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California Appellate Court Rules Tenant Protection Plan Not Insurance

Monday, February 29, 2016   (0 Comments)
Posted by: Erin King
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California Appellate Court Rules Tenant Protection Plan Not Insurance

Analysis and commentary (for California operators) as provided by Carlos Kaslow, General Counsel to the National Self Storage Association.


The California Court of Appeal, in Heckart v. A-1 Self Storage, 2015 Cal. App. LEXIS 1167, has upheld the dismissal of a class-action lawsuit alleging that a storage operator who offered a customer goods protection plan was engaged in selling insurance without a license.  The defendants countered that the tenant protection plan was not insurance but a limited direct assumption of liability for loss of or damage to tenant stored property.  The storage operator assumed liability under the terms of the rental agreement for a higher monthly rent.  The plan participants are given some relief from the rental agreement waiver of liability and the operator agrees to pay certain tenants stored property losses.  Most operators then purchase insurance to cover the risk of a catastrophic loss that may involve dozens or even hundreds of tenants.  In this instance the storage operator paid losses up to $250,000 caused by a single occurrence.  The lawsuit had been brought against the A-1 Self Storage and Deans & Homer, which provides catastrophic loss coverage to the storage operator.  


California courts apply the “principal object” test to determine whether a contract that includes elements of indemnity is or is not insurance.  To be insurance the contract’s principal object must be the allocation of risk between the contracting parties.  The court wrote:


The Rental Agreement allocated the risk of property damage and loss to the tenant. Tenants were free to choose that option. Alternatively, for an additional fee of $10 per month, tenants could choose to enter into the Protection Plan, which allocated risk to A-1. If the tenant chose to participate in the Protection Plan, it modified paragraphs 11 and 12 of the Rental Agreement, which concerned indemnity and the tenant's obligation to maintain insurance on his or her stored property. Just as the parties were free to contract to allocate risk to the tenant, they were also free to allocate risk to A-1. Allowing parties to shift the risk of property damage does not turn an agreement, whose primary objective is storage rental into insurance.


The principle object of the transaction between the tenant and the facility operator is renting a storage unit, not indemnity for loss of or damage to stored property. The protection plan offers the tenant a choice of either shouldering all liability for loss of or damage to stored property or participating in the plan.   Alternatively, the tenant can purchase insurance from an insurance company.  


This is the second appellate opinion holding that a protection plan program is not insurance.  In 2014 the Kentucky Court of Appeals, in Deans & Homer, Inc. v. Commonwealth Of Kentucky, 451 S.W.3d 659, also ruled that the Deans & Homer Tenant Protection Plan program was not insurance.  The California Court of Appeals is an influential court and the opinion could have impact on this issue beyond California. 


The impact of this opinion on the California self storage industry is significant.  It settles an important legal question for the state’s storage operators.   Protection Plan as described in this lawsuit is not insurance and therefore not regulated by the California Department of Insurance.  Storage operators who offer protection do not need to be licensed as insurance agents to offer this type of program.  


The court also ruled that the storage operator was not violating California law by requiring that tenants insure their stored property and that each tenant provide adequate proof that such insurance was in place.  If the tenant did not provide proof of insurance, the self storage operator could enroll the tenant in the facility’s property protection plan.  This is important to storage operators who offer insurance because it strongly suggests that forced enrollment in such programs does not violate the law, provided it is clearly disclosed in the rental agreement and other move-in documents.   


Storage operators trying to decide between a pay-with-rent insurance program and a property protection plan should understand the differences between these types of programs.   The A-1 protection plan program was a direct undertaking by the storage operator to pay for certain losses for additional monthly rent.  This is not a trivial undertaking.  If 300 tenants participate in the protection plan and each may recover up to $5,000 for a covered loss, the owner has a potential liability exposure of $1.5 million. It would be a rare event that would result in a loss of this magnitude but it could happen.  A-1 had insurance that covered losses in excess of $250,000 from a single occurrence.   It paid losses under this amount.  However, there are protection plan programs available with no deductible. What the facility owner needs to understand is that his or her obligation to pay losses under the rental agreement assumption of liability runs directly to the tenant and is not dependent on the insurance company to pay for losses. 


A pay-with-rent insurance program is very different.  It is an agreement between each tenant and the insurance company.  The storage owner has no obligation under the insurance contract and no direct liability to the tenants.   Both approaches can be a source of additional revenue for the storage operator and help ameliorate customer claims.  However, facility operators should carefully analyze the programs they are considering and determine if they are comfortable with the regulation, revenue and risks involved in each option.  


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