Property insurance is a top expense for a self-storage facility, even in the best of times. In recent years, the market has become increasingly challenging, leading to a significant rise in premiums, especially in areas prone to catastrophic loss. This can be difficult for owners who are used to paying more reasonable rates and have only budgeted for nominal annual boosts.
If this is you, you’re probably concerned about the impact of climbing rates on your bottom line. In this article, I’ll explore why insurance costs are increasing and offer tips on how to negotiate the best rates for your next renewal.
Why It’s Happening
There are several factors behind the recent self-storage insurance-rate increases, with the primary cause being a surge in weather-related catastrophes such as hurricanes, tornadoes, wildfires, unexpected freezing and other natural disasters. Even before Hurricane Ian caused an estimated $112 billion in property damage in Florida last year, the insurance marketplace was reeling from the impact of reinsurance companies who missed their target earnings for six years in a row.
In fact, the insurance industry has officially entered a true “hard” market, according to an article in the “Insurance Journal,” which provides business news for the property and casualty insurance industry. Increased reinsurance rates and limited capacity have put pressure on insurance companies to be more restrictive in their guidelines.
Another reason for higher premiums is property replacement-cost valuations. The increased price of building materials, plus supply-chain challenges, labor shortages and inflation have led to a significant rise in the cost to repair or replace damaged structures. Many self-storage policyholders who experience partial losses max out their property limits because they’re underinsured, which creates higher payouts than insurers anticipated.
For this reason, underwriters are now requiring increased replacement-cost limits. Many of the top self-storage insurance programs expect at least $50 per gross square foot for replacement cost for single-story, metal, non-climate-controlled construction but recommend $60 per square foot or higher in some areas. A prudent step would be to request an insurable value calculation from a licensed appraiser to confirm your self-storage facility is adequately covered.
Managing Your Premium
The underwriting process for self-storage property insurance is complex, involving many factors. Providers look at facility location, age, construction type and condition as well as any additional features such as security systems. They’ll also consider the risk associated with natural disasters such as hurricanes, hail, tornadoes and wildfires in the area. This process is called “modeling,” and insurers use it to determine the premium for each policyholder.
Generally speaking, higher-risk self-storage facilities will have higher premiums than those in low-risk areas. However, it's important to note that even if your property is in the latter category, you may still be subject to increases due to change in overall market conditions. The good news is that when the time comes to renew your insurance policy, there are steps you can take to get the best value for your money. Let’s explore some of them below.
Work With an Agent
It’s common for business owners to get bids from several suppliers when they need to buy a product or service. It’s a smart way to ensure you’re getting the best value. But my advice for property insurance is to choose an independent agent who specializes in self-storage and let them shop the market for you. They’ll perform due diligence and negotiate with underwriters on your behalf, then outline multiple options for your consideration. They’ll even compare complicated coverage forms to ensure there are no gaps. The marketplace for self-storage insurers is limited, so trust in the expertise of your agent and let them go to work for you.
Once you’ve chosen your agent, give them your résumé and a brief history of your business. Emphasize your experience in self-storage, real estate or property management. Insurance underwriters may have room for discretionary pricing based on this knowledge. The more background you can provide, the better your agent can paint a picture of a well-managed operation.
Also arm your agent with a list of improvements you’ve made at your self-storage facility. Updates to roofing, electrical systems, plumbing and heating are the most important, but even painting, paving and cosmetic renovations show pride of ownership. In addition, provide a list of planned improvements for the upcoming year to demonstrate your intention to invest in the property and mitigate potential losses.
Finally, include photos and a site map to show property condition. Otherwise, underwriters will rely solely on the tools at their discretion, which could include an outdated Google Maps aerial photo or street view.
Focus on Roofing
If your self-storage facility is in area prone to wind damage, the construction material, age and condition of your roof are critical factors to insurance underwriting. To get the most favorable pricing and coverage terms, reveal everything you can about your roof’s warranty, metal gauge and wind-uplift rating.
Depending on your location, your insurer may restrict roof coverage to actual cash-value payout rather than full replacement cost. They’ll also add a cosmetic damage limitation to pay only for repairs if a roof is structurally damaged by hail. In other words, they won’t pay if the damage is solely aesthetic. However, either of these restrictions may be removed if you have the right roof.
Boast About Security
Technology advancements provide excellent, low-cost opportunities to protect your self-storage assets. When discussing your facility with your agent, brag about the security features you have or plan to implement such as fencing, access control, lighting, cameras, smart locks and alarms. These are all important features that mitigate loss and for which insurance companies offer credits. Highlighting them should maximize the discounts you receive.
Be aware: Sprinkler systems and alarms result in the highest discounts, but the savings usually come with a warranty requiring the systems to be active and in working order at the time of a claim. It’s important to have a maintenance agreement for your system to ensure it’s operating and functional.
Strengthen Your Lease Agreement
Your lease agreement is your first line of defense against lawsuits from self-storage tenants, and most insurance providers will require a copy of this document. Being proactive and providing the contract up front will facilitate the underwriting process.
Make sure your lease is updated regularly and written by an attorney who specializes in self-storage. Most state associations now have sample rental agreements members can purchase as a starting point. It should then be modified to match your specific operation.
Important clauses offer valuable protection against tenant claims. For example, there should be a value limitation to restrict the worth of items stored. Customers should be aware that their contents are being stored at their own risk, with a hold-harmless agreement for property damage. There should also be a clause prohibiting hazardous, flammable and toxic materials.
Offer Tenant Insurance or Protection
It’s important that your operation offers tenant insurance or a tenant-protection plan to cover customer goods while in self-storage. The more insured units you have at your facility, the better your business is protected from potential lawsuits, which makes your property-insurance company happy. Let your agent know your penetration rate and work with your provider on ways to increase it.
Communicate in a Timely Fashion
This is the most important part of the insurance-underwriting process. Let your agent know your timeline for securing coverage. Underwriters prefer at least 30 days to properly review and assess a risk. If you require a premium estimate for an acquisition, let your agent know when your due-diligence period is expiring so they can provide what you need in a timely manner.
Think of your agent as an ally and valued partner in your ability to acquire and own self-storage facilities competitively, especially in a challenging insurance environment. Open and honest communication is key to a productive relationship. The more information you can provide regarding the characteristics of your facility and your personal experience, the better they’ll be able to negotiate on your behalf for the best value—a combination of coverage and premium to adequately protect your asset.
Jessica Lamoureux is the program manager for the self-storage division of World Insurance Associates LLC, which offers insurance and risk-management solutions to self-storage owners nationwide. The company services more than 300,000 clients from more than 250 offices. For more information, call 860.955.9944; email [email protected].