Storelocal Team Dec 6, 2022 1:42:26 PM 26 min read

Tenant Protection vs. Tenant Insurance: Which is Right for Your Self Storage Facility?

Whether you are new to the industry or an old pro adding a new service, offering tenant protection or tenant insurance is important for all self storage professionals.

Both are valid business choices, with legitimate services to offer your tenants, backed by reputable companies. In fact, many of the vendors in our industry provide both tenant protection programs and tenant insurance plans. That is a resounding endorsement of both approaches.

Both tenant protection and tenant insurance offer you an additional stream of revenue. Most providers have developed plans that are simple to use, and they integrate with property management software (except for PMS vendors who restrict your choices to vendors or programs they own). 

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Both tenant protection and tenant insurance can provide the customer service you seek when stored property is damaged or lost. Good programs offer wide coverage to protect against the most common losses. For example, Storelocal Protection covers loss or damage not specifically excluded in the self storage rental agreement addendum (like hazardous materials, acts of terrorism, or volcanic eruption, for instance). 

Offering tenant protection or tenant insurance helps both the self storage operator and the tenant. To protect your business, all self storage rental agreements (leases) should include limit of liability language. Liability coverage is the first of several legal matters addressed here, especially as it relates to tenants' belongings. This clause tells your tenant that their stored personal belongings are their own responsibility, not yours. Your lease should also make it clear that insuring stored personal property is the tenant’s responsibility. 

Fortunately, you can offer either tenant protection or tenant insurance so tenants can cover their property and be made whole when the unfortunate happens. 

What’s best for you, tenant insurance vs tenant protection is entirely your choice. Here are some of the pros and cons of both offerings. 

Tenant Protection 

Protection plans have been widely used for decades. When you purchase a cell phone, computer, or car, you typically get a protection plan to protect against damage. 

Tenant protection plans were introduced to our industry about 20 years ago, by Deans & Homer. Tenant protection is the single largest stream of ancillary income available to self storage facilities, a revenue source second only to rental income. Generally, tenant protection gives self storage operators a higher revenue share than tenant insurance – because insurance companies have higher overhead to cover, due to strict insurance regulations.

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Plus, if you have a good program, it gives your tenants excellent customer service. When the unfortunate happens, your tenant can be made whole because they purchased protection coverage. 

Objections to tenant protection include worries over court battles and Departments of Insurance looking for their own additional revenue streams. The fact is that self storage protection plans have stood the test of both time and litigation. When protection programs are taken to court, they win the battles. Tenant protection plans are not insurance, and they are not regulated by Departments of Insurance, as decided by the California Supreme Court in Heckart v. A-1 Self Storage. 

Because they are not insurance, which is strictly regulated in every detail (see below), you have more control over what you offer in a tenant protection plan. This flexibility can better serve you and your tenants. Think about revenue management: rent is higher in large metropolitan areas like Houston, Texas, than in suburban or rural areas, like Boyd or Longview, Texas, right? But if you use a tenant insurance plan, you must charge the same price everywhere, because that is the price filed in the state of Texas. 

With a tenant protection plan, you can charge a higher price for markets with higher income and rent, like Houston, and a lower price for lower income markets, like Boyd or Longview.

You can also use this flexibility in bringing tenants into a new protection plan. For instance, you can give the first month of protection for free, or introduce it at a lower price to avoid sticker shock, then gradually raise the price over the next year, in coordination with your in-place rent increases.  If you decide to do this, be aware that most tenant protection providers will still charge you their minimum fee, so your revenue share will be a lower percentage initially. However, you will accomplish your objective to bring your tenants into the plan with good penetration from the start, and you will achieve your target revenue share within a few months. 

You also have flexibility on how or whether you incentivize your team to sell the plan. Whether you provide bonuses for each plan sold or based on overall net operating income, or anything in between, you can incentivize your management team to sell tenant protection, thereby deepening penetration. The more you sell, the more you make. And the more tenants you have covered when the unfortunate happens.

The method used to gather claims also benefits from the flexibility of a protection plan. With tenant insurance, who does this and how it is done is determined by what the insurance company filed with your state’s Department of Insurance. Using tenant insurance, you can’t deviate from the filed details. 

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This flexibility is what enabled Storelocal Protection to develop the industry’s first fully integrated online claims portal. Suppose a tenant discovers damage from a roof leak. They can literally stand in their unit, take photos of items damaged by the leak and of how the water entered the self storage unit, and file a claim right then and there on their phone. 

In addition, most protection plans do not have deductibles and pay claims based on replacement value, not depreciated value. Using the example of the roof leak above, suppose the tenant recently purchased a television for $700 and a computer for $1,000 computer, and these items were damaged by the roof leak. If this tenant had $2,000 of protection and submitted a claim to Storelocal Protection, no deductible would be applied and the tenant would be paid the replacement value for the television and computer: $1,700. Storelocal Protection tells tenants they’ll get a check within three days of receiving all required documentation (in this case, the only other thing needed is confirmation of the roof leak from the operator). Fortunately, Storelocal Protection’s track record is even better than 3 days: checks are often sent the same day documentation is received, often within the hour. 

Tenant protection and tenant insurance plans involve different types of contractual relationships. Tenant protection plans are a contractual relationship that involve three parties. The first and second parties are the tenant and the self storage operator, who retains limited responsibility for the tenant’s property under specific terms and conditions, specified in an addendum to the tenant’s lease. The third party is typically a protection provider to which the risk is transferred via a contract, such as Storelocal Protection’s Program Management Agreement. Larger operators may choose to retain this risk on their own, if they have enough tenants and properties to spread the risk over a large portfolio. They can also transfer risk to a third party such as an insurance company, via a contract liability-insurance policy, or a micro captive, which they form (again, an option for large portfolios).

In short, tenant protection is the self storage operator’s commitment, contractually spelled out in a lease addendum, to pay for losses covered by the addendum. Storelocal Protection pays for those losses, as spelled out in the Program Management Agreement. 

Tenant Insurance

Self storage tenant insurance is a traditional insurance product, which creates significant differences. One difference is that insurance is heavily regulated in every state. Every insurance plan is filed with the Department of Insurance in every state where it is offered. These filings cover every aspect of how the insurance is sold, remunerated, rates charged, commissions, etc. This means there is no flexibility in what you charge, how you incentivize your team to sell the plan, what is typically covered, how claims are processed, or any other operational details. 

Another difference with a tenant insurance program is licensing. Most states require anyone selling insurance (including tenant insurance) to be a licensed insurance agent. Due to successful lobbying efforts of self storage associations on the state and federal level, many states now allow the owner or principal to obtain a “limited liability” insurance license to register the sale of insurance at their facilities. Typically, the requirements to get and use a limited license are not odious, but they do involve additional cost for the license, training requirements, fingerprinting, and errors and omissions insurance coverage. 

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Something else to consider is that insurance plans often include deductibles and pay claims based on depreciated value, instead of replacement value. That means that a tenant with $2000 in insurance may have to pay a deductible of several hundred dollars or more, then be paid a portion of what it would cost them to replace lost or damaged property. Using the example above, the tenant who recently paid $700 for a television and $1,000 for a computer that were damaged in a roof leak might be told the depreciated value of these items is $350 and $500, totaling $850. If the tenant had an extremely low deductible of $500, they would only get a check for $350. That would not make them whole, and they would not be a satisfied customer. This dissatisfaction could likely be reflected in the tenant moving out, giving one-star online reviews, and spreading negative word of mouth. It would harm your business's reputation. 

Another thing to consider is revenue share. In the past, tenant insurance offered storage operators less of the revenue generated by the sale of the plan, but insurance companies feeling the bite of increasing competition from protection plans are increasing their revenue share accordingly. Amazing what the market forces can do, isn’t it? 

In terms of the contractual relationship, tenant insurance is a two-party contract between the tenant and a tenant insurance company. It transfers the risk of financial loss from a tenant to an insurance company, for a payment (the premium). The insurance company is required to provide the tenant with a contract (a policy) that outlines the terms of coverage and their rights under that contract. Communication is direct between the tenant and the insurance company, and it is regulated by Departments of Insurance. You as the self storage operator are not part of this arrangement, and you must strictly comply with all details of the tenant insurance plan filed in your state. 

Important Considerations for both Tenant Protection and Tenant Insurance

If you are going to offer either tenant protection or tenant insurance, use best practices and be reasonable. The self storage industry, and you as an owner, are well served by staying off the radar of regulators. To protect against unwanted attention, follow the rules of both the law and common sense. 

Don’t Be Greedy

This is the first thing to consider, and it applies specifically to tenant protection: don’t charge exorbitant prices, out of line with the demographics in your local 3-5 mile market. Such practices draw attention to our industry from regulators or legislators. All too often, when self storage receives such focus, it doesn’t go well for the whole industry, and it is due to the actions of only one company or facility manager, being too aggressive or not following the law. It is also very important to train your entire team on the program - which is detailed below. 

Don’t Surprise Tenants

This is another legal matter. Make sure your tenants understand the terms of your lease, especially if you require coverage of stored property. You can require coverage, but you cannot require tenants to buy the coverage you sell. 

This is very important. Keep it in mind when you set up your online move in workflows, as well as your manager-assisted move in workflows. No matter where or how your tenants rent from you, you must explain to them that they have choices in how they cover their stored property. 

That means making sure tenants have a way to “opt out” of buying what you sell. The ability of a tenant to “opt out” is a legal requirement you must meet, and it applies to both tenant protection programs and tenant insurance plans. 

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Forced Placement

Make sure your lease contains the proper language if you plan to bring tenants into your protection or insurance plan if they do not provide proof of insurance or other coverage. This is a “forced placement” clause in your lease – another legal matter that applies to both types of programs. Your tenants should never be surprised that they have been brought into your plan because they didn’t provide proof of insurance. So, make a big deal about it to be sure your customers are informed. 

Communicate

Usually this means you have to talk to your tenants about it. If they rent online, do a customer service call to welcome them and ask if they have any questions. Mention your plan, whether they bought it or not. If they didn’t buy it, offer it to them over the phone. If they decline, remind them that they can bring in or send you proof of coverage any time this month – always making sure tenants understand they have freedom of choice. When the next month rolls around, give them another month: add them to your program BUT let them know if they bring in proof of coverage, you’ll refund the amount charged. If you decide to do this, be aware that most tenant protection and tenant insurance providers will not refund or prorate you for partial months of coverage. That is a small price to pay for all the benefits of a well-implemented plan in full compliance with the law. 

Again, communication is critical. Don’t just verbally mention this in conversation, follow up with multiple letters and emails, not just one, so you can demonstrate to a court of law that you provided plenty of notice. A judge will never object that you provided too much notice, but you can be penalized for not providing enough. 

Notice Requirements 

If you are changing your lease terms or adding a new tenant protection or insurance plan, you must give notice to your tenants. Think of this as just another version of your “raise the rent” letter, with slightly different language. Provide notice of any change in lease terms at least 30 days in advance of the changes taking place – mail it and email it. You can never give too much notice. We always advise 40 days, to provide time for the email or snail mail to be delivered and discovered by the tenant. We all have unopened mail or unread emails to plow through. 

Training

Proper training and implementation of your protection or insurance plan is critical. It’s the only way you can provide the excellent customer service you seek for your tenants, great protection against unfortunate events, and the healthy stream of revenue you want added to your bottom line. 

Avoid Insurance Words

If you offer a protection plan, what to say and what NOT to say is an important part of training. All members of your team need to know the proper vocabulary to use (covered extensively in the training material provided by Storelocal Protection). Your team must not use “insurance” words if you sell protection. That will confuse the consumer. It will also suggest that you are talking about insurance, and only a licensed insurance agent is allowed to discuss insurance. 

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So, if the tenant brings you their homeowners or renters insurance policy, DON’T go through it with or for them. Don’t do anything that suggests that you are interpreting their policy. Only a licensed insurance agent can do that. It is your tenant’s policy. Let them go through it and show you the language that says items stored off-site (away from the home, apartment, or place of business) are covered, and that the policy is in effect when the lease is signed. If they have questions, tenants should talk to their insurance agent. The burden is on the tenant to show you that the coverage they obtained elsewhere meets the requirements of your self storage rental agreement terms and conditions. 

A Good Offense is the Best Defense

Perhaps even more importantly, strong, effective training is your first line of defense. It worked like a charm for Public Storage in Perez v. Public Storage. The company was brought to court under the accusation that they were forcing self storage tenants to buy their protection plan, but Public Storage was able to show the court that they have a well-established training program that trains managers not to force tenants to buy their plan, and that the manager in question had been trained properly but basically went “rogue”. This defense saved Public Storage from a costly, unfavorable ruling. That makes the importance of training pretty clear, right? 

Storelocal Protection

Storelocal members keep 70% of the revenue they collect from protection plan sales, no matter how many self storage facilities they own and operate. Facilities equipped with Nokē Smart Entry technology keep 75%. This way, you can keep more of your money instead of sending it off to insurance companies or protection providers.

It's just one of the many perks of the Storelocal Protection Program. Learn more about how the Storelocal Protection Program can increase your asset value and help you make more money.

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