Is a self-storage company's 'protection plan' considered 'insurance' in California?

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You’ve probably seen the low-rise buildings in your community and along the highway. They look like a set of garages stacked on top of each other, and they’re often attached to the local U-Haul or other self-moving facilities. The units are even the subject of a reality TV show, “Storage Wars,” in which a group of bidders is trying to find hidden treasure by buying repossessed storage units.

The users of self-storage facilities vary from baby boomers who are downsizing but not ready to part with all their things, to college students leaving their property near the school when they leave for summer vacation, to plumbers or electricians who need supplies but don’t have a warehouse for storage, to hoarders or collectors.

When property is stored in a residence or business location, most people obtain personal property coverage, but they don’t always ask their insurance agents about coverage for property in the storage unit, mistakenly assuming that indemnity language in the rental agreement for the unit is “insurance.”  But is it really? Not according to a recent Supreme Court of California case.

Rental agreement & property insurance

Samuel Heckart rented a storage unit from A-1 Self Storage, Inc., in June 2012 for $55 a month. The “A-1 Self Storage Rental Agreement” signed by Heckart released A-1 from liability for loss of or damage to property at the facility.

The rental agreement also required Heckart to maintain insurance for the value of his stored property.

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The rental agreement stated that if Heckart elected to participate in the “Customer Goods Protection Plan,” the provisions of the rental agreement related to A-1’s liability would be modified by the protection plan. Toward that end, the protection plan acknowledged the provisions of the rental agreement that limited A-1’s liability and required Heckart to obtain insurance, and then provided:

In consideration of an additional payment of $10.00 monthly rent, the Owner retains liability for loss of or damage to Tenant’s property, while stored within the enclosed storage unit . . ., up to $2,500 for losses caused by the following: [P] a. Fire, explosion or smoke. [P] b. Theft, vandalism or malicious mischief . . . . [P] c. Roof leak or water damage. [P] . . . [P] d. Windstorm that first causes damage to the building. [P] e. Collapse of the building where your property is stored.

Automatically enrolled in plan without proof of insurance

The protection plan allowed Heckart to decline to participate in the plan, but stated, in that event, that he had to provide to A-1, within 30 days, with information concerning his own insurance policy. If Heckart did not provide that information within 30 days, the protection plan provided, he would automatically be enrolled in the protection plan until he provided other insurance information.

Heckart noted on the protection plan that he declined to participate, but thereafter he was automatically enrolled in the plan and was charged $10 a month, presumably for failing to provide evidence of his own insurance within 30 days of signing the contract.

Alleged misrepresentation & conspiracy

In April 2013, Heckart brought a putative class action on behalf of himself and all others similarly situated against A-1, claiming that the protection plan violated California’s Unfair Competition Law (UCL) and the Consumers Legal Remedies Act (CLRA). He also alleged theories of misrepresentation and civil conspiracy. His claims were based on the allegation that the protection plan was a policy of insurance, which A-1 was not licensed to sell.

Heckart contended that Deans & Homer, an insurance underwriter, agent, and broker licensed to sell insurance in California, had created the protection plan and told A-1 that if A-1 sold the protection plan instead of licensed insurance, A-1 “could charge higher rates than approved by the California [Department of Insurance], and avoid the additional administrative costs required if A-1 sold a licensed insurance product.”

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In addition, A-1 “would net nearly twice the revenue from the . . . Protection Plan [as] opposed to the sale of insurance.” To accomplish this end, Heckart contended, Deans & Homer provided A-1 with the language for the protection plan and related forms. Deans & Homer also allegedly provided policies and procedures related to the implementation of the protection plan, consulted with A-1, and gave its approval before A-1 changed aspects of the protection plan.

Liability for losses

Moreover, Heckart alleged, to cover losses incurred by A-1 under the protection plan, Deans & Homer sold A-1 a “Storage Operator’s Contract Liability Policy” under which Deans & Homer assumed the liability for all losses under the Protection Plan in excess of $250,000 per year. Thus, A-1 assumed the risk of the first 100 claims per year for losses of $2,500.

At any given time, more than 15,000 renters were enrolled in the protection plan, according to Heckart. Under the Storage Operator’s Contract Liability Policy, Deans & Homer retained the “right to adjust the [protection plan] claim directly with the [protection plan] customer.” The policy required A-1 to provide monthly reports to Deans & Homer setting forth who was enrolled in the protection plan and their coverage dates.

According to Heckart’s complaint, employees at A-1 facilities were instructed to offer the protection plan to each rental customer. They told customers that A-1 did not insure their property and that the protection plan satisfied the insurance requirement of the rental agreement. If the customers had insurance, the employee was to remind them that under A-1’s plan there was no deductible and because it was not insurance, there would be no rate increases if there were to be a claim.

Alleged failure to comply with insurance regs

Heckart’s complaint concluded that the protection plan was an insurance policy and alleged that A-1 failed to comply with insurance regulations. For example, A-1 allegedly did not provide an appeals process with respect to claims, did not maintain payments in segregated accounts, and did not maintain reserves adequate to pay claims, as required with respect to insurance.

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According to Heckart, A-1 misled consumers by requiring insurance on stored property and by failing to disclose that the protection plan was unlicensed and illegal insurance, that A-1 did not segregate the payments or maintain reserves, that cheaper and more comprehensive insurance was available in the marketplace, that renters were not required to purchase the protection plan to rent a storage unit, and that a renter’s home or renter’s insurance policy might provide coverage for stored property.

He alleged that by 2013, A-1 was annually collecting approximately $1.8 million under the protection plan, paying Deans & Homer approximately $133,000, and paying approximately $25,000 in claims.

Lower courts: Protection plan not insurance

The trial court ruled that the protection plan was not insurance, and the court of appeal affirmed. Both courts premised their rulings on the “principal object and purpose” test, which excluded from insurance regulation transactions that had an element of insurance when that element merely was incidental to a different principal object and purpose. The two courts concluded that the protection plan was incidental to the principal object and purpose of the parties’ transaction: the rental of storage space.

The dispute reached the California Supreme Court.

California law

Article 16.3 of the California Insurance Code, which is titled “Self-Service Storage Agents,” provides that:

A self-service storage facility . . . shall not offer or sell insurance unless it has complied with the requirements of this article and has been issued a license by the commissioner as provided in this article.

The referenced license allows a self-storage facility to:

act as a[n] . . . agent for an authorized insurer only with respect to the following types of insurance and only in connection with, and incidental to, self-service storage rental agreements: [P] (a) Insurance that provides hazard insurance coverage to renters for the loss of, or damage to, tangible personal property in storage or in transit during the rental period. [P] (b) Any other coverage the commissioner may approve as meaningful and appropriate in connection with the rental of storage space. (Emphasis added.)

Article 22 of the Insurance Code defines “insurance” as:

a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

Calif. top court: Protection plan did not involve the sale of insurance

The California Supreme Court affirmed, holding that the protection plan did not involve the sale of insurance.

In its decision, the court first found that although, as Heckart’s complaint alleged, Deans & Homer assisted A-1 with the protection plan, Deans & Homer did not provide insurance to renters; rather, the court pointed out, the protection plan was an agreement between only A-1 and individual renters. Therefore, the court ruled, the procedures and regulations that apply to a self-service storage facility in its role as an insurance agent did not apply to A-1’s protection plan.

The court then examined whether the protection plan was insurance within the meaning of Insurance Code Article 22, and concluded that it was not.

Principal object & purpose test

The court said that, to determine whether a contract was subject to insurance regulation, it considered whether its “principal object and purpose” was “service” rather than “indemnity.” Applying the principal object and purpose test to the protection plan, the court found that the rental of storage space was the principal object and purpose of the parties’ transaction, and the protection plan was incidental to that purpose.

The court pointed out that the protection plan adjusted risks between the parties to the rental agreement; A-1, not a third party, indemnified Heckart.

Plan optional

Next, the court continued, A-1 assumed risks that arose directly from the rental relationship and did not provide indemnification beyond damages that might occur to property while it was stored in the rented space. The protection plan, the court reasoned, had no purpose independent of the rental agreement, and was “purely incidental” to the rental agreement.

The court also pointed out that the protection plan was optional, which, it added, tended to establish that the rental of space rather than indemnification was the principal purpose of the parties’ transaction.

The court added that the protection plan extended only to risks over which A-1 had some control, such as fires, roof leaks, criminal activity, and damage to the building. Therefore, the court noted, the protection plan served an additional purpose of providing an incentive to minimize the risks to stored property.

Finally, the court said, the $10 monthly charge for the protection plan was significantly less than the $55 monthly charge for renting space. In the court’s view, this contrast tended to establish that the principal purpose of the transaction was the rental of storage space.

The court rejected the interpretation of Article 16.3 put forth by the California Department of Insurance, which included the protection plan as insurance, reasoning that if the legislature perceived a need to regulate these agreements, it could weigh whether to treat them as insurance.

A-1′s protection plan was not ‘insurance’

In summary, the court said, A-1’s protection plan did not constitute insurance subject to regulation under the California Insurance Code. Article 16.3 enabled self-storage facilities to act as agents for insurance companies with respect to the narrow category of insurance described in Article 16.3, but it did not prohibit the indemnification agreement set forth in the protection plan, according to the court.

Because Heckart’s claims were premised on his contention that the protection plan was subject to regulation under the Insurance Code, his claims failed, the court concluded.

The case is Heckart v. A-1 Self Storage, Inc., No. S232322 (Cal. April 23, 2018).

Editor’s Note: The lesson here is clear for renters of self-storage units: Check with your insurance agent, broker or carrier to understand what coverage you have available and what you might need to protect your property, as well as what the law covers in your state. Calculate the value of the contents you have in the storage unit and share that with the agent to ensure proper limits as well.

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.