, because insurance providers have developed endorsements to extend coverage for additional property or liability exposure created by ancillaries. If insurance covering your operations can’t be amended to address the exposure of a specific ancillary service, a separate policy may be available to provide appropriate coverage.

With an eBay trading-assistance operation, I believe the only option is to purchase a separate policy. The service is too new for standard self-storage insurance to have developed an appropriate endorsement. However, AddIt's representatives say they've found separate coverage for this operation and can work with interested facility operators to secure it.

If you do shop for ancillary coverage, review the initial application for coverage within the basic insurance policy or the availability of coverage options through special endorsement. If it isn’t clear, discuss options with your insurance agent.

Legal Considerations

The real test for any ancillaries is how well they work within your primary business to increase net revenue. Any business model should be carefully researched, including AddIt’s. 

In my own research, I spoke with Jeffrey Greenberger, partner in the law firm of Katz, Greenberger & Norton LLP, who provides frequent counsel to the self-storage industry on legal issues about the AddIt business model. He had some reservations about the ability to handle delinquent rents through voluntary sale of property and even stronger concerns about the use of eBay in conducting unit auctions.

While selling customers’ items to help offset delinquent balances may be possible, Greenberger notes that in a typical delinquent account a facility owner has a very short period of time to correct the delinquency before proceeding to lock-out and sale. A voluntary response by the delinquent tenant would have to be quick, since the time from listing to receipt of proceeds from a sale on eBay may take 30 days. You’ll need a delinquent tenant who responds quickly and cooperatively to your offer. Plus, the tenant needs sufficient valuable property that can be auctioned, packaged and shipped to a bidder in order to offset delinquent rent.

As you probably know, the lien sale is the legal recourse for a self-storage owner when a tenant doesn’t pay overdue rent within a specified period of time. The process is governed by statute in most states. These statutes include many provisions to protect tenants; a lien sale typically must be conducted at the storage facility and the delinquent tenant may stop the sale by paying the full amount of the outstanding lien.

Greenberger says he’s not sure how conducting a lien sale on eBay would work with these statutes. In addition, when an eBay listing is terminated early, the listing account will be charged fees even when the item isn’t sold to an eBay bidder.

As an insurer, I would be reluctant to insure a facility using eBay in its lien sale process until it’s clear how the process works with applicable statutes. Lest you believe that I’m just an insurance guy trying to kill another good idea, I must end by saying: “Not true.” I think the idea of eBay trading assistance as an ancillary service to self-storage has great potential and should be explored and developed— correctly and carefully. 

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 or visit www.self-storage-insurance.com

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