Protection plans are not the same as tenant insurance programs. There are crucial distinctions between the two even though the goals of both might be the same.
Let’s take a look first at tenant insurance programs. Tenant insurance is an offering by a third-party insurance company to a self-storage tenant to insure their stored property, up to a certain value, for the payment of a monthly premium. In the majority of states, self-storage facility operators are able to “sell” this insurance to their tenants on behalf of the third-party insurance company as a disclosed agent under a “limited lines” statutory approval process. Under this approval system, the operator is entitled to receive a commission from the insurance company for the sale of the insurance to the tenant. The coverage that is purchased will typically cover the risk of loss of or damage to the stored property except for specific exclusions (for example, floods).
Next, let’s look at what a protection plan is. A protection plan is a direct contract between the self storage facility operator and their tenant whereby the operator agrees that, although they assume no care, custody or control over the tenant’s stored property, for a certain amount of “additional rent”, the operator will accept liability for the loss of or damage to the stored property, again, only up to a specific value. There are no third parties with protection plans. The “protection” or “warranty” offered is directly from the self-storage operator to their own tenant under an addendum to their standard rental agreement. In consideration for the additional rent paid by the tenant, the operator agrees to assume liability for the risk of loss or damage to the tenant’s stored property that the operator typically would not have under most state’s bailment laws.
The ultimate goal of tenant insurance programs and facility protection plans is the same - to offer a method of recovery to a tenant that suffers a loss of their storage property. But the method of that recovery is legally very different. One is direct and the other is through a third- party insurance company. This distinction is crucial as to how the program can be regulated or not regulated by the state where the program is offered and its department of insurance.
Because the goal for tenants is the same whichever approach is used, the concepts of tenant insurance and protection plans are often interchanged, which can lead to confusion. One of most significant cases on this topic was heard in California and went to the Supreme Court of that State. In Samuel Heckart v. A-1 Self Storage, Inc., et al., the California Supreme Court reviewed a lawsuit filed by Heckart against A-1 Storage where Heckert claimed that A-1, by providing a protection plan, was allegedly selling insurance. The lower court denied the Plaintiff’s claims and the Plaintiff then filed his appeal to the California Court of Appeals and then to the State Supreme Court. The appellate courts rejected Heckart’s arguments and found that the company’s protection plan was not insurance, notably because the “principal object” of the business was not to sell insurance but to rent storage units. This ruling has been the basis for clarifying how protection plans should be managed across the country so as to avoid any confusion with third party tenant insurance programs, which are governed by the applicable insurance laws of each state.
The Heckart decision was only recently impacted by a ruling from the New Mexico Office of the Superintendent of Insurance in the matter of CP Rio Rancho, LLC dba Northern Boulevard Storage, et al., wherein the agency concluded that the facility’s protection plan “appears to be a separate contract of indemnity” and “falls within the New Mexico statutory definition of insurance”. Accordingly, in this administrative agency decision, the Department of Insurance found that the protection plan offered by the self-storage facility owner was an insurance product that could be regulated.
These two contrasting decisions speak volumes as to the challenge of educating operators and their managers about the important differences between a tenant insurance program and a protection plan and the significance of how each state may independently interpret those issues. Both the Heckart and the Northern Boulevard Storage cases should be carefully reviewed as a guide toward the operation of a protection plan so as to avoid any issues in their presentation and implementation.
Scott Zucker is a founding partner in the Atlanta law firm of Weissmann Zucker Euster Morochnik & Garber P.C. and has been practicing law since 1987. Scott represents self-storage owners and managers throughout the country on legal matters including property development, facility construction, lease preparation, employment policies and tenant claims defense. He also provides, on a consulting basis, advice to self-storage companies in the areas of foreclosure and lien sales, premises liability and loss control safeguards. Scott can be reached at 404-364-4626 or by e-mail at Scott@wzlegal.com.
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