Prepared for the worst

Protecting yourself and your customers against risk

It’s the worst possible scenario for a self-storage business: a fire breaks out and the entire facility is lost. It sounds unlikely, maybe even impossible, and yet it happened just last year.

On January 9, 2013, a five-alarm fire demolished the entirety of a large storage facility located in Toronto, ON. Once the fire broke out, it spread quickly, while the volume of contents, constricted layout, and hundreds of locked doors prevented emergency responders from effectively containing the fire and minimizing damage. By the time the blaze was finally brought under control, the contents of the facility were completely destroyed and the facility itself was rendered unusable.

Just over a year later, investigation into the incident suggested that property managers were negligent in maintaining the four story building, and that the fire prevention systems were improperly functioning, allowing the fire to spread more easily and hindering containment efforts. It is also alleged that the property managers did not take adequate measures to ensure the facility was clear of illegal activity, properly secured, and sufficiently heated. The latter resulted in the use of space heaters which may have contributed to the outbreak and spread of the flames. Now, a class-action lawsuit seeking ten million dollars in damages has been brought against the property owners.

An unthinkable scenario

Property destroyed, a business lost, physical and emotional damage, and a lawsuit valued into the millions; the outcome is almost unimaginable, but the risk is very real and understanding what you need to do you protect yourself and your customers from disaster is a critical part of your business plan.

Of course, a number of factors had to come into play to cause that fire, and it’s likely that most owners and operators will thankfully never experience such a disaster. But while a catastrophe of that magnitude is an unlikely scenario, there remains a host of considerable risks you should be aware of to ensure that you are adequately managing all the potential risks that even the most well-maintained facilities can fall prey to.

Fire and smoke damage
While an all-consuming five-alarm blaze is rare occurrence, fire is a significant risk in ay facility. Even a blaze that is contained can render some or all of a facility temporarily unusable, and even areas unaffected by flames may still see considerable damage to from smoke or water damage from fire prevention measures.

Water damage
A common and often overlooked concern, water damage can easily go undetected until it is too late. Something as simple as an unnoticed leak in the fire prevention system or unanticipated volatile weather conditions resulting in atypical conditions such as flooding, could lead to significant damages that are beyond your control.

Hazardous materials
A tenant storing hazardous materials on the premises without your knowledge could also pose a substantial risk to you on several fronts. The materials themselves could cause damage to the property of other customers or to the facility itself.

Should you find yourself in possession of hazardous material after a tenant vacates or is evicted from your facility, you are responsible for disposing of that material in the appropriate way. This can be a costly undertaking and could pose health and safety risks if not attended to in the most cautious manner.

Additionally, this process of evicting a tenant and disposing of their property is risky in itself, as you could be ordered to reimburse the tenant if they take legal action after you have removed their property.

Managing Risk
While the list of potential risks may seem overwhelming, much can be done up front to manage your exposure to risk and ensure that, should the worst occur, you are well prepared to meet the challenges head on, support your customers, and continue your business with as little interruption as possible.

Start with a comprehensive emergency addresses how your facility will continue operating in the event of an emergency. A well-thought out emergency plan can help you minimize the effect on your business operations and reduce lost time and revenue when emergency situations arise.
 
Your emergency plan should account for the following:

  • A comprehensive list of risks you face, including fire, theft, staff disruption, power outage, technology failure, etc.
  • A detailed evaluation of the affect each risk could have on your business. For example, depending on duration and scope, a power disruption may be determined have no effect, limit operations for some time, or result in a total shutdown until power is restored.
  • The steps needed to mitigate the risks, such as contingency plans to keep operating, roles and responsibilities to ensure continued operations, communications strategy for contacting media and customers.

Here are some areas to consider when developing a plan to mitigate risk.

Fire protection
Ensure your fire suppression system supports the size of your facility and is designed for your circumstances. Install fire extinguishers on every floor, between buildings, and anywhere else required by fire codes. Keep the system well maintained and have the system and extinguishers inspected and serviced annually by a reputable and qualified contractor.

Security
Video monitoring, alarm systems, security personnel, locks, fences, and lighting can protect you and your customers from theft or vandalism. Keep your security system well maintained with regular checks on all systems and measures. Train your staff on how to respond to security concerns and consider installing signage that identifies the security measures in place as a deterrent to criminal activity. Your facility should always be safe and secure.

Rental agreements
Your rental agreement should be clear that you are not responsible for tenant content insurance and liability. It should also outline what content tenants can and cannot store in their allocated space.

Flammables, perishables, explosives, chemicals, waste, plants, firearms, odorous items, and animals should not be allowed in storage units under any circumstances.

Tenant education
It is important to ensure that tenants are informed and understand their responsibility to protect their property. This includes educating tenants on restrictions on what can be stored, storing content appropriately, safe usage of the facility, and what safety and security measures are in place.

Talk to tenants about tenant insurance, which can help them protect their property and is a good way to limit your risk of legal action over liability for lost or damaged property.

Business operations
Any physical or electronic backups of all your business paperwork should be stored off site, well away from the facility. Backup information should include customer contact, critical transactions, business paperwork, such as deeds, ownership, insurance policies, and rental agreements, and all financial documents. Should your place of business be inaccessible in an emergency, offsite backups will ensure you can continue your operations or execute your business continuity plan.

Insurance

Even when you’ve done all the right things to reduce your risk, and to protect your business and your customers, problems can still occur. Take some time to consider the unique insurance needs of your facility; your business is unique by design and your insurance coverage should be as well.

Basic commercial insurance coverage for property and general liability is a necessity. But you should also think about these options.

Find the right provider
It’s important to find an insurance broker you trust and who understands the unique insurance needs of the self-storage industry. Some brokers specialize in servicing specific industries and have programs developed to meet the unique needs of a given industry. Find a broker that knows your industry and is prepared to meet your unique needs.
 
Whatever you choose, the important thing is to ensure the insurance company you select is financially stable, able to meet its commitments and is in for the long-haul. Like any other business, insurance companies can fail. Failure of an insurance company may result in unpaid claims, reduced claims payments and even lost premiums. They should also be committed to the industry to ensure they will be supportive during the good and bad times.

Define the insurance terms
Make sure the tenant’s insurance coverage is not linked to your storage contract. Insurance companies and insurance brokers are heavily regulated, and the rules and requirements for doing business in a given province or territory are well defined. Tenants insurance must be in the form of a contract between the tenant and the insurance company. The tenant agreement cannot legally contain the promise to pay an insurance claim to the tenant, as the self-storage facility is not an insurance company.

An insurance company can choose to discontinue service to a certain business sector, such as storage facilities, at any time. This situation could leave your business holding the bag forcing it to honor the terms of the tenant agreement. The result could spell financial disaster in the event of a significant claim.

Also, make sure that your customers are not sharing a policy or single limit of insurance. If a policy or limit of insurance is being shared, this is your first clue that this method is likely not in compliance with those regulatory bodies that govern the sale of insurance products.

Put Tenants First
Aside from the need to comply with regulating bodies, it’s important to consider whether the total limit of insurance may not be enough to compensate all your tenants for damage should a significant catastrophe occur. Having insufficient coverage could have dire financial consequences for both the storage facility and the tenants.

An insurance offering as part of a rental agreement should be considered a value-add that can attract new tenants and continue to build loyalty with existing tenants. Make sure that the process is easy for your tenants and, as previously stated, make sure they are dealing with a solid insurance company and broker with an established reputation. Finding great protection for you and your clients that is easy to manage will continue to build strong relationships and attract reliable tenants.

The Broker Bond
The support of your broker is vital to offering adequate tenant insurance. Be sure the administration of the tenants insurance is efficient with solid insurance broker support. An efficient system will likely use technology, create a unique insurance contract for each tenant and provide a searchable database available to the facility. The administrative system will be tailored to meet those regulations that govern the distribution of insurance in a given province or territory. Lastly, you need an insurance broker available and equipped to field insurance questions from your valued tenants.

Your coverage

Market value versus reconstruction cost
Businesses owners often insure property for the market value rather than for the reconstruction cost. Market value is what your property may sell for in current market conditions. Market value is affected by several factors, including location and condition. Reconstruction cost is the estimated cost of rebuilding your property to the same size and quality.  Reconstruction costs depend on the cost of labour and materials, the location of your property and even municipal by-laws.

Reconstruction costs are often much higher than the original market value of a property and can change from year to year. That’s why it’s important to reassess your insurance coverage annually. If you suffered a property loss today, could you afford to rebuild from the ground up?

If you’re not sure how to determine the value of your property, or if you have questions about what’s included in reconstruction costs, it’s a good idea to ask a professional. A contractor who specializes in buildings similar to your property can help you determine how much it could cost to rebuild. Independent companies also offer reconstruction cost appraisals.

Other insurance options:

Business interruption insurance
Business interruption insurance covers your loss of revenue while you rebuild. It can cover lost profits (determined by reviewing your previous profits), costs incurred while your business is out of operation, temporary operation costs and other unforeseen expenses. In short, business interruption insurance makes sure that you are in the same financial position that you were before the emergency.

Legal liability
Storage operators’ legal liability coverage protects your business from claims for lost or damaged goods. Typically, legal liability only covers claims where the owner or operator is at fault. Limits for this type of coverage typically range from $100 000 to $5 million, depending on the size of the facility and the estimated value of the property stored in it.

Sale and disposal insurance
If your tenant fails to meet their financial obligations and you go through the eviction process, you may have to dispose of their property. This process is risky, as you could be ordered to reimburse the tenant if they take legal action after you have removed their property. Specialty insurance coverages are available to protect you from the cost of disposing tenant belongings and from paying for reimbursement.

Hazardous content abandonment
If you find yourself in possession of hazardous material after a tenant vacates or is evicted from your facility, you are responsible for disposing of that material in the appropriate way. This can be a costly undertaking. Hazardous content insurance helps you take care of the transportation and proper disposal of dangerous contents.

In short there are three important things you need to think about when it comes to being prepared to face risk: make a comprehensive plan that accounts for the risks you face; find an insurance broker you trust to help you analyze your plan and create solutions to limit risk; consider the insurance options available to you so that you have the right mechanisms in place to recover quickly from a loss and ensure your customers are taken care of.

It is unlikely that you’ll be confronted with the kind of catastrophic loss that occurred in Toronto last year, but it is a certainty that you’ll be confronting risk at some level on a daily basis. It’s important to be prepared, have strong partners to support you, and ensure that you and your tenants are protected no matter what happens.

Toby Struewing
Commercial Account Executive