OGC Op. No. 04-03-13
The Office of General Counsel issued the following opinion on March 12, 2004, representing the position of the New York State Insurance Department.
Re: Self- Service Storage Facilities
May an owner of a self-service storage facility, who is not an authorized insurer, include a Retained Liability Provision in an occupancy agreement by which the owner assumes liability for loss or damage to an occupants stored property as a result of events such as roof leakage, fire, water damage, explosion, theft or malicious mischief, in exchange for a fixed fee?
No. Such owner may not include such a provision in an occupancy agreement because this would constitute doing an insurance business, for which licensing as an insurer is required. However, an owner of a self-service storage facility may offer a protection plan (in the form of a rider to an occupancy agreement) to its occupants whereby the owner assumes the risk for its own liability (which has been previously discharged through an underlying rental agreement between the owner and its occupants) for a fixed monthly fee if such risk is: (1) of a kind, or type, for which the owner would otherwise be liable under the law, and (2) of a kind, or type, that the owner may legally limit under the law.
A self-service storage facility is real property that is used by occupants to store personal property. The owner of the facility is an individual or entity that operates the facility and receives storage fees from an occupant under a rental agreement.
The inquirer would like to know whether an owner can include a Retained Liability Provision in an occupancy agreement by which the owner retains or assumes liability for loss or damage to stored property as a result of any or all of the following causes: roof leakage, fire, water damage, explosion, theft, or malicious mischief. Under the Retained Liability Provision, no liability would be retained or assumed due to an occupants failure to properly lock the storage unit after use. The owners retained liability would start above a certain dollar threshold (a floor) and would likely also contain a cap on the amount of the owners retained liability.
The occupant would be able to select from among various rental forms offered by the owner. For example, one might contain a full release of liability and others may offer owner retained or assumption of liability with various combinations of floors and caps. The agreement to retain or assume risk made to the occupant would only be made by the owner.
The inquirer submitted an inquiry that sets forth various reasons why he believes that an owner of a self-service storage facility may assume liability for loss or damage to an occupants stored property as a result of various events, in exchange for a fixed fee. We will address each topic separately below. Please note that since the inquirer did not submit a specific occupancy agreement, the following analysis will be general in nature.
Doing an Insurance Business
N.Y. Ins. Law § 1102(a) (McKinney 2000 & Supp. 2004) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2000 & Supp. 2004) defines the term "doing an insurance business", in pertinent part, as follows:
(A) making, or proposing to make, as an insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;
B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety; . . .
Subparagraphs (C), (D) and (E) are not relevant to this discussion.
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000 & Supp. 2004) defines "insurance contract" as follows:
(a)(1) [A]ny agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
N.Y. Ins. Law § 1101(a)(2) (McKinney 2000 & Supp. 2004) defines "fortuitous event" as "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party."
In accordance with the above, if the owner promises the occupant that, in exchange for a fee, it will assume the risk of loss or damage to the occupants property dependent upon a fortuitous event, such activity would constitute doing an insurance business. However, an owner of a self-service storage facility may offer a protection plan (in the form of a rider to an occupancy agreement) to its occupants whereby the owner assumes the risk for its own liability (which has been previously discharged through an underlying rental agreement between the owner and its occupants) for a fixed monthly fee if such risk is: (1) of a kind, or type, for which the owner would otherwise be liable under the law, and (2) of a kind, or type, that the owner may legally limit under the law.
Such a protection plan may not insure its occupants against any loss; and the company may not assume, through the protection plan, any risk beyond that which the law imposes upon it (ie. negligence, strict liability, etc.). The assumption of liability without such limitations constitutes the doing of an insurance business and requires a license as an insurer. Additionally, any advertisement materials used to promote the plan must make it emphatically clear that the plan is not insurance and does not offer the same protections as insurance.
While the Insurance Law does not define the term "warranty", in general, a warranty relates in some way to the nature or efficiency of a product or service. Typically, the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship, or a contract otherwise covering the breakdown of the product. A warranty would not cover a hazard that has nothing to do with the make or quality of the product. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938).
In order to be a warranty, the maker of the contract must have some relationship to the product or service or do some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by Section 1101(a). Otherwise, the maker of the contract undertakes an obligation involving a fortuitous risk and the agreement is an insurance contract.
Generally speaking, a warranty made by the manufacturer, seller or other person in the distribution of sale or lease does not constitute the doing of an insurance business when done as merely incidental to the makers other legitimate business or activity. The Department has opined that such activities do not come within the language contained in Section 1101(b)(1)(B) and do not constitute doing an insurance business. If the warrantor would be engaged in the making of a warranty as a vocation, however, this would constitute doing an insurance business, for which licensing as an insurer would be required.
An owner of a self-service storage facility, who would be leasing the facility to an occupant, would be a warrantor if it agreed to repair, replace or maintain a product (the storage unit) that fails to perform due to a defect in materials or workmanship or wear and tear. The owner would not be doing an insurance business, if it would be engaged in making warranties as incidental to its business, rather than as a vocation.
However, if the owner warrants against fortuitous events that are beyond its control, it would constitute doing an insurance business and would have to become licensed as an insurer. In the present case, the owners obligation would not be based on defects in the product or service that is being provided, but would be dependent upon the happening of various fortuitous events that would be beyond the control of the owner. Thus, the contract that the inquirer described would not constitute a proper warranty.
N.Y. Lien Law § 182(6) (McKinney 1993), provides, in relevant part, as follows:
6. Lien. The owner of a self-service storage facility has a lien upon all personal property stored at a self-service storage facility for occupancy fees or other charges, present or future, in relation to the personal property and for expenses necessary for its preservation or expenses reasonably incurred in its sale or other disposition pursuant to law and any other charges pursuant to the occupancy agreement. The lien provided for in this section is superior to any other lien or security interest. The lien attaches as of the date the personal property is brought to the self-service storage facility.
Section 182(7) further provides:
7. Enforcement of lien. An owners lien may be enforced by public or private sale of the goods that have been removed from the storage space at a self-service storage facility, in block, or in parcel, at any time or place and on any terms which are commercially reasonable after notice to all persons known to claim an interest in the goods. . . .
Section 182(2)(a)(v) requires that the occupancy agreement, entered into between the owner and the occupant, must include certain required information, including the following:
2. Required disclosures (a) . . . (v) a statement of any limitation of damages which shall only be applicable after the owner has enforced his lien pursuant to subdivision seven of this section limiting the amount of the owners liability in case of loss or damage of the goods setting forth a specific liability per room size or dollar amount beyond which the owner will not be liable; provided that if damages are so limited, a statement shall be included that such liability may on the written request of the occupant and if accepted in writing by the owner at the time of signing such occupancy agreement or within a reasonable time thereafter be increased on part or all of the goods stored, in which event increased rates may be charged based on such increased valuation. The rates charged for an increased valuation shall be set forth and a pre-addressed request form to enable the occupant to request an increased valuation shall be provided. . . . (emphasis supplied).
Pursuant to Section 182(2)(a)(v), an owner must include a provision in the occupancy agreement that discloses any limitation of damages and, if damages are so limited, the owner must include a provision in the agreement that offers to increase the owners liability for loss or damage to the occupants stored property. The limitation of the owners liability and the ability to charge an increased rate for an increased valuation relates only to the owners liability for its negligence. See Goldberg v. Manhattan Mini Storage Corp., 225 A.D.2d 408, 640 N.Y.S.2d 493 (1st Dept. 1996). The Lien Law does not allow the owner to assume liability for loss or damage to the occupants property as a result of events that are beyond its control, and for which the owner would presumably not be liable under the law.
Under the facts presented, the Retained Liability Provision would not be limited to the owners liability for negligence. Consequently, it would be broader in scope than what the Lien Law addresses.
For further information you may contact Senior Attorney Pascale Joasil at the New York City Office.