Self-storage owners often wonder, “How can I earn more money and also protect my investment without additional overhead?” The answer is to offer tenant insurance or a tenant-protection plan. These products are quite different, however. How do you decide between them?
There are several critical areas to examine, which should help you make a fair comparison between these unique offerings. No matter which plan you choose, it’s imperative to understand your customers’ attachment to their “valuables” and their pain if these possessions are lost or damaged.
In the rental agreement, many self-storage operators insist the tenant assume full risk for damage or loss to his stored goods and be responsible for his own insurance coverage. While this approach may be seen as “playing it safe” when it comes to liability for a loss, it’s becoming increasingly difficult to defend in court and may ultimately prove costly if a major loss occurs. A court defense and the negative impact to your business reputation are expensive and potentially damaging to future earnings.
There’s a better way. With a well-crafted lease and addendum, you can transfer or assume the risk for tenants’ property in exchange for a monthly premium or fee. Self-storage tenant insurance or protection plans help you in several ways:
- They provide protection for tenants stored belongings without the added cost or hassle of dealing with a homeowner’s or renter’s insurance policy.
- There’s profit to be had. With a tenant-insurance plan, it’s a commission; with a tenant-protection plan, it’s an “administration fee.” Either way, it’s cash flow.
- These products bring a new level of service to customers and help reduce your general liability.
- The importance of reputation management is at an all-time high. One negative review could be detrimental to a company. These products help ensure customer satisfaction in the event of a tenant loss.
Whichever program you offer, it’s important to be familiar with all its facets, particularly regulatory compliance, and how it works from an operator’s and customer’s perspective. Here’s a quick overview.
Tenant insurance is the transfer of risk from your tenant to an insurance provider/carrier in exchange for payment. This is a two-party contract. The company must provide the tenant with a contract (policy) that outlines the terms of coverage and his rights therein.
Selling tenant insurance requires an agent or producer license representing one of two classifications in all 50 states. A special limited license is available for self-storage operators in about 34 states, with legislation pending in a few others. The limited license simplifies the licensing process for facility employees. There are fees associated with it, and staff training is sometimes required.
States without a special limited license require a “full” property and casualty license to represent an insurance product at the counter. Self-storage owners and managers would need to fulfill the obligations required by their state’s insurance commission. Errors and omissions insurance is usually required.
In California and other states, the courts have ruled that a tenant-protection plan is not insurance. It’s essentially a three-party contract. The tenant and facility operator are the first and second parties. The tenant contracts with the operator as part of the conditions of the lease agreement, via a signed addendum. In consideration of the payment of an additional fee per month, the operator will protect the tenant from property damage. The plan’s limits are indicated in the addendum.
The third party of this protection plan is added when the self-storage owner purchases a contractual liability-insurance policy that assumes any liability to the tenant on his behalf. This is a “reinsurance” agreement. The owner becomes legally responsible only if he’s negligent or breaches some other duty to the tenant and the tenant suffers a loss. The provider receives a portion of the administrative fees. In this case, the storage operator isn’t required to be licensed. It’s the agent selling the contractual liability-insurance policy who must be licensed.
The first factor in deciding on a program is whether your state is one that requires limited licensing for self-storage tenant insurance. If your state doesn’t have a licensing law, you can’t legally sell insurance without an insurance producer or agent license for each person offering the program. In this case, your option is to offer a protection plan. Call or visit your state’s insurance department if you’re unsure about the licensing requirement. If considering a protection plan, make sure the agent offering your policy is licensed for property and casualty.
When setting rates or commissions, a tenant-insurance carrier must follow each state’s guidelines. Rates can’t be arbitrarily adjusted by the facility operator, who’s now an insurance agent. Your carrier must submit any changes to the state’s insurance department for review and approval.
Note: Any insurer, agent or producer who gives or offers some benefit other than those specified in the policy to induce a customer to buy insurance is considered “rebating.” This is illegal in most states. Most tenant-insurance plans will pay actual cash value. This is a depreciation-based model.
Self-storage operators who offer a tenant-protection plan set their own administrative fees and share the profit with the policy provider in an agreed split. Some plans require a “self-insured” fund to underwrite a specified number of claims. This pool is usually paid to the protection program. Other plans are looking for a minimum amount of participation and paid month by month, depending upon the plans sold. Rates and fees aren’t set by the state’s department of insurance, and most tenant-protection plans pay replacement cost.
Note: Neither program will provide a “gain” via a claim for one’s contents or items. This is against insurance regulations.
It’s an absolute must to establish ongoing communication with tenants. This communication should start with the sales presentation at the counter. To encourage participation in a tenant-insurance or -protection program:
- Create sales material and a promotional video that tout the benefits of your program.
- Train and incentivize staff to sell your program.
- Share examples of tenants who suffered a loss and had “peace of mind” because they were protected by a plan.
- Convey that a loss reported to one’s homeowner’s insurance provider won’t get the same treatment as one reported through a tenant-insurance or -protection plan.
- Explain that the deductible for most homeowner’s policies starts at $500, while for most tenant-insurance or -protection plans it’s $0 to $100.
- Finally, communicate that the premium on a homeowner’s or renter’s insurance almost always increases after a claim, which isn’t the case with a tenant-insurance or -protection plan.
It really isn’t a hard decision. These plans are good for your customer. They also serve your profit, protection and reputation-management needs much better than having nothing at all!
What are the revenue-generating aspects of these programs? With tenant insurance, providers pay a commission based on rates they each file at your state’s department of insurance. These rates are established within a set parameter and must be approved by the state. They may not be changed except by a new filing.
Many tenant-insurance providers base their commissions on a fixed percentage of a sold plan or on a fee basis per policy. The profit may be non-existent for low-production self-storage facilities. For mid- to high-production facilities, it could be in the tens of thousands to six figures per year.
Tenant-protection programs pay an administrative fee, which is either a percentage of the tenant retail price or a set fee per plan based on a “rate per $1,000.” In the case of the latter, the owner can set his own profit above this fee based on sales. Most protection programs will produce in the tens of thousands to six figures per year, too. In either case, self-storage operators have often realized this product offering to be their second-highest profit center after rental income.
Depending on the program, there are other profit advantages. The higher the coverage amount sold, the more profit received. Thus, many owners are going from smaller $8 plans to $12 or even $15 plans as the minimum offering. The higher-priced plans also consider the growing value of tenant contents being stored, such as electronics and valuable sport or business equipment.
Many owners use the sale of their insurance or protection plans to incentivize their managers or cover a portion of employee salaries and benefits. Thus, they see more profit and higher employee morale. For some, this profit center will raise their portfolio value by eight to 12 times the annual residual income received from their program.
Each state requires self-storage operators with tenant-insurance programs to receive training, a license and errors and omissions (E&O) coverage. You also need to consider the opportunity cost to start and sustain your program. Some programs require an upfront premium deposit or funds to initiate, including money to protect against initial individual or aggregate claim costs. Each insurance program has its own standard for determining these upfront costs.
Tenant-protection programs require little to no upfront cost for the training, license or E&O coverage. However, there are several that require a minimum upfront setup fee. Finally, there are protection programs that require a “premium deposit” or funds to initiate the program and “self-insure” against initial claims.
Paramount in your decision of whether to offer tenant insurance or a protection plan and which provider to choose is whether a company is customer-oriented and will respond quickly to your customers. Remember, it’s your facility’s reputation on the line. Tenants want their claims handled quickly and fairly, so make sure you understand the provider’s claims process and how efficiently the client is served.
Research each provider’s claims-paying record and financial strength. You can easily do a Google search or check with fellow operators you trust. With tenant insurance, always get a copy of the policy terms and conditions so you’ll understand how it affects your tenants. With a protection plan, get a copy of the lease addendum. In both cases, read the fine print!
Here are some other important considerations:
- Which company will provide the best training and support for your employees?
- Which offers the best marketing and addendum materials?
- Does the provider offer tenant forms that clearly lay out the terms and conditions for each party?
In his book, “Life, the Truth, and Being Free,” Steve Maraboli said, “A lack of clarity could put the brakes on any journey to success.” Keep this mind, and you’ll be in great shape with whichever product you decide makes the most sense for you and your self-storage business.
Terry D. Anderson is CEO and president of Arizona-based Tenant Property Protection, which partners with self-storage operators nationwide to provide protection of tenant goods while maximizing facility revenue. He has 37 years of experience in nonprofit, retail and professional services. For more information, call 877.575.7774; e-mail [email protected]; visit www.tenantpropertyprotection.com.