Self-storage tenant-insurance selling practices in Alabama and Michigan have come under fire from state regulators who say some storage operators are selling insurance without a license and some policies offered by insurers have intentionally misled customers. Indiana-based provider Bader Co. was fined $50,000 last December by Michigan’s Department of Insurance and Financial Services (DIFS) for several violations.
Among the citations levied against Bader by DIFS were that it misrepresented a commercial inland-marine policy as tenant insurance, misled tenants to believe they were buying personal property insurance, and rebated a portion of collected premiums back to self-storage operators.
According to the DIFS order, the inland-marine policy is designed to provide self-storage operators with insurance coverage for “their liability for damage to personal property stored in their facilities.” The department concluded Bader encouraged facility owners to sell the policy to customers as tenant insurance even though they were not licensed to sell it. Bader also created claims letters referring to tenants as the insured “despite the fact that the tenant was not a named insured on the policy and had no right to file a claim.”
Between March 2002 and January 2012, Bader received more than 101,000 insurance applications from self-storage facilities in Michigan. It collected more than $5.4 million from tenants during that period and rebated more than $2.4 million back to storage owners, which is a violation of state code, according to DIFS.
The department concluded, in part, that Bader “used dishonest practices and demonstrated untrustworthiness and/or incompetence in the business of insurance when it created and supplied forms to [self-storage owners] for dissemination to tenants purporting to represent a ‘tenant insurance’ program knowing that no tenant would be insured under the commercial inland marine insurance policy, that the insurance coverage represented to the tenants was not personal property insurance or tenant insurance, and that tenants would have no ability to make a claim under the policy.”
In addition to the $50,000 fine, Bader was given 60 days to restructure its self-storage insurance program in Michigan and agreed to transfer all current Michigan self-storage policyholders to a “non-reporting commercial inland marine insurance policy with an additional insured-loss payable provisions endorsement.”
In Alabama, the state’s department of insurance is investigating at least one incident of a self-storage operator selling a “Property Protection Guarantee and Warranty” product as a way around not being licensed to sell tenant insurance. The department began its investigation after local television station WVTM alerted officials to a letter sent by Florida-based operator iStorage allegedly telling its Alabama customers the property-protection product would be added to the bills of tenants who did not have coverage through their own insurance. iStorage operates facilities in 11 states, including 10 in Alabama.
Similar to Michigan, self-storage operators in Alabama do not have legislation granting them limited-lines licenses to act as agents on behalf of authorized insurers. The iStorage warranty plan could cost up to $252 a year for a payout of up to $5,000 per claim, according to the WVTM report.
Many storage operators offer some form of contents coverage to reduce their risk in the event of a claim as well as generate additional revenue. In the self-storage industry, tenant-protection plans are not the same as tenant insurance but are frequently used by operators in states where selling tenant insurance as part of a storage business is not possible. The warranty plans enable operators to take advantage of the lessor/lessee contractual relationship and modify the "Release of Liability" provisions found in most self-storage rental agreements. In exchange for a monthly fee, the operator assumes responsibility for a tenant's property up to a stated amount. He then insures the additional risk by purchasing insurance for himself.
However, Bill Sager, executive vice president of the Alabama Association of Independent Insurance Agents, said it appeared iStorage was “skirting an insurance issue.” “You can buy $40,000 or $50,000 worth of contents insurance that's literally insurance and not $5,000 worth of a warranty with many stipulations," he told the news station.
Sager also called the iStorage product “clear profit” and said similar policies sold by self-storage operators benefited the operator more than customers.
Many self-storage operators across the nation require tenants to carry property insurance as part of their rental agreements, but tenants who can demonstrate they already have coverage in an existing policy would not need to purchase an additional policy through a storage facility. Not all facilities offer tenant insurance or make it a requirement to rent a unit.
"We in no way condone the requirement that tenants purchase their insurance," said Brent Fields, executive director of the Alabama Self Storage Association (ALSSA). "I just don't think we're in a position to force anything on a tenant. Self-storage is and probably always will be a store at your own risk business transaction."
Fields said many storage operators offer tenant insurance from a “liability standpoint,” and the ALSSA is considering pushing for legislation in 2015 that would enable owners to sell insurance with a limited-lines license. This falls in line with many state industry associations which have successfully pushed through tenant-insurance legislation. Similar bills were recently introduced in Kentucky and Maryland and laws passed in Indiana, Oregon and Tennessee.
The WVTM news report included affirmation from Bader Co. that it also sells inland-marine policies in Alabama, but the company did not publicly comment further about its practices in the state or the insurance order in Michigan.