The California Court of Appeal recently affirmed a ruling that an optional protection plan in a storage rental contract to transfer the risk of property damage or loss from the renter to the rental company did not transform the rental contract into a contract for insurance. A storage unit renter sued A-1 Self Storage, Inc., as well as its operators and insurance broker for violations of the Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA), negligent misrepresentation, and civil conspiracy, alleging that A-1’s storage unit protection plan was an unlicensed and illegal insurance policy. In reaching its decision, the appellate court deferred to the California Department of Insurance’s (DOI) informal opinion that the protection plan was not an insurance contract. Heckart v. A-1 Self Storage, Inc., 243 Cal. App. 4th 525 (2015).

Factual Background. Samuel Heckart rented a storage unit from A-1 Self Storage, Inc. The rental contract stated that A-1 was not liable for any loss or damage to the stored property and that the renter must provide proof of an independent insurance policy to A-1. A-1 also provided an option titled a “Protection Plan,” which stated that for an additional payment of $10 per month, the storage company would retain liability for loss of or damage to the renter’s stored property up to $2,500. The Protection Plan stated: “I understand that I need to provide the policy information in writing to the facility Owner within 30 days or I will automatically be enrolled in the . . . Protection Plan until I do provide such information to the Owner.” Heckart was enrolled in the Protection Plan, presumably because he failed to provide proof of insurance within 30 days. Heckart later sued A-1 for engaging in the unfair, unlawful, and deceptive sale of unlicensed insurance in conjunction with the rental of storage units.

Statutory Scheme. California’s Insurance Code defines the term insurance and provides for licensing and other requirements in connection with the sale of insurance. Under California precedent, courts look to the “principal object and purpose of the transaction” to determine whether it is a contract of insurance.

DOI’s Position. A-1’s insurance underwriter also requested an opinion letter regarding the Protection Plan from the California DOI. The DOI’s response opined that it “did not believe that such contracts between landlords and tenants are insurance contracts for purposes of statutory regulation. The primary purpose of the contract is rental of the premises.”

Trial and Appellate Court Holdings. The trial court sustained A-1’s demurrer without leave to amend, finding that the principal object of the transaction between Heckart and A-1 was the rental of a storage unit, not the sale of insurance.

The Court of Appeal affirmed, noting that California courts must give deference to the DOI’s interpretation of the Insurance Code. The appellate court noted that “[w]e have long recognized that considerable weight should be accorded to an executive department’s construction of a statutory scheme it is entrusted to administer.” 243 Cal. App. 4th at 535 (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984)). Viewing the entire transaction between the parties, the court concluded that without the rental agreement, the Protection Plan would not exist and would have no purpose and, therefore, it was not an insurance contract.

This decision is consistent with Yamaha Corp. of America v. State Board of Equalization, 19 Cal. 4th 1 (1998), which held that an agency interpretation of a statute is entitled to deference; however, such deference is not absolute. Under Yamaha, in weighing an agency’s interpretation, the courts consider (i) the agency’s comparative interpretive advantage over the courts, and (ii) whether the interpretation is likely to be correct.