In the business of self-storage, operators are like landlords who rent storage units instead of living space. What a tenant puts into his unit is not the operators concernunless those contents violate certain contractual limitations and conditions.
Self-storage owners are obligated to provide space that is reasonably safe, dry and suitable for the storage of property. They must not, however, covet any of the three Cs: care, custody or control. This should be spelled out explicitly in the rental contract.
Most self-storage agreements also contain specific prohibitions about storing property that is dangerous or toxic in nature. Whether tenants follow these guidelines is strictly their business unless theyre caught in the act of placing contractually prohibited items in the space. To help relieve business owners of this threat, the insurance industry has developed limited pollution-removal endorsements.
Although this article is not intended to be an exhaustive legal treatise on the subject of insurance coverage for pollution-related issues, it should serve as a primer to introduce the subject in generic terms and foster a better understanding of three key issues:
- Why coverage is limited
- What coverage includes and excludes
- Why it is highly recommended that you have coverage
If you have unanswered questions after reading this article, consult your insurance agent or your attorney for further information and recommendations regarding risks faced in your day-to-day business operation. In fact, such a discussion is a good idea even if you dont have lingering questions.
Getting Started
If you examine the insurance policy covering your premises for property damage and liability matters, you will likely find a total pollution exclusion. This means the insurance carrier will not provide coverage for pollution-related claims.
The insurance industry has learned from years of experience that no premium amount can cover the risks to insurers when pollution is discovered at an insured site. Once a pollutant enters the soil or affects the water table in a particular area, effectively escaping any confinement to the insured premises itself, the cost of cleanup can be staggering, depending on the size of the area affected.
Many companies whose properties have been found to contain unregulated pollutants, even decades old, have gone out of business because of those costs; and many insurance companies whose policies have provided coverage for such risks have suffered a similar fate. Thats a key reason why the government established the Environmental Protection Agency (EPA) and the pollution Superfund, along with other remedies, to deal with catastrophic environmental damage. Its also why such a limited coverage endorsement was developed by the insurance industry.
Whats a Pollutant?
Lets examine a typical definition of pollution as included in a standard policy contract. Pollutants are usually defined in language such as the following: any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
How do pollutants get onto self-storage sites? There have been isolated incidents of tenants operating methamphetamine labs out of or storing the chemicals used in the production of such drugs in their units. Both the drugs and the raw materials are extremely toxic.
This is an extreme example of pollutants, but there are many more that are far more innocent. Tenants may store items such as paint or cleaning products in their spaces, posing an environmental hazard that would technically fit the definition of pollutants as spelled out in the insurance policy. Because a facility owner cant sufficiently police his tenants to prevent the storage of such items, limited pollution-removal coverage is essential for handling accidental spills.
What Is Included?
Without resorting to legalese, lets examine the coverage available under a typical limited pollution-removal endorsement:
- The coverage is limited"; it isn't all-encompassing and doesn't provide protection from every form of claim that could be made against the policy.
- The coverage applies to the removal and detoxification of pollution only.
- The endorsement modifies coverage according to "Part One, Property in the Select Custom Package" form, which pertains to property coverage and not liability coverage. All the other terms and conditions applicable to Part One of the Select Custom Package form are applicable.
- Further, the coverage usually extends to the affected storage unit only, not to surrounding areas, surface or ground water, or other facilities, and not to other storage units. The endorsement obligates the insurance carrier to pay up to the specified limit of insurance to remove pollutants or otherwise detoxify a storage unit, and only to the extent required by the authorities. Also, the endorsement requires timely reporting, which means you must report the pollutants to your insurance carrier as close in time to the discovery as possible.
Coverage is usually further limited by the Exclusions section of the endorsement, which may preclude payment under the policy for fines or penalties related to:
- Government directives concerning pollutant cleanup.
- The costs associated with extracting pollutants from, or replacing or restoring, contaminated groundwater or soil.
- Any claimed business-interruption losses due to limited access to the insured premises or adjacent premises due to pollutant cleanup.
- Damage to the insured premises other than the affected storage unit or the property of others resulting from the storage or removal of pollutants in a tenants storage unit.
Finally, coverage amounts are limited to those stated in the policy declarations page or on the endorsement itself, and can be described in two ways: per occurrence, which means each individual incident of pollution in a storage unit at the insured premises; and in the aggregate, which encompasses all individual incidents in any policy year. These policy limitations are contractual in nature. The insurance company is not bound to pay any more for covered losses or related expenses than the agreed-upon limitations.
Why Have an Endorsement?
A limited pollution-removal endorsement provides protection to your storage facility in case of a toxic event in any storage space. Even though coverage is often extremely limited, the endorsement also provides protection to your facility in the hope that early detection and cleanup of the immediate area of environmental exposure will prevent more serious environmental damage from occurring at your property.
This article is not intended to act as legal advice or to take the place of consultation with your insurance agent and attorney. Consultations with these professionals are critical to ensure your business has the appropriate insurance coverage and you have full understanding of the coverages and limitations of your policy.
Michael Rice is manager of claims for Phoenix-based MiniCo Inc., which provides specialty programs for self-storage businesses including property and casualty insurance and tenant insurance programs. For more information, call 800.528.1056; visit www.minico.com.
