Self-storage operators nationwide are talking about the California legal case Heckart v. A-1 Self Storage Inc., which aims to determine whether tenant-protection plans constitute insurance. The California Department of Insurance (CDI) changed its stance on the definition of the product in a Sept. 12 legal brief filed in connection to the case, which is currently before the state supreme court. In the brief, it flipped its previous assertion that such plans do not equate to tenant insurance.
Why should self-storage operators care? The case outcome is vital for the continued offering of customer-protection plans in California as well as the trickle-down efforts to change rulings in other states where protection plans are currently cleared. The ruling may also have unforeseen consequences in the wording of standard leases of real estate and risk-shifting techniques common to all commercial landlords today. Following is a summary of the conflict and its significance to the industry.
The lawsuit was filed in 2013 by self-storage tenant Samuel Heckart, who rented a unit from A-1 Self Storage in 2012. Under the terms of the lease, Heckert was required to provide proof of insurance coverage for his stored belongings, as he declined to participate in the operator’s tenant-protection program, provided by insurance broker Deans & Homer. When Heckart failed to produce such proof, A-1 added its plan to his account to meet the lease requirement.
Heckart’s lawsuit questions whether a tenant-protection plan qualifies as insurance. If so, it alleges the storage operator should’ve been licensed to sell such a product.
The Deans & Homer Customer Service Protection Plan (CSPP) was provided clearance twice from the California Department of Insurance (CDI)—once in 2003 and again in 2008. The initial ruling was that the “alternative lease” program was not insurance.
The Superior Court of California upheld the CDI decision in response to Heckart’s suit in 2014. Heckart then appealed, and in December 2015, the appeals court again affirmed the ruling. Not satisfied, Heckart took the case to the California Supreme Court, where it was supposed to be heard in September 2017. The hearing never occurred, however, a new insurance commissioner with the CDI did file a brief, reversing the department’s stance and declaring that CSPP is insurance.
The Issue of Indemnification
Seemingly overlooked in the entire issue is the right of parties in a real estate lease to contractually assign risk of loss to the other party, specifically indemnification. These provisions may also include an agreement to reimburse the other party for its losses or damages.
Originally, a waiver of claims was intended to cover loss or damage to tenant property so the landlord wouldn’t face claims by the tenant, even if the property was damaged by the landlord’s own negligence. Many of these waivers include “peril-specific” wording similar to what’s found in a property-insurance policy form.
The same provisions in a real estate lease that allow this waiver of risk would allow the landlord to accept liability for the same risk. It can’t be stressed enough that indemnification provisions within a real estate lease are not considered insurance. If this were the case, the attorney general would open cases against every landlord who leases space.
The California courts have explained that contractual releases of future liability and ordinary negligence as well as contractual indemnity provisions are generally enforceable unless the “public interest” is involved or a statute expressly forbids it. In fact, since 1986, the commercial general liability policy (CGL) has provided clear explanation of assumption of liability in a contract or agreement. In the CGL, liability assumed under a contract or agreement is “excluded,” but with exceptions. Here’s where the coverage comes back in: “Liability of the insured that would be imposed without the contract or agreement, or liability that’s assumed in a contract or agreement that’s an ‘insured contract.’”
One of the five “insured contracts” is lease of premises. (The other four are railroad sidetrack agreement, easement or license agreement, indemnity of municipality, and elevator maintenance agreement.) In layman’s terms, the contractual obligation of the landlord or tenant to assume risk and agree to indemnify the other party is already covered under the CGL policy. (Every storage operator will already have this in his general-liability policy.)
What Deans & Homer has done is take this assumption of risk and indemnification that’s in the operator’s CGL policy and replaced it with another called contractual liability insurance policy, or CLIP. It’s designed to handle these assumed risks to avoid overloading the CGL with contractual obligation claims.
The Kentucky Court of Appeals got this issue right in Deans & Homer Inc. v. Commonwealth of Kentucky, 2014. The same claim of the program being “insurance” was presented by a competitor of Deans & Homer. The appeals court reversed the judgement of the superior court and the Kentucky Department of Insurance that the customer-protection plan was insurance. The court wrote:
The appellant’s (Deans & Homer) solution was rather simple: amend the storage rental agreement so that the risk of loss, which the base contracts exculpatory provision placed entirely on the customer, is partially re-allocated to the operator when damage occurs as a result of the operator’s actions. A short addendum to the existing rental contract would suffice. The appellant crafted a sample provision, which Kentucky operators could add to their existing rental agreements and captioned the addendum as the ‘Customer Storage Protection Plan-Owner’s Limited Assumption of Liability.’
The Kentucky Court of Appeals held that the Kentucky DOI was wrong in its determination that the CSPP was insurance and it was simply a transfer of risk-of-loss prevention. “We conclude that the real character of the promise and exact nature of the agreement in question is that of a common risk-of-loss provision, a waiver of a portion of the exculpatory provision of the base contract.”
Going Back to Cali
To understand what the outcome of the case may be in California, we need to keep these things in mind:
Political winds have shifted the prior two CDI rulings on protection plans, and this may remain a fluid situation depending on politics of the moment.
The insurance commissioner of California is a political appointee who has zero background in the practice of insurance.
As insurance and tenant-protection plan providers anxiously await the verdict, we must be reminded that the California system of judgement has a way of surprising us all.
Matt Schaller is president of Arizona-based Tenant Property Protection, which partners with self-storage operators nationwide to provide protection of tenant goods while maximizing facility revenue. Matt has more than 30 years of experience in the self-storage and insurance industries and has worked with companies that provide tenant insurance and property-protection plans. He’s licensed as a Certified Insurance Counselor and a Certified Risk Manager. For more information, call 877.575.7774; visit www.tenantpropertyprotection.com.