The Price Of Protection: Coverage Challenges Climb For Carriers And Policyholders

Posted by Christina Alvino on Jul 26, 2022 12:00:00 AM

Insurance is one of the highest costs for self-storage facility owners. While it’s always subject to increases, this is especially true with costs rising for construction materials, facility replacement, and many other related goods and services, experts say

Main Considerations
One of the biggest challenges in self-storage insurance is providing coverage in catastrophe-prone (“cat” prone) areas, says Chris Nelson, who works in new business sales and development for Phoenix-based MiniCo Insurance Agency.

These areas include some parts of California, the Gulf and Atlantic Coasts, and tornado alley. Insurance carriers have taken losses the past few years in California from wildfires and in these other areas from hurricanes, tornadoes, and other wind damage. According to Nelson, this has prompted more carriers in those areas to either stop providing coverage, raise their rates, increase policy restrictions, or some combination of these. 

“It’s getting harder to find affordable insurance in those cat-prone areas,” says Nelson. “If I were a facility owner, that would be one of my biggest concerns as far as insurance. … They’ll always be able to find insurance, but who’s going to write it and at what cost? It’s not as competitive of a market in these high-risk areas.”

Facilities in downtown Los Angeles or San Diego, for example, will have less problems finding insurance than in more wildfire cat-prone areas of California, Nelson adds. It’s harder to find insurance for facilities with wood-frame construction in fire-prone areas. 

“California used to be, until four or five years ago, where [insurance carriers wanted to provide coverage] because it was such a good state in terms of weather and that sort of thing,” says Nelson. “Not too long after Paradise, Calif., was decimated by wildfire, carriers didn’t want to write in the state.”

In addition to insurance difficulties in cat-prone areas, tenant-caused fires are increasing. In other words, tenants are “doing things in their units that they’re not supposed to be doing,” Nelson says, such as welding or using electric space heaters. MiniCo paid claims on many facilities for those reasons. Lease agreements should clearly prohibit those kinds of activities. MiniCo looks for that language when it underwrites coverage, but unfortunately tenants fail to read their contract or breach the terms of their contract and store prohited items anyway.” 

Another important insurance factor to consider is the recent large increases in construction costs, which make reviewing building coverage limits even more important than usual, says Dee Wiseman, self-storage program director for William Knight Insurance Agency Inc. of Knoxville, Tenn. 

Wiseman cites as an example a client who built her first building in 2020 with steel that cost about $14 a square foot. In May of this year, the same steel package for her second building jumped to $24 a square foot, up 71.4 percent. For a 15,000-square-foot building, that means a $150,000 increase for steel alone. Inflated fuel prices are causing construction costs to rise as well, and Wiseman expects inflated construction costs to continue in the coming months.

Changes in self-storage insurance coverage also grew from the COVID-19 pandemic, she says. As the pandemic took hold starting in early 2020, the self-storage industry quickly transitioned to unmanned facilities with employees working remotely, as did employees in many other industries. 

“With those employees using laptop computers, tablets, and cell phones, I anticipate a rise in cyber liability and data breach claims,” Wiseman says. “As a result, many carriers have begun to revise their policy forms with limitations and security requirements.”

Rob Gibson, owner of Robert S. Gibson Insurance Agency in Wheat Ridge, Colo., says the toughest problem in the insurance industry is arriving at the correct replacement value. He thinks insurance companies haven’t kept up with actual replacement value. 

“Anytime you go to a self-storage show, they can do these for $30 to $45 a square foot,” Gibson says. “An insurance company is more at $80 to $120 a square foot, depending on the type. And while that’s just kind of a starting point, they haven’t done their due diligence with [the company] they’re using to do their appraisement values and to update the industry. So, we’re constantly trying to work with the insurance companies to come up with an appropriate value of the buildings.”

Another issue to keep in mind is that for the past two or three years the insurance industry has increased deductibles and premiums while excluding coverage in some geographic areas. This applies especially to Texas, Colorado, and Oklahoma, and particularly areas with hail exposure.

“A lot of that, in my opinion, is difficulty for us on our end, where we’re basically selling a liability catastrophe policy,” says Gibson. “It probably took a while for the insurance companies to react or change their underwriting theory, but now the owners are paying for it. … I’ve got companies that used to write in Colorado that don’t even write in Colorado anymore. It’s a huge problem that we deal with, because there’s only a handful of carriers out there that really understand self-storage insurance. The rest of them basically have a commercial real estate policy, and they try to adapt to it, but they don’t have all the coverages.”

Add flood insurance to the list, too, Gibson says, calling it “a real nightmare” for those seeking insurance. The National Flood Insurance Program only allows writing up to $500,000 on a building. If a self-storage owner has 20 buildings, for example, Gibson’s company must write 20 policies, which isn’t cost-effective for the insured. This is another way the insurance industry is “still years and years behind” in adapting with the evolving self-storage industry.

Brian Bogdanoff, director of property and casualty insurance for Storable, which provides self-storage insurance in all 50 states, says self-storage owners should consider many unique insurance necessities for their industry. These include shielding their businesses from the current litigious environment and unpredictable weather. 

“The good news is there are ways to reduce your exposure and manage your cost by working with an experienced self-storage insurance agent,” Bogdanoff says. “Sometimes the least expensive coverages are the most important and often overlooked when evaluating your appetite for risk.”

All property insurance policies contain building coverage, but with costs rising for construction materials and labor, and from inflation, it’s especially important to evaluate these elements when policy renewal time arrives. A policy’s value limitation can cause a problem if a claim arises. 

According to Bogdanoff, other key areas insureds should keep in mind include: 

  • Customer goods legal liability – A typical self-storage lease states the business owner is not responsible for the tenant’s stored goods. If a customer sues, alleging his property was damaged because of the owner’s negligence, the legal costs and any judgment awarded by the courts can be devastating to your business. 
  • Wrongful sale liability coverage – State statutes govern tenant property sale and disposal, along with auctions. Owners must fully understand their state’s statues because errors could make them vulnerable to lawsuits claiming losses or damages. If a court finds an operator negligent, high legal costs and payouts can result. This specialty coverage includes legal coverage even if a court finds a customer’s lawsuit baseless.
  • Business interruption/loss of income – A catastrophic loss, such as a flood or fire, that interrupts the business’ operation makes this coverage “extremely important.” Most policies include up to a year of coverage. But some self-storage facilities take more time to rebuild, so operators may need to consider a longer coverage period.
  • Ordinance or law coverage – Building construction codes are subject to change. Older facilities face a greater chance of needing changes or rebuilds to meet building codes. Policies may also cover higher construction costs for things such as adding a sprinkler system or updating wiring and plumbing when faced with a loss.

“Not every insurance policy is tailored to meet specific self-storage operator needs,” Bogdanoff says. “The wrong coverage could leave your business exposed even though you’ve done everything right.”

Mike Gong has worked in insurance for about 20 years. He agrees that evaluating property replacement cost values is crucial to adequate insurance. Gong is the Fresno, Calif.-based national self-storage practice leader for Gallagher Insurance Services, headquartered in the Chicago suburb of Rolling Meadows, Ill.

Gong says a self-storage facility built five to 10 years ago, for example, might have cost $1 million to build. Today, many facility owners don’t want to increase their insurance to cover higher replacement values driven by inflation and higher materials and supply chain costs. In that case, their policy probably won’t cover a catastrophic loss. 

“At the end of the day, my job is to give sound advice to cover risk correctly,” he says.

Owners should consider flood insurance even if their facility isn’t in a FEMA high-hazard flood area. Owners typically buy flood insurance only when the bank they seek a loan from requires it if the facility is in a high-hazard flood zone. But Gong tells his clients they should consider buying flood insurance even if the property isn’t in a flood zone because it’ll cost less than if it were in a flood zone. 

“And we see flood events going on in the world in areas that have never been designated as flood zones because of hurricanes coming inland dumping rain and rivers overflowing,” says Gong. “That’s the kind of thing a lot of building owners don’t consider.”

Gong agrees with Wiseman that cyber liability coverage is also increasingly important because online transactions have become the norm, financial crime is rising, and business owners sometimes don’t have secure networks, which leaves them vulnerable to stolen customer data and management system sabotage. And COVID-19 increased these risks. Cyber insurance companies now require multifactor authentication to decrease loss risk, and they’re looking at where most of their claims arise. He also advises customers to always review liability limits because lawsuits aimed at self-storage are increasing.

Overlooked Risks

Cyber insurance is not only growing in importance, but it’s also one of the most overlooked risks. That applies to all business sectors and companies large and small, not only self-storage. 

“A lot of times, the insurance agent doesn’t understand that coverage, so it’s not sold, or it’s undersold,” says Nelson. “I think that’s a growing threat in any small business. I’ve read that over the next few years, carriers will spend more on cyber claims than property claims.” 

Nelson says business income/business interruption coverage is one of the most important coverages a business can have in the event of a catastrophic claim. The basic objective of the coverage is to provide a revenue flow for a designated period of time as a result of the loss of revenue from units being damaged from a covered loss. It is one of the more complex coverages, and it’s important for the self-storage operator to have their agent thoroughly explain the coverage and provide professional counsel on this particular coverage.

Another overlooked type is employment practices liability insurance, Wiseman noted. An EPLI policy protects a business from lawsuits and administrative actions for discrimination, sexual harassment, wrongful termination, and other issues.

“An employer is nearly three times more likely to be sued by an employee than experience a fire,” says Wiseman. “Although many of these cases are settled, employees are successful in nearly 70 percent of the cases, with an average cost of $70,000, including cost of defense and compensation to the claimant.” 

However, Wiseman believes that the self-storage industry’s continuing growth will entice more insurance companies to enter the market. Limited data to determine rates will lead those carriers to charge lower prices in order to quickly grow. This will force many of them to take large rate increases, exclude losses for certain types of claims, or even quickly leave the market when claims start to roll in.

Wiseman goes on to say that policyholders should not let the term “replacement cost” give them a false sense of security and remember that it’s followed by the coverage “limit.”

“Most policies also include a co-insurance clause,” she says. “Simply put, the policy will dictate the limit that the policyholder needs to buy. If the policyholder purchases a limit of insurance lower than the specified percentage of the insured value, they’ll be hit with a reduced claim payout in the event they suffer a claim.”

Gibson also adds customer goods and sale disposal liability to the list, which few companies understand adequately. “It’s buyer beware when buying coverage from companies that aren’t self-storage friendly,” he says.

According to Bogdanoff, one of the greatest self-storage risks is caused by insufficient facility maintenance. Slip and fall claims are the most common general liability claims his company handles, and this type of coverage “can go a long way” and is “the best form of risk control and reduce your exposure and insurance costs in the long term.”

As for Gong, he feels environmental liability/pollution liability coverage is one of the most overlooked coverage types. Probably 90 percent of all facility owners will get a loan, and typically the lender requires personal indemnity coverage, which covers their personal responsibility for any environmental problems that occur at their property. 

What’s Ahead?

“Increased rates and coverage restrictions and getting coverage in catastrophe areas will continue being a challenge,” Nelson says. “Some of these things are not going to get any better. One of the good things is [that although] the insurance industry has always been behind in tech, a lot of companies are investing millions of dollars in tech.”

Wiseman reiterates that the new insurance companies will enter the market as the self-storage market continues to expand. “With limited data to determine rates, those carriers will underprice to grow quickly,” she says. “As a result, many will be forced to take large rate increases, exclude losses for certain types of claims, or even exit the market in a short time when claims begin to come in.”

Insurance companies that educate themselves about writing the right kinds of self-storage policies will find that what lies ahead will be much smoother than it would be without that education, Gibson says. The other companies “are just behind” and will have a “tough time” ahead. Some companies will evolve, but “I don’t know if we’ll see all of them evolve.”

“We are experiencing what we call a hard insurance market,” in which “insurance carriers raise rates, cut back on coverages offered, and decrease capacity in many regions,” says Bogdanoff. “These conditions mean less competition for insurers.”

This situation will likely continue because of natural disasters and loss trend. Interest rates can’t go much lower, Bogdanoff adds, which also drives some of the current increases. Insurance companies use investment income as one of the main vehicles to maintain profitability.

“When you look at what drives the pricing of self-storage insurance, it is a function of how you run your business,” Bogdanoff says. “Over the long term, those self-storage owners that establish safety and risk management practices are going to be a better risk. Working with an experienced self-storage insurance broker in their advisory and advocacy capacity can aid in risk mitigation practices, help educate owners on the market conditions, and assist with loss control processes to obtain the most favorable insurance rates.”