Insurance: Protecting Stored Property from Loss

By Christopher A. LaVoy, Esq.
AZSA Legal Counsel

An important and persisting issue in the self-storage industry is protecting the tenant in the event of the damage or destruction of his or her stored property. Such protection not only benefits the tenant, but also the operator, as a tenant suffering an unreimbursed loss often blames and seeks compensation from the operator regardless of the merits of such demand.

To be clear, under Arizona law, an operator is not deemed to insure the tenant’s property stored in the unit absent an express assumption of such obligation or, perhaps failing to make the required disclosure in the lease that the tenant must obtain his or her own insurance. Nevertheless, as explained above, it is arguably in the operator’s best interest that its tenants carry insurance or some other protection from loss, which is why some operators mandate it for tenants.

If the tenant has a homeowner’s or renter’s policy for his or her residence, its coverage for loss of personal property may extend to property stored away from the residence in a self-storage unit. Absent this, a tenant must normally obtain some type of specialty self-storage insurance, which is offered by a variety of companies.

Traditionally, such insurance was independent of the self-storage rental transaction. The operator would, at most, refer the tenant to an insurer offering such coverage, perhaps by featuring one or more insurance brochures at the counter. The tenant would then purchase the insurance directly from the insurer. The operator had no involvement in the transaction beyond the referral and typically did not financially profit from it. Such approach is still available.

However, if rental car companies can sell insurance at the counter, why can’t self-storage facilities? The parallel seems obvious, but it did not happen in Arizona until a few years ago as a result of new legislation, thanks to the hard work of AZSA that lead the way nationally on this

As a result of this AZSA-sponsored legislation, an operator may now obtain a license from the Arizona Department of Insurance to be a “self-service storage agent” and sell such insurance to tenants as part of the lease transaction and, especially significant, be compensated for this. The insurance is still typically offered through a third-party insurer, but the insurance transaction is processed at the self-storage counter, with the tenant paying the insurance premium along with his or her monthly rent in one lump-sum payment (the operator then remits the insurance premium portion to the insurer). However, an important restriction on this type of coverage under Arizona law is that the operator may not pay its manager a commission or other special compensation for originating the policy (i.e., while the insurer may pay the operator for originating the policy, it may not in turn pay the manager for it). Today this is the dominant form of self-storage insurance in Arizona.

Still another form of insurance is emerging in the market which claims not to be insurance at all. It is marketed as a “warranty” for a tenant’s stored property and is typically issued by the operator rather than a third-party. The operator assumes responsibility for damage to the tenant’s stored property in exchange for payment of a monthly fee, drawing a strained analogy to a manufacturer’s liability for a defect in a product that it manufacturers and sells. The operator then normally purchases insurance for itself to cover any claims that it pays. The theoretical advantage of selling a “warranty” rather than insurance is that, by stepping outside of the insurance paradigm, the operator can do things prohibited by applicable insurance law, such as, in Arizona, paying the manager a commission for originating the coverage and thereby incentivizing more sales by managers.

As to such “warranty” programs, regardless of how they are described, they may in fact constitute insurance subject to applicable insurance law. In Arizona, that would mean, at a minimum, that no commission could be paid the manager. Arizona insurance law may (it is not clear) prohibit such programs in their entirety on the ground that the operator becomes an insurer operating without an insurance license (as distinguished from selling a licensed insurer’s policy). To their credit, some of these programs openly acknowledge at least some of this uncertainty and risk, as one seller states on its website: 

“If you are running a tenant INSURANCE program, assigning or sharing compensation in any way from these products with unlicensed personnel may be a violation of your state’s insurance laws, resulting in fines and/or loss of license. Please consult your legal advisor or State Insurance Department for clarification.”  1

Therefore, before choosing to participate in such a “warranty” program, it is advisable to consult your attorney

[This article deals with a law related subject at a general level and is not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issues.]

Christopher A. LaVoy is partner in the law firm, Tiffany & Bosco, P.C., and serves as AZSA’s legal counsel.

Source: Behind Closed Doors, AZSA Newsletter Archives