By Woody Webb, Sr
Attorney and guest columnist Woody Webb takes on how to adequately address property loss, damage, destruction, & theft – both inside & outside your stores
Under the category of “we live in strange, uncertain, and oftentimes troubling times,” I submit the following true tales, which might also belong in the annals of “day in the life of rent-to-own.” I’ll close with a substantive legal discussion for you to ponder. But first, the stories:
1. An Alabama attorney wrote me last spring that a customer’s rented appliances kept getting attacked by rats in her home, and she demanded recourse (i.e., money). As a native Alabamian and fervent Crimson Tide football fan, I immediately called the attorney and after some chatting, I said to him, “I’m sorry for your customer, but was she under the impression that we rent rat-proof appliances?” Following a pregnant moment, I heard a chuckle, and we resolved the case by agreeing that Alabama would once again be the National Champions. Roll Tide!
2. A rental dealer from Virginia was visiting New York to go to his son’s graduation from medical school, when he received a call from his manager that his store and a great deal of his inventory had been totally destroyed by a fire in the neighboring Dollar Tree store. Apparently, a woman came into the Dollar Tree with her nine-year-old daughter in tow, and while the daughter sprayed the premises with lighter fluid and tossed a match on it, the mother rolled through the store stealing items from the shelves. The ensuing fire predictably spread to the rent-to-own store next-door, and our RTO man was temporarily shut down and eventually forced to relocate. Welcome to the Start a Fire/Smash-n-Grab era!
Which brings me to the topic of how rent-to-own operators can adequately address property loss, damage, theft, and destruction (rat attacks notwithstanding).
I imagine most Rental Purchase Agreements contain Risk of Loss provisions, fixing responsibility on the customer for rental property that is lost, stolen, damaged, or destroyed – generally up to the fair market value. Absolving the customer of this responsibility is achieved by the optional Liability Damage Waiver agreements. Quite clearly, in a catastrophic event such as a hurricane, tornado, or earthquake, a Risk of Loss provision is essentially worthless, when customers lucky enough to have survived have semi-destroyed or no homes, probably no jobs, and very scarce monetary resources.
“In a catastrophic event such as a hurricane, tornado, or earthquake, a Risk of Loss provision is essentially worthless.”
Woody Webb, Sr
So the question becomes what type of insurance products are available to afford rental dealers the maximum protection for loss, damage, or destruction of their merchandise, as well as business interruption in the form of loss of rental income?
A North Carolina RTO operator believed, not unreasonably, that he was protected by a standard insurance policy, as well as by a Business Income (and Extra Expense) Coverage policy, when Hurricane Matthew came barreling through the state.
This rental dealer managed to avoid any significant property damage on his business premises (including even inventory). His real problems were elsewhere; for example, rental property in customers’ homes that may be lost, damaged, or destroyed; or in homes no longer in existence or habitable; or with a customer who was suddenly unemployed and unable to keep the rental revenue coming in. Simply put, the challenge was insurmountable, but for the Business Income Interruption policy the dealer believed he had the foresight to procure.
I wish this was the end of the story. But not surprisingly, the insurance company denied the dealer’s claim, noting the loss of business income “must be caused by direct physical loss of or damage to property at the premises,” and – adding insult to injury – any loss or damage caused directly or indirectly by flood, water, or windstorm was excluded from coverage. In my view, the value of this policy was highly questionable. Its coverage seemed to be limited to vandalism, theft, or fire, but that’s about it. Not much help in a natural disaster situation.
Not only should you procure building coverage insurance, but you should also ask your agent about contents coverage, which is not automatically included in a building coverage policy – and by “contents coverage,” I mean to encompass not only property in the store, but also property in customers’ homes.
If you live or do business in an area susceptible to flooding from a temporary event (almost everywhere), flood insurance is something you should definitely consider. Flooding can be caused by overflow of inland (lake, river) or coastal waters, runoff from heavy rainfall, or mudflows.
I have consulted several insurance agents, one of whom recommended procuring flood insurance from the National Flood Insurance Program or other carriers, while another suggested a blanket Inland Marine Policy which would, he said, cover off-premises property. Further, I was told that in order to secure coverage for business interruption in the rental-purchase industry, both products mentioned above must be accompanied by a Business Income (and Extra Expense) Coverage Form. Of course, a lot depends on where you live, what you can afford, and what degree of risk you are willing to take on.
As for earthquake insurance, I’d suggest asking your agent for a policy comparable to flood insurance policies, making sure to cover off-premises property as well as business interruption. And if you happen to live in California, do not let your “quake” insurance lapse (see Bosch: Legacy, Episode 2, on Prime).
Inasmuch as I do not profess to be an insurance expert, I’d certainly counsel you to consult with an agent you trust, and make sure to explain fully the nature of the rental-purchase business.
Woody Webb, Sr., is a founder and partner at APRO Associate Member Edmisten & Webb Law Firm in Raleigh, North Carolina.
