All smart business owners know they need insurance to limit risks. For most, a standard business policy covering the property and liability for others’ property or bodily injury is sufficient. But self-storage operators have some risks not addressed by standard policies. These risks are directly related to the nature of the business: storing customers’ property.
Self-storage used to be compared to traditional warehouse businesses where primary responsibility for customers’ goods is on the warehouse owner. However, the industry has successfully promoted laws and legal decisions that firmly establish its role as that of a landlord, meaning far less direct control of, and less legal responsibility for, tenants’ property.
The language in rental agreements has been quite successful in limiting responsibility for damage to tenants’ goods. Still, every state has slightly different laws; no matter how carefully worded your agreement may be, there’s always a possibility you’ll be held responsible for some damage. Moreover, there’s an even greater likelihood that a tenant may make a claim against you to attempt to hold you responsible for damage.
On Guard: Customer Goods
Several special insurance coverages are available to deal with your special risks. The first is Customers Goods Legal Liability. This coverage protects owners against claims of responsibility for damage to tenants’ stored property. It should pay two costs:
- The defense against such a claim.
- Any damage for which the facility owner is found responsible.
In a good policy, you’ll have a limit covering damage to tenants’ property, and the defense costs will be provided in addition to that limit.
One of the most common causes for a claim against a facility is water damage due to a leaky roof. Let’s say your rental agreement states you’re not responsible for damage to tenants’ goods, and the value of stored property in a unit may not exceed $5,000. Let’s also say, in spite of the wording of your agreement, 10 of your tenants get together and hire a lawyer to try and prove damage to their belongings because the leaky roof is your fault, and they should be compensated for it.
For this scenario, we’ll imagine you bought Customers Goods Legal Liability coverage with a property damage limit of $50,000, providing you relief and a defense. The tenants in our imagined case ask for more than the $5,000 worth of goods they were allowed to store in the units, so a good defense is doubly important (Hint: A good defense is not cheap!).
Maybe the total legal fees and court costs add up to $150,000. In spite of the energetic defense, the court decides you should have fixed the roof sooner and finds you responsible for the damage. However, the court recognizes the tenants ignored the terms of the lease and should not have stored so much in their units, thereby limiting the amount you must pay to $5,000 per unit, or a total of $50,000.
So, in this case, you could have been out of pocket a total of $200,000. Fortunately, your limit was adequate for the damage to your tenants’ property, and your policy covered defense costs in addition to your limits. Your entire costs are covered by your insurance!
On Guard: Sale and Disposal
Sale-and-Disposal Legal Liability is another specialty coverage you must consider. If a tenant defaults on rent, you’ll eventually need to dispose of his unit’s stored property. What if he comes back and claims you shouldn’t have disposed of his stuff or, worse, property from the wrong space was sold?
This coverage will defend you and pay anything you owe (up to the policy’s limits you choose to buy) if it is found that you’ve complied with the particular state laws. Here, too, your coverage should pay for defense in addition to the limit of coverage for improperly sold property.
Naturally, you’ll want to minimize the possibility of a claim like this. Work with a qualified lawyer to review your state’s lien laws and be sure they are properly listed in your rental agreement. Finally, develop clear written procedures listing all steps employees must take before holding a sale.
On Guard: Tenant Insurance
While both liability coverages are important, it’s obviously better for you and customers to avoid the argument and finger-pointing that lead to legal actions. Making affordable insurance coverage available for tenants to cover their own property has proven to be an excellent way to deflect a customer’s frustration and anger, and also to reinforce your rental agreement’s provisions placing all responsibility for customers’ property with the customer. If insurance specifically covering stored belongings is convenient and affordable, even customers who choose not to buy insurance are much less likely to succeed in claims against you for damage to their property.
Tenant-insurance programs are available from several specialty carriers, often those who offer specialized coverages such as Customers Goods and Sale and Disposal legal liability. The programs available are similar, but not identical.
Some of the differences you will want to consider when choosing a program to offer your customers include:
- The perils or causes of loss insured against.
- The cost to your customer of insurance protection.
- The ease of purchase for your customers.
- The possible insurance regulatory and licensing issues, including the level of manager involvement in the program administration and any service fees paid to you for your involvement.
There is an alternative to offering insurance to your customers. A number of self-storage operators are beginning to assume some direct but limited liability for damage to customers’ property in their rental agreements. There are a number of possible advantages to this approach:
- Gives you an opportunity to provide exceptional customer service, to take care of possible problems without having to involve insurance.
- Demonstrates your high level of confidence regarding safety and security within your facility.
- Offered for additional rent, it can increase your income and your facility’s value.
The cost for any limited liability assumed in a rental agreement can be covered in whole or part by insurance. The best way to be sure you are adequately protected is to work with a company or agent who specializes in the self-storage industry and can recognize and address your particular needs.
Don’t settle for generic insurance; self-storage is a unique breed and requires specialized coverage.
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.