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You've probably seen the low-rise buildings in your communityand along the highway. They look like a set of garages stacked ontop of each other, and they're often attached to the local U-Haulor other self-moving facilities. The units are even thesubject of a reality TV show, “StorageWars,” in which a group of bidders is trying to find hiddentreasure by buying repossessed storage units.

The users of self-storage facilities vary from baby boomers whoare downsizing but not ready to part with all their things, tocollege students leaving their property near the school when theyleave for summer vacation, to plumbers or electricians who needsupplies but don't have a warehouse for storage, to hoarders orcollectors.

When property is stored in a residence or business location,most people obtain personal property coverage, but they don'talways ask their insurance agents about coverage for property inthe storage unit, mistakenly assuming that indemnity language inthe rental agreement for the unit is “insurance.” But is itreally? Not according to a recent Supreme Court of Californiacase.

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 StorageRental Agreement” signed by Heckart released A-1 from liability forloss of or damage to property at the facility.

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

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The rental agreement stated that if Heckart elected toparticipate in the “Customer Goods Protection Plan,” the provisionsof the rental agreement related to A-1's liability would bemodified by the protection plan. Toward that end, the protectionplan acknowledged the provisions of the rental agreement thatlimited A-1's liability and required Heckart to obtain insurance,and then provided:

In consideration of an additionalpayment of $10.00 monthly rent, the Owner retains liability forloss of or damage to Tenant's property, while stored within theenclosed storage unit . . ., up to $2,500 for losses caused by thefollowing: [P] a. Fire, explosion or smoke. [P] b. Theft, vandalismor 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 isstored.

Automatically enrolled in plan without proof of insurance

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

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

Alleged misrepresentation & conspiracy

In April 2013, Heckart brought a putative class action on behalfof himself and all others similarly situated against A-1, claimingthat the protection plan violated California's UnfairCompetition Law (UCL) and the Consumers Legal RemediesAct (CLRA). He also alleged theories of misrepresentation andcivil conspiracy. His claims were based on the allegation that theprotection plan was a policy of insurance, which A-1 was notlicensed to sell.

Heckart contended that Deans & Homer, an insurance underwriter, agent,and broker licensed to sell insurance in California, hadcreated the protection plan and told A-1 that if A-1 sold theprotection plan instead of licensed insurance, A-1 “could chargehigher rates than approved by the California [Department ofInsurance], and avoid the additional administrative costs requiredif 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.” Toaccomplish this end, Heckart contended, Deans & Homer providedA-1 with the language for the protection plan and related forms.Deans & Homer also allegedly provided policies and proceduresrelated to the implementation of the protection plan, consultedwith A-1, and gave its approval before A-1 changed aspects of theprotection plan.

Liability for losses

Moreover, Heckart alleged, to cover losses incurred by A-1 underthe protection plan, Deans & Homer sold A-1 a “StorageOperator's Contract Liability Policy” under which Deans & Homerassumed the liability for all losses under the Protection Plan inexcess of $250,000 per year. Thus, A-1 assumed the risk of thefirst 100 claims per year for losses of $2,500.

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

According to Heckart's complaint, employees at A-1 facilitieswere instructed to offer the protection plan to each rentalcustomer. They told customers that A-1 did not insure theirproperty and that the protection plan satisfied the insurancerequirement of the rental agreement. If the customers hadinsurance, the employee was to remind them that under A-1's planthere was no deductible and because it was not insurance, therewould 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 aninsurance policy and alleged that A-1 failed to comply withinsurance regulations. For example, A-1 allegedly did not providean appeals process with respect to claims, did not maintainpayments in segregated accounts, and did not maintain reservesadequate to pay claims, as required with respect to insurance.

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According to Heckart, A-1 misled consumers by requiringinsurance on stored property and by failing to disclose that theprotection plan was unlicensed and illegal insurance, that A-1 didnot segregate the payments or maintain reserves, that cheaperand more comprehensive insurance was available in the marketplace,that renters were not required to purchase the protection plan torent a storage unit, and that a renter's home or renter's insurancepolicy might provide coverage for stored property.

He alleged that by 2013, A-1 was annually collectingapproximately $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 notinsurance, and the court of appeal affirmed. Both courts premisedtheir rulings on the “principal object and purpose” test, whichexcluded from insurance regulation transactions that had an elementof insurance when that element merely was incidental to adifferent principal object and purpose. The two courts concludedthat the protection plan was incidental to the principal object andpurpose of the parties' transaction: the rental of storagespace.

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 therequirements of this article and has been issued a license by thecommissioner as provided in this article.

The referenced license allows a self-storage facility to:

act as a[n] . . . agent foran authorized insurer only with respect to the followingtypes of insurance and only in connection with, and incidental to,self-service storage rental agreements: [P] (a) Insurance thatprovides hazard insurance coverage to renters for the loss of, ordamage to, tangible personal property in storage or in transitduring the rental period. [P] (b) Any other coverage thecommissioner may approve as meaningful and appropriate inconnection with the rental of storage space. (Emphasisadded.)

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

a contract whereby one undertakes toindemnify another against loss, damage, or liability arising from acontingent or unknown event.

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

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

In its decision, the court first found that although, asHeckart's complaint alleged, Deans & Homer assisted A-1 withthe protection plan, Deans & Homer did not provide insurance torenters; rather, the court pointed out, the protection plan was anagreement between only A-1 and individual renters. Therefore, thecourt ruled, the procedures and regulations that apply to aself-service storage facility in its role as an insurance agent didnot apply to A-1's protection plan.

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

Principal object & purpose test

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

The court pointed out that the protection planadjusted 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 directlyfrom the rental relationship and did not provide indemnificationbeyond damages that might occur to property while it wasstored in the rented space. The protection plan, the courtreasoned, had no purpose independent of the rental agreement, andwas “purely incidental” to the rental agreement.

The court also pointed out that the protection plan wasoptional, which, it added, tended to establish that the rental ofspace rather than indemnification was the principal purpose of theparties' transaction.

The court added that the protection plan extended only to risksover which A-1 had some control, such as fires, roof leaks,criminal activity, and damage to the building. Therefore, the courtnoted, the protection plan served an additional purpose ofproviding an incentive to minimize the risks to storedproperty.

Finally, the court said, the $10 monthly charge for theprotection plan was significantly less than the $55 monthly chargefor renting space. In the court's view, this contrast tended toestablish that the principal purpose of the transaction wasthe rental of storage space.

The court rejected the interpretation of Article 16.3 put forthby the California Department of Insurance, which included theprotection plan as insurance, reasoning that if the legislatureperceived a need to regulate these agreements, it could weighwhether to treat them as insurance.

A-1's protection plan was not 'insurance'

In summary, the court said, A-1's protection plan did notconstitute insurance subject to regulation under the CaliforniaInsurance Code. Article 16.3 enabled self-storage facilities to actas agents for insurance companies with respect to the narrowcategory of insurance described in Article 16.3, but it did notprohibit the indemnification agreement set forth in the protectionplan, according to the court.

Because Heckart's claims were premised on his contention thatthe protection plan was subject to regulation under the InsuranceCode, 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 clearfor renters of self-storage units: Check with your insurance agent,broker or carrier to understand what coverage you have availableand what you might need to protect your property, as well as whatthe law covers in your state. Calculate the value of the contentsyou have in the storage unit and share that with the agent toensure 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 thefounder and president of Meyerowitz Communications Inc. Email himat [email protected].