Insurance Update

Coming To Terms With Aging Storage Facilities

As the self-storage industry matures, the 50,000-plus facilities that house customers’ contents are showing their age.

These storage buildings—many of them well past 30 years old—withstand weather extremes ranging from minus-20 degree Midwest winters to 110-plus degree desert summers. Facilities are asked to stand up to the forces of hurricanes and tornados along with hail storms and even earthquakes.

Insurance carriers have taken note of the industry’s aging facilities and are making adjustments to compensate for increasing claims. These adjustments are seen in the form of higher premiums and rising deductibles, especially in some wind-prone areas.

When evaluating policy risks, insurance companies are looking at how older facilities are being maintained and modernized. Has the roof been upgraded in the past 30 years? What about the electrical system? The answer to those and other questions can affect the self-storage owner’s premiums. In some cases, the insurance company may decline coverage altogether.

Coverage restrictions could be placed on the building structure and roof separately because of wear-and-tear issues. An aging roof that has not been updated may be subjected to a cosmetic loss limitation endorsement or other restrictions.

The endorsement addresses coverage for hail exposure when cosmetic storm damage does not impact the integrity of the roof. MiniCo’s cosmetic loss limitation endorsement is designed as a solution for self-storage owners with locations in hail-prone areas who have difficulty acquiring property coverage, primarily in Arkansas, Colorado, Kansas, Missouri, Nebraska, Oklahoma, and Texas.

While the endorsement limits coverage for cosmetic damage to roofs, the policy still covers superficial hail damage to roll-up doors, siding, downspouts, and gutters.

“Insurance isn’t designed to treat something cosmetic; it’s got to be an actual loss,” says Brian Bogdanoff, vice president of Insurance Office of America in Longwood, Fla. “The reason they’re putting that on there is because of storm chasers—roofers that are knocking on the doors of facilities.”

He explains that unscrupulous roofers visit storage facilities following a hail storm and convince owners to file damage claims with their insurance companies. The roofs may only be dimpled but still maintain their integrity.

“Some facilities got away with it in the past and that’s what’s causing a lot of claims and loss ratios to go up,” Bogdanoff says. “The common areas we’re seeing it in is Texas, Oklahoma, and areas with a lot of wind and hail claims in the last few years.”

Policy Limitations

Some carriers are writing policies that place actual cash value (ACV) limitations on roofs and replacement cost coverage on the rest of the structure. ACV means that the carrier would adjust the claim based on the depreciation of the roof, while replacement cost pays the full cost for all the labor and materials required to rebuild the rest of the structure.

“The importance of upgrading your roof has an impact in the event there are claims on that roof,” says Mike Schofield, president and CEO of MiniCo Insurance Agency in Phoenix. “If you have actual cash value coverage on that roof, then you’re going to get less than if you had upgraded the roof and had replacement cost on it.”

The roof on a 30-year-old facility that has not been upgraded could be subject to a considerable amount of depreciation.

“Companies are getting to the point where they’re not willing to put replacement cost on an aging building,” says Chris Nelson, MiniCo’s new business team supervisor. “They’re going to increase the price, decrease coverages, or put restrictions on it, so it’s to the facility owners’ benefit to maintain the facility or budget for facility maintenance.”

Higher roof deductibles are now more common as well. “We’re seeing carriers putting on percentage deductibles, whereas 10 years ago, that was unheard of; it would be a flat deductible,” Bogdanoff says. “Now they’re putting one percent up to five percent or even 10 percent in some areas. That percentage could be a high dollar amount out of pocket.”

For example, a $600,000 building with a five percent deductible would mean that the owner is responsible for the first $30,000 cost of repairing the roof damage caused by wind or hail. For multimillion dollar facilities, the out-of-pocket costs could be extreme.

“You have to prepare yourself, because if something happens, you’re going to be out of pocket a substantial amount of money,” Bogdanoff says. “A lot of people are just looking at price and it’s important to analyze what type of coverage you’re getting. It’s important to review your policy with your agent who can explain this to you. If you have a high deductible, you should be putting money aside as a reserve fund. You always want to have a security blanket fund to pay for uncovered claims.”

To help combat this sticker shock, MiniCo Insurance Agency offers a wind/hail deductible buy-back program. The program is designed to decrease the potential out-of-pocket financial exposure for commercial property owners.

With wind and hail deductibles for commercial property on the rise in many areas of the United States, the buy-back policy lowers the deductible to as little as one percent or a specific dollar amount when the owner pays a premium to reduce the existing deductible.

To provide insurance protection in locations where some carriers may avoid because of the risk, MiniCo last year was named a coverholder for London-based Lloyd’s. This status grants MiniCo the authority to underwrite business in the United States and Canada on behalf of Lloyd’s syndicates.

MiniCo will develop innovative insurance products and solutions for commercial property risks, including the self-storage sector.

“A financial institution may require earthquake or flood coverage and we can provide that under the Lloyds program, where we might not be able to provide it under our admitted carriers,” Schofield says. “We offer the Lloyds program as an alternative because of the flexibility of coverage and their appetite for risk.”

Lloyds may be an appropriate alternative for an aging facility or a property that has a high loss experience.

Operators Face Cyber Risks

Self-storage operators take risks every day when they go on the Internet. Hackers abound, not only in the U.S. but all over the world as well. Operators who take automatic credit card and debit card payments regularly can put their customers’ personal information at risk.

Should a breach occur and customer data ends up in the wrong hands, owners and operators face a multitude of costly legal rules with certain requirements.

Cyber risks are increasingly appearing on the radar of insurance companies, which now offer various forms of insurance protection that cover computer breaches.

Businesses are usually required to notify affected customers when a security breach occurs. Plus, there are additional expenses and possible litigation involved if identity theft occurs, including offering customers one or two years of free credit monitoring.

Cyber liability protection is designed to reimburse owners for expenses resulting from a notification. In addition, it provides liability coverage if a customer lodges a lawsuit as a result of a data breach.

MiniCo’s Data Compromise policy provides self-storage businesses with $50,000 in coverage to respond to data theft by providing services such as forensic IT reviews, legal assistance, credit monitoring, identity restoration services, and notifications to affected individuals. The coverage responds to a wide range of data breaches, including electronic theft (hacking), theft of computer systems, employee theft of data, accidental publishing, procedural errors, and fraud.

In addition to cyber liability insurance, operators can protect their businesses from hacking by storing sensitive customer information off site at a third-party company.

“Those that collect customer data and store it on their system on site are much more exposed than those that are utilizing third-party software management companies,” Schofield says. “There’s a large portion of the self-storage industry that transfers the risk associated with cyber liability to a facility software management platform. That risk is being transferred to third-party companies because they’re the ones collecting the data on their platforms and storing the data.”

One of the third-party companies, Raleigh, N.C.-based SiteLink, stores customer data encrypted. “Encrypting cardholder data is another measure that makes it more difficult for an unauthorized individual to retrieve usable cardholder data,” says SiteLink Merchant Services Chief Operating Officer Sheryl Scott.

Additionally, any business that stores, processes, or transmits payment cardholder data must be PCI (Payment Card Industry) compliant. “No matter where the cardholder data is being stored, on site at the self-storage facility or off site by their management software company or payment processor, the self-storage company—the merchant—still needs to make sure they have completed PCI compliance if they want to accept credit card payments, because they’re still processing and transmitting data,” Scott says. “PCI compliance is a big step in protecting your business and customers from a data breach.”

SiteLink Web Edition software is PCI DSS Level 1 certified, the most secure PCI standard.

Visa and MasterCard mandate that their merchants are PCI compliant, and SiteLink is helping its clients achieve that status by adhering to PCI best practices. The consequences of non-compliance can threaten the business itself.

“In the event you experience a breach, you could face steep fines for PCI non-compliance along with the possible costs associated with forensics and card reinsurance,” Scott warns. “To ensure you are fully covered, check with your insurance provider to verify you have the proper coverage to protect against unauthorized attacks.”

Bogdanoff recommends having a separate cyber liability policy that extends the coverage of a basic business owner’s policy.

“Some self-storage programs provide some limits for identity theft and media coverage, but that number could easily be used up and it’s important to purchase higher limits,” Bogdanoff says. “It’s still new to a lot of people, and it’s becoming more of a topic that needs to be addressed. In the next few years as everyone moves on to different platforms, especially payment online, it’s certainly something to consider.”

Specialty Coverage For Storage Owners

Self-storage owners have unique exposures and some insurance companies have designed specialty policies to cover operators for negligence, wrongful sales, damage to customers’ property, and legal costs.

Companies that specialize in self-storage insurance, such as MiniCo, offer customer goods legal liability to provide coverage against loss or damage to customers’ personal property for which the self-storage business may be legally liable. The policy also pays for defense costs against allegations.

Some self-storage owners who are new to the business may think that just because their lease agreement states they are not responsible for the tenant’s contents, they are absolved from all blame. But a tenant could sue the business for an injury or the loss of property if the owner failed to repair a known issue with the roof, roll-up door, or other equipment.

“In today’s litigious society, people sign a contract saying they understand they are responsible for insuring their own stuff, but when there is a loss they always look to blame someone else,” Nelson says. “A storm comes through and puts a hole in the roof, but if that owner didn’t fix that roof in a timely manner, or if he let the maintenance slide and some damage occurred, that’s what you would be legally liable for loss or damage to the contents.”

Self-storage leases generally contain a value limitation of up to $5,000, however, a court judgment can penetrate that legal document.

“I’ve seen claims of $20,000 to $100,000 for household goods that have been ruined and it was held that the owner/operator was negligent,” Bogdanoff says. “The $5,000 amount in a lease is a good safety barrier because that’s going to stop people from storing [expensive] items. It depends on how the court is going to decide, whether that was a valid number. We have seen payments in excess of that amount even though there are limits in the lease.”

Tenants can make critical mistakes as well, but a lawyer could convince a judge or jury that the storage owner is still responsible for the error. Recently, a self-storage tenant put personal items in the wrong unit. The facility management failed to catch the mistake and compounded the error by putting the unit up for auction since monthly rental payments were not credited to that unit number.

If the case goes to court and it’s ruled that the storage operator should have known better, the business could face a judgment for a wrongful sale.

Self-storage operators can protect their businesses with a sale and disposal liability policy that provides coverage for negligent acts arising from the lockout, sale, removal, or disposal of customers’ property when the tenant becomes delinquent on the rent. Sale and disposal includes legal defense, which is especially important since owners can be sued even if they conducted the auction properly.

Overlooked Insurance Protection

Funds for insurance expenses are limited at most facilities, and it’s impossible to insure against every peril, however, some casualties can deal a fatal blow to some business operations.

“Most businesses, after a fire or other catastrophic loss, go under not because they weren’t properly insured, but because they don’t have enough business income coverage,” Nelson notes. “It’s not well understood, but it’s probably one of the most important coverages. A lot of people don’t take into account rentals. It took them two to three years to rent the property up and it might take that long again to get it back to where it was.”

Business income or business interruption coverage protects a storage operation’s income in the event of a loss requiring reconstruction. A typical policy provides regular business income and extra expenses incurred for 12 to 15 months following reconstruction while storage spaces are being re-rented. MiniCo offers the option to extend the coverage additional months.

Another policy some storage owners should consider is systems protection coverage, which addresses equipment breakdown losses that would not normally be covered under a traditional commercial insurance policy.

Since equipment breakdown can slow down or stop a business in its tracks, systems protection coverage commonly includes items such as heating and cooling equipment, computers, surveillance equipment, electronic gates, cash registers, and telecommunication systems.

It’s always wise to meet with an independent insurance agent annually to assess a facility’s insurance needs and recommend the proper coverage that fits the owner’s budget.

March is the start of the peak hail season, and an increased chance of severe weather may bring significant property damage. Self-storage owners can take action now to plan ahead should severe weather come your way. Owning a suitable property and casualty policy along with specialty coverage designed specifically for self-storage companies is an important part of risk management and perhaps even the survival of the business.

David Lucas is a freelance writer based in Phoenix, Arizona. He is a frequent contributor to all of MiniCo’s publications.