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California Department of Insurance Reverses Stance on Self-Storage Tenant-Protection Plans

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Providers of self-storage tenant-protection plans received a potential blow last month when the California Department of Insurance (CDI) changed its previous stance on the definition of these programs in a legal brief filed in connection to the case Heckart v. A-1 Self Storage Inc., which is currently before the state supreme court. At issue is whether protection plans constitute insurance.

In the brief filed Sept. 12, CDI reversed its “previous and long-standing legal position” that protection plans didn’t equate to tenant insurance, according to a statement released by Deans & Homer, the insurance underwriter, agent and broker that provided A-1 with its template for selling protection plans.

“The specific issue before the court is does a self-storage facility’s storage rental agreement offering an addendum under which the facility assumed liability for damage to stored property constitute insurance subject to regulation under the insurance code when the principal object of the agreement between the parties was the rental of storage space rather than the shifting and distribution of risk?” Deans & Homer officials said.

An Oct. 3 filing in rebuttal to the CDI brief by attorneys from Sheppard Mullin Richter & Hampton LLP, the law firm representing A-1 in the case, discredits the CDI’s contentions, arguing that "the commissioner's views in the amicus curiae brief are not entitled to deference because no position or argument in the brief is grounded in the commissioner's expertise, technical knowledge or experience. Nor does the commissioner offer any facts that might assist the court in evaluating the dispute from a public policy perspective."

The A-1 brief also notes the California legislature hasn’t taken any action to regulate protection plans and implores the court to reaffirm the December 2015 decision by the California Court of Appeal, which determined that the rental agreement and addendum in the A-1 case didn’t constitute insurance regulated under the state’s insurance code. “The addendum was dependent on the rental agreement whose principal object was the rental of storage space. Thus, the storage facility that offered the addendum did not engage in the unlicensed sale of insurance,” justice James A. McIntyre wrote in the court’s opinion.

“These determinations are in line with other cases in which courts have long affirmed the right of contracting parties to allocate risk within their agreements when incidental to the principal object of such agreements,” Deans & Homer officials said. “Deans & Homer respectfully disagrees with opinions expressed by the California Department of Insurance in its amicus brief, and it strongly believes that the fundamental legal tenets that led to the development of this program are valid. Deans & Homer continues to believe that the protection program does not constitute insurance.”

The lawsuit was filed by tenant Samuel Heckart, who rented a unit from A-1 in July 2012. “The protection plan reiterated terms of the rental agreement, including that the tenant assumed the sole risk of loss or damage to stored property, A-1 was not liable for loss or damage to stored property, and the tenant must insure his or her stored property,” McIntyre wrote. The protection plan also stipulated that Heckart could pay $10 per month to have A-1 retain the liability for loss or damage to his property up to $2,500. Heckart initialed the plan’s option to decline participation in the plan and acknowledged he was covered by his own insurance plan, according to the lower court’s ruling.

Protection plans began to emerge in 2002 as an alternative to traditional self-storage tenant insurance. They’ve been used widely by facility operators in states that haven’t granted storage businesses limited-lines licenses to sell tenant insurance. Among the biggest difference between coverage types is protection plans are a contractual relationship between the tenant and the storage operator, not the tenant and an insurance carrier.

Deans & Homer developed the concept of protection plans for the self-storage industry “after consultation with the legal division” of the CDI, according to the company’s statement.

"The protection agreement is not insurance, it is not a warranty, and does not require the owner/operator to have an insurance license," according to Ted Dobbs, protection sales leader for Deans & Homer. "The agreement is part of the rental agreement and is simply the transfer of some limited liability for loss or damage to stored property back from the tenant to the owner in exchange for additional rent. The facility owner may retain all of the potential liability created by this agreement, or they may transfer part of or all of that risk to an insurance company by purchasing a separate policy of contractual liability insurance."

Based in Phoenix, Deans & Homer has more than 35 years of experience insuring the self-storage industry. The firm offers programs specifically for the protection of facility owners and tenants, including a package policy to protect the facility, direct mail-in tenant insurance and tenant-protection programs.

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