Court Holds That Damage Waiver and Forced Place Protection Plan in Self Storage Rental Agreement Is Not Insurance

In Heckart v. A-1 Self Storage (No. D066831, filed 12/30/15) a California appeals court held that damage waiver, indemnity and insurance provisions of a self-storage facility’s rental agreement did not make a forced-place “protection plan” in the rental agreement “insurance,” so as to subject the self-storage facility to liability under the Unfair Competition Law and the Consumers Legal Remedies Act for transacting insurance without a license.

In Heckart, the self-storage facility’s rental agreement contained an indemnity agreement holding the facility harmless from any damage to stored property. Under the terms of the agreement, the customer warranted that he or she carried insurance covering the stored property against damage or theft, and assumed all risk of loss that would be covered by such insurance. However, those provisions were deleted if the customer opted to participate in a “Protection Plan,” offered for an additional $10 per month.

The Plan itself provided that the self-storage facility would retain liability for loss of or damage to the tenant’s stored property up to $2,500 for losses caused by fire, explosion, smoke, theft, vandalism, malicious mischief, roof leak, water damage, or collapse of the building. Further, that an election to participate in the Plan satisfied the insurance requirement of the agreement. Finally, the rental agreement had an opt-out provision for the Protection Plan that required the customer to provide proof of insurance, with automatic enrollment on a failure to do so within 30 days.

The terms of the Protection Plan, along with forms and procedures for its implementation, had been provided to the self-storage facility by its insurance broker, which was licensed to transact insurance and also underwrote Storage Operator’s Contract Liability Insurance covering the facility for any losses it might have to pay under the Protection Plan.

Although the plaintiff had opted out, he failed to provide proof of insurance and was automatically enrolled in the Protection Plan. He filed suit alleging violations of the Unfair Competition Law (Bus. & Prof. Code, § 17200, et seq.) and the Consumer Legal remedies Act (Civ. Code, § 1750 et seq.), along with negligent misrepresentation and civil conspiracy. He also sued the brokers. The gist of his lawsuit was that the self-storage facility was engaged in selling insurance without a license. The plaintiff alleged that the automatic enrollment provision was deceptive, that the Plan was insurance but not properly disclosed as such, and cost more but provided less coverage than other self-storage insurance, including an insurance policy offered directly by the brokerage.

The Heckart court rejected those contentions. Pointing to the definition of insurance contained in Insurance Code section 22, the court said that insurance necessarily involves two elements: (1) a risk of loss to which one party is subject and a shifting of that risk to another party; and (2) distribution of risk among similarly situated persons. However, “the mere fact that a contract contains these two elements does not necessarily mean that the agreement constitutes an insurance contract for purposes of statutory regulation. A statute designed to regulate the business of insurance is not intended to apply to all organizations having some element of risk assumption or distribution in their operations.” Citing Truta v. Avis Rent A Car System, Inc. (1987) 193 Cal.App.3d 802, 812, the Heckart court said that “[t]he question of whether an arrangement is one of insurance may turn, not on whether a risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object and purpose.”

Although the Insurance Code does contain a specific requirement that self-storage facilities be licensed in order to sell insurance (Ins. Code, § 1758.7, et seq.), the Heckart court held that the Protection Plan was not insurance. Citing Truta, supra, the Heckart court said that whether or not a contract constitutes insurance is determined by looking at the “principal object and purpose of the transaction.” In Truta, the court had concluded that a damage waiver in a car rental agreement was not insurance, because “the ‘principal object and purpose of the transaction’ and ‘the element which gives the transaction its distinctive character’ was the rental of an automobile, and not [the] incidental benefit [of a damage waiver] offered to consumers.” The Heckart court found that dispositive, since the hold harmless, insurance and Protection Plan provisions in the self-storage rental agreement were not the main object of the contract: “Allowing parties to shift the risk of property damage does not turn an agreement, whose primary objective is storage rental into insurance.”

The Heckart court went on to find the fact that the self-storage facility procured its own insurance coverage for Protection Plan losses irrelevant to the transaction between the plaintiff and the self-storage facility. And although the plaintiff attempted to argue that the automatic enrollment feature was an actionable deceptive practice in and of itself, the appeals court affirmed judgment in favor of the self-storage facility and the brokerage because all of the causes of action hinged on the allegation that the Protection Plan constituted insurance in the first instance.

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December 30, 2015