Recuperating From 2017’s Natural Disasters
Hurricanes Harvey and Irma inundated the Gulf Coast region in 2017, causing billions of dollars in damage. Wildfires indiscriminately scarred scenic areas of California and ruined portions of the Wine Country. Tornados and severe thunderstorms were the usual suspects over the summer, resulting in substantial wind damage in parts of the Midwest and Southwest.
Extreme weather conditions from coast to coast seem to be on the rise. Areas with little history of flooding and extreme heat are preparing for more of the same this year. Similar volatile weather patterns may become more frequent as the climate changes, according to the reinsurer Munich Re of Germany.
Insurers are set to pay out a record $135 billion to cover losses from worldwide natural disasters in 2017, Munich Re reports, driven by the costliest hurricane season ever in the United States. Overall losses, including uninsured damage, totaled $330 billion. The 2017 hurricane season caused the most damage ever, with losses reaching $215 billion.
The devastating wildfire season in California drove insured losses to $8 billion. Several severe thunderstorms across the country, accompanied by tornadoes and hail, caused insured losses of more than $5 billion.
Hurricanes Harvey and Irma impacted hundreds of self-storage properties during August and September, and Public Storage lost seven properties in the Houston area that were destroyed by Harvey.
With the approaching onslaught of the tornado and hurricane seasons, self-storage owners should plan to meet with their insurance agents soon to ensure their facilities have adequate coverage and determine where insufficient protection could potentially result in severe business losses.
Commercial Insurance For Self-Storage
Phoenix-based MiniCo Insurance Agency and several other companies offer a range of insurance policies designed specifically for self-storage operators. Not only do their policies protect against numerous risks, but insurance companies that specialize in self-storage have the claims handling experience to expedite cases and help minimize business interruptions.
Recognizing the growing impact that wind, rain, and other perils have on structures in hard-hit areas of the United States and Canada, MiniCo became a coverholder for London-based Lloyd’s in 2016. This status allows MiniCo the authority to offer a specialty property program designed specifically for those self-storage risks that may be challenging to insure. This program provides a solution for facilities in higher-risk geographic areas as well as those with marginal underwriting characteristics.
“In coastal communities and areas that have heavier hail activity where we had to exclude, now we can offer wind and hail coverage in these areas,” says Rob Novak, MiniCo’s commercial underwriting team leader.
For example, in certain coastal areas, insurance coverage was restricted to a designated distance from the shoreline. With the Lloyd’s program, MiniCo can offer property and wind coverage closer to the coast.
Lloyd’s may also provide an option for properties in areas with a high risk of wildfires.
MiniCo also offers other protection for older facilities or those residing in areas with a higher risk for wind damage.
Higher roof deductibles are now more common because of a facility’s history or its vulnerability to wind damage. Percentage deductibles now range from one percent up to five percent or higher in some areas. That means, for a $600,000 building with a five percent deductible, for example, the facility owner would be responsible for the first $30,000 cost of repairing the roof damage caused by wind or hail.
MiniCo Insurance Agency’s wind/hail deductible buy-back program is designed to decrease the potential out-of-pocket financial exposure for commercial property owners. 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.
Another MiniCo offering, the deductible waiver option, removes the property deductible when the insured owner and the company mutually agree to choose elastomeric roof coating instead of roof replacement to repair cosmetic loss or damage to roof coverings caused by wind or hail. This waiver is available in Arkansas, Colorado, Kansas, Oklahoma, and Texas.
Effects On Premiums
With insurers set to pay out a record amount to cover losses from last year’s natural disasters, it can be assumed that companies will enact their own options: hike premiums, raise deductibles, pull out of certain areas, or a combination of all three. But the effect has not been immediate.
“There has not been a significant increase that you would expect,” Novak says of premiums insurance customers are paying. “Sometimes it takes a while to trickle down, so it may be a few months before you see an impact.”
It’s conceivable some customers may pay lower premiums early in the year compared to those whose insurance renewals come up later on.
Some insurance companies may opt to pull out of a state such as Texas where they’ve had acute loss experiences. “They may decide it’s not worth writing business there, or they will create coverage adjustments such as putting on higher deductibles or cosmetic loss endorsements to help mitigate their risk,” says Chris Nelson with MiniCo’s new business sales and development.
Some companies offer a hybrid coverage where a property carries two types of deductibles on the same policy: one for a standard storm with high winds and a higher deductible that’s enacted under a “named storm endorsement”. If a storm reaches the severity where it is assigned a name, e.g. Hurricane Irma, the higher deductible will kick in, meaning the policyholder would be responsible for a larger portion of any loss.
Equipment Breakdown Insurance
Natural disasters are relatively rare to the majority of business owners; however, many other perils can interrupt the daily operations of self-storage and other companies. Broken electronic gate systems, damaged cash registers, and faulty computers can cause major headaches and potentially lose business for a facility.
To help provide remedies for these incidents, MiniCo has introduced an equipment breakdown insurance program to protect critical business equipment for commercial properties nationwide. Coverages include property damage, electronic circuitry impairment, business income, extra expense, spoilage, utility interruption, computer equipment, and data and media.
The program is underwritten by MiniCo’s carrier partner Liberty Mutual Insurance Company, which has been rated “A” (Excellent) by A.M. Best.
MiniCo’s program complements existing commercial property policies and specifically addresses exposures related to equipment breakdown.
Some self-storage owners also operate other types of businesses, so MiniCo offers the policy to industries such as healthcare, commercial real estate, manufacturing, hospitality, and printing and publishing.
“Equipment breakdown is a necessary coverage for commercial risks, and MiniCo has been working to enhance our program to benefit both agents and property owners,” says MiniCo President and CEO Mike Schofield. “Through our partnership with Liberty Mutual, we are now able to offer monoline equipment breakdown solutions to a wide range of commercial properties nationwide.”
Property And Liability Coverage
All self-storage owners need to have their property, employees, tenants, and income protected in the event of a mishap or catastrophic event. A business owner’s policy, such as the one MiniCo offers, provides a broad range of protection for virtually any storage operation.
MiniCo’s policy covers buildings and structures, including fences, building glass, signs, walks and roadways, and buildings under construction. In addition, it covers business personal property and business income loss incurred up to 15 months with higher options available.
Additional coverage is provided for valuable papers and records, accounts receivables, and fine art, all of which may be increased up to $250,000. The policy covers several other property losses, including money lost as a result of a crime both on premises and off, as well as employee dishonesty and forgery.
Identity recovery coverage provides case management service and expense reimbursement coverage if certain requirements are met.
MiniCo’s business liability coverage ranges from $1 million per occurrence up to $4 million aggregate. Coverage includes personal injury and advertising injury, hired and non-owned auto liability, and medical expenses. Umbrella coverage is available up to $10 million.
MiniCo’s business owner’s policy offers replacement cost coverage with a no co-insurance clause. Coverage for replacement cost value will compensate the property owner for the full cost of replacing the lost or damaged property without deducting for depreciation.
With the Equifax hack and numerous other online crimes receiving prominent news coverage last year, more and more storage operators are becoming aware of the need to provide protection against data breaches. Notifying customers and providing remedies when their personal records have been compromised can be very costly.
Data compromise coverage is one method to provide a level of online protection. Coverage provides assistance to insured owners pertaining to a wide range of possible data breaches such as electronic theft or hacking. Data compromise coverage is available in most states through MiniCo.
Insurance agents may provide guidance on setting up training programs for staff members to safeguard against careless handling of customer records as well as a multitude of online threats.
Insurance companies that specialize in self-storage also offer specialty coverage for exposures that are unique to this industry.
For example, MiniCo offers customer goods legal liability to provide coverage against loss or damage to customers’ personal property for which the self-storage business may be held legally liable. The policy also pays for defense costs against allegations with limits available from $25,000 to $1 million.
While the operator’s lease agreement may state that the facility owner is not responsible for the customer’s contents, a tenant could still sue the business for an injury or the loss of property if the owner failed to repair a known issue with a roof, roll-up door, or other equipment.
Self-storage leases generally contain a value limitation of $5,000 to $7,000, however a court judgment can penetrate that legal document. Courts have awarded as much as $100,000 for damaged household goods when it was held that the owner/operator was negligent.
“If there was something the owner was legally negligent in, he could be held liable for the damage,” Nelson says. “If a storm went through and blew a hole in a roof, and the owner didn’t fix that hole in a timely manner, and a month later another storm comes through and damages contents, the owner could be held legally liable for the loss.”
Security is becoming an important standard in storage facilities, and customers expect a certain level of protection for themselves and their property.
“We probably see more of that type of accusation made in fire related claims or in theft or break-in claims where the tenant will allege that the facility should have done more to prevent the damage from occurring,” says Don Sedlacek, MiniCo’s vice president of claims. “If they had 10 break-ins in the last year, yet have no cameras on site or done anything to try to protect the property, they could be deemed to be legally liable. In order for a tenant to have a claim against a facility, it would have to be deemed the facility is legally liable.”
Lien Sale Coverage
States have delineated laws specific to the sale of tenants’ goods in the event of delinquency. Self-storage operators must be extremely careful to abide by these laws before putting a delinquent tenant’s contents up for auction.
Even when owners follow prescribed processes and hold a lien sale in good faith, mistakes still occur, or the tenant feels violated and files suit anyway.
That’s why storage owners carry sale and disposal liability coverage. This optional insurance covers claims against the insured for negligent acts arising from the lockout, sale, removal, or disposal of customers’ property when reclaiming rented space for which rental or other charges are delinquent or unpaid.
Sale and disposal Includes defense against allegations with limits available from $10,000 to $1 million.
“Recordkeeping is very important. It goes to substantiate that you have followed the law—keeping records of all letters sent out and notices provided,” Sedlacek says. “It’s the core of whether the case has merit.”
A solid lease agreement also provides a high degree of protection for storage owners. “Rental agreements are one of the most important items we look at when we’re underwriting sale and disposal,” Nelson says. “We like to see a limit of the dollar amount stored, something that describes the lien sale process, and language that prohibits flammable or hazardous materials.”
Owners can enlist the aid of an attorney who specializes in self-storage to prepare the lease language or they can emulate a sample lease that most state associations make available to members.
Another specialty coverage available to self-storage operators is limited pollutant removal. This policy pays for costs to remove pollutants from a storage unit required by a statutory authority. These removal costs can be exorbitant at times.
Limits of $25,000/$100,000 and $50,000/$200,000 are available from MiniCo. Also, facility owners with more than 1,000 units can secure limits of $100,000/$200,000 and $200,000/$400,000.
An Ounce Of Prevention
An important ingredient in any protection plan is to practice risk management to avoid some of the more common mishaps. Preventive measures can be taken to avoid slip-and-fall injuries, theft, and other issues that can lead to claims or lawsuits.
When maintenance or repairs need to be made, an unlicensed contractor could create more problems than he fixes. “Greater attention should be given to making sure those contractors are licensed and have an insurance policy to afford for any damages or negligence they may cause,” Sedlacek advises.
A manager walk-through is another inexpensive risk management method. For example, a manager may see a tenant burning a candle or find a gas can near the front of a unit. “Those are potential hazards for fire,” Sedlacek notes. “Something as basic as that can prevent a loss from occurring.”
There’s not much mere humans can do to avoid natural disasters, but some preventive measures can be taken. We’ve seen several 100-year floods in recent years, some of them in areas where flooding was not expected.
“Make sure you have determined whether or not your facility is in a flood plain,” Sedlacek advises. “Any type of construction that goes around the vicinity of the facility may have an impact at some point that it does not have today, because it can change the topography of the landscape. Water today is being diverted, but tomorrow may not be the same situation. Especially on new construction, make sure you check with the city and understand what potential situations could be in that area.”
Working with a licensed architect and engineer with experience in this process is a worthwhile expense that may save you from a potential disaster.
Also, contact your insurance agent to review the coverages on your policies to ensure that storm- and disaster-related exposures are addressed. Take the time to review your building values, deductibles, and how business interruption coverage will be addressed if a catastrophic event occurs.
David Lucas is a freelance writer based in Phoenix, Arizona. He is a regular contributor to all of MiniCo’s publications.