- Heckart V. A-1 Self Storage, Inc. (Cal. Sup. Ct. 2118) ___ Cal. 4th ___, 2018 Djdar 3583, Case No. S232322
- August 3, 2018
Plaintiff rented a storage unit from A-1 for $55 per month. Pursuant to the terms of the rental agreement, plaintiff agreed to release A-1 from liability for damage to plaintiff's property stored at the facility. The agreement required plaintiff to obtain insurance covering any damage to his property at the facility. It further provided that plaintiff could elect to participate in the "Customer Goods Protection Plan" for an additional payment of $10 per month and that doing so would modify A-1's responsibility for loss to the plaintiff's property pursuant to the terms of the protection plan. Under the protection plan, A-1 retained liability for specified losses to the tenant's property while stored within the storage unit, up to $2500. The tenant was permitted to decline participation in the plan but, in such circumstances, the tenant was to provide evidence of insurance within 30 days or the tenant would be automatically enrolled in the protection plan. The plaintiff declined to participate but was automatically enrolled, presumably for failure to provide evidence of insurance.
Plaintiff subsequently brought a putative class action against A-1 and licensed insurance underwriter, broker and agent Deans & Homer claiming the protection plan violated the Unfair Competition Law and alleging misrepresentation and civil conspiracy. It was alleged that the protection plan was a policy of insurance, something A-1 was not licensed to sell. According to the allegations of the complaint, Deans & Homer created the plan and told A-1 that if it sold the plan it could charge a higher amount than that allowed by the California Department of Insurance. Deans & Homer also sold A-1 a storage operator's contract liability policy pursuant to which Deans & Homer would assume liability for losses under the protection plan that exceeded $250,000 per year. Plaintiff alleged that the protection plan functioned exactly like an insurance policy, other than providing less coverage, but that A-1 failed to comply with insurance regulations. Plaintiff alleged that by 2013, A-1 was collecting $1.8 million annually, was paying Deans & Homer $133,000 and was paying $25,000 in claims.
The trial court sustained the defendants' demurrer on the ground that the protection plan was not insurance. The Court of Appeal affirmed. Both lower courts applied the "principal object and purpose" test and found that the protection plan was merely incidental to the principal object of the contract, namely the rental of storage space.
CALIFORNIA SUPREME COURT'S RULING
Plaintiff argued that the protection plan violated the Insurance Code because A-1 was not licensed to sell insurance. The Supreme Court began by addressing Article 16.3 of the Insurance Code entitled "Self Service Storage Agents" which provides that self-service storage facilities are not to offer insurance unless they first comply with the requirements of the article and have been issued a license. Such a license, under this article, would enable the facility to act as an agent for an authorized insurer with respect to certain types of insurance. The Supreme Court noted that these provisions indicate that Article 16.3 addresses licensing of self-storage facilities to act as agents on behalf of licensed insurers. However, the complaint did not allege that A-1 was acting as an agent for an insurer. Although Deans & Homer assisted A-1, it did not provide insurance to renters. As such, the regulations applying to self-service storage facilities acting as agents did not apply to the protection plan.
The court next addressed the "principal object and purpose test." Section 22 of the Insurance Code provides a definition of "insurance" and courts interpreting this section have required two elements to characterize a contract as insurance: "'(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. [Citations.]'" The protection plan satisfied this test by shifting the loss to A-1 and distributing the loss among all protection plan purchasers. However, as the Supreme Court noted, not every contact meeting these criteria amounts to insurance. If the contract "is not the business of insurance, it is outside the scope of state regulation of the insurance industry. [Citation.]"
To make the determination of whether a contract is subject to insurance regulation, courts consider "'whether, looking at the plan of operation as a whole, "service" rather than "indemnity" is its principal object and purpose.' (Citation.)" In concluding that the principal purpose of the contract was the rental of the storage space, the Supreme Court referred to various factors, including the fact that the contract shifted the risk from the renter to the owner as opposed to a third party, A-1 assumed risks only associated with property stored in the rented unit, the protection plan was both dependent on the rental agreement and was optional, the protection plan only extended to risks over which A-1 had some control, and the $10 charge for the protection plan was significantly less than the $55 charge to rent the space. In affirming the judgment, the Supreme Court summarized its holding, as follows: "the Protection Plan does not constitute insurance subject to regulation under the Insurance Code. The Legislature's enactment of Article 16.3 enables self-storage facilities to act as agents for insurance companies with respect to the narrow category of insurance described in Article 16.3, but it does not prohibit the parties' indemnification agreement set forth in the Protection Plan. Because plaintiff's claims are premised on his contention that the Protection Plan is subject to regulation under the Insurance Code, his claims fail."
EFFECTS OF THE COURT'S RULINGUnder the California Supreme Court's ruling in this case, a self-storage facility may, without first obtaining an insurance license, contract to indemnify its tenants for loss or damage to property stored at the facility and charge a "premium" for such shifting of the risk, as long as the principal object and purpose of the contract remains the rental of storage space, and the owner is not acting as an agent of an insurer in selling the agreement to shift the risk. This allows the owners to charge a higher amount for the protection plan than would be allowed under insurance regulations, and also allows them to avoid following other procedures dictated by the insurance regulations.