Saving money for a rainy day, much less a security deposit, feels out of reach as tenants struggle to pay for basic necessities. Without those extra funds, it’s been near impossible to take advantage of opportunities for housing choice until the advent of security deposit flexibility; namely security deposit insurance.
Although not entirely new, security deposit insurance has not been well understood by renters or housing professionals. This article will help bridge the knowledge gap so that more landlords and tenants can benefit from the opportunities security deposit insurance provides.
What is Security Deposit Insurance
Imagine leasing a vehicle that is totaled in an accident. Without some type of insurance, you’d be responsible to pay the remaining balance and would also need the resources to get a replacement.
Conventional insurance (health, car, life, etc.) provide coverage against those unforeseen accidents or injury. Paying a small monthly fee for an insurance policy has a large return in peace of mind that if something beyond your control happens, it wouldn’t be financially ruinous.
“The average American has less than $400 saved for emergencies. Financial flexibility will be a difference-maker that defines our time, and holding on to savings in important moments goes a long way. 190 billion dollars are locked away in deposits across the United States. It’s time for that to change,” according to security deposit insurance experts at Rhino.
Renters are often in this same quandary when it comes to rental choice. They have likely submitted a security deposit to their current landlord of one to three times the rent. Those funds are tied up and not available or guaranteed to be available to use as a security deposit at a new location.
Security deposit insurance to the rescue! The provider takes on the risk of unpaid rents and damages in lieu of a landlord requiring and holding a security deposit. The renter now has the ability to move without the need to save up thousands of dollars by simply paying a small monthly premium to the provider instead. The landlord avoids risk because they can submit a claim to the provider if the tenant defaults in their obligations.
Surety Bond | The Foundation of Security Deposit Insurance
Unlike traditional insurance, the foundation of security deposit insurance is a surety bond. The bond is established when a contract (policy) is created and the renter begins paying the monthly premium.
Despite the name, security deposit insurance isn’t a protection for the tenant against a claim as they remain fully liable for any claims paid to their landlords. A traditional insurance policy is designed to shift risk away from the policyholder. Instead, the function of a surety bond is to guarantee that the bonded party (tenant) will satisfy their contractual obligations; namely paying rent and not causing damage to the home.
A security deposit surety bond policy is a contractual arrangement between three parties: the landlord, the tenant, and the surety bond provider. Like a traditional security deposit, a security deposit insurance policy covers physical damage, lost rent, and unpaid fees, but not normal wear and tear.
Instead of the landlord holding a security deposit to cover these expenses, if the tenant was not able to remedy the concern, the landlord would file a claim. The insurance company uses the surety bond to cover and payout any claims directly to the landlord for their losses. That means, if a landlord files a claim that’s deemed valid, the surety company will pay the landlord and then seek repayment from the renter. For example, instead of the landlord deducting charges for tenant-caused repairs from a deposit already paid, the renter gets a bill directly from the carrier.
Want to know more about security deposit surety bonds? Check out this detailed article for all the best information: What is a Surety Bond for Security Deposits
Landlord Perspective for a Surety Bond
Security deposits have been an important factor in the rental process as they help reduce the inherent risk of renting a property from potential damages, repair costs, and the lost revenue from tenant turnover. But managing, holding, and returning deposits can be complicated and time-consuming.
Fortunately, security deposit insurance providers make it easy for landlords to offer tenants an alternative to the traditional security deposit requirements in the form of an insurance policy. Outsourcing to a security deposit surety bond provider has many benefits.
Pros of a Surety Bond
- Not only does a security deposit policy cover damages but also covers unpaid rent.
- A property manager does not have to wait until after the home is vacant — they can file a claim before a renter moves out.
- It eliminates the need for landlords to hold, manage and payout interest (where required) on deposit funds.
- Property managers and landlords can benefit from the marketing advantage — offering a security deposit alternative is certain to set them apart from their housing competitors.
Cons of a Surety Bond
- Each claim is evaluated at the time of loss to determine coverage and not necessarily guaranteed. For instance, normal wear and tear is not covered.
- Time will need to be spent educating potential tenants about the benefits and features of security deposit insurance versus a traditional security deposit.
Costs and Considerations
The ultimate cost for landlords will be in the time needed to update lease agreements and in tenant education. Some local and state legislation caps the amount landlords can require as a security deposit. Whereas, landlords may be able to require a security bond above the state’s cap.
Renter Perspective on Security Deposit Insurance
Moving is an expensive proposition for renters. They can’t tap into the funds the current landlord is holding and saving for another security deposit can feel impossible in this economy. That means better housing opportunities are out of reach for most — making a security deposit insurance premium a small price to pay to be able to move without needing to scrape together and save for a new deposit. From the renters’ perspective, there are other benefits to bypassing the traditional security deposit requirements.
Pros of Security Deposit Insurance for Renters
- Security deposit insurance gives renters housing flexibility. Housing becomes more accessible and renters can take advantage of better rental opportunities.
- The renter is liberated from the burden of saving towards a security deposit freeing up those funds for necessities.
- Security deposit insurance is inexpensive and easy to purchase.
- Typically the landlord has the final word about what is deducted from a security deposit (within limits set by their local regulations). However, with security deposit insurance, the tenant can submit photos and evidence to the carrier for consideration.
Cons of Security Deposit Insurance for Renters
- Security deposit surety bond providers are not all the same. First and foremost, be sure the carrier is a reputable company.
- A long-term renter in a very expensive market could end up paying more in total premiums than a traditional security deposit depending on the provider and length of tenancy. (Some providers offer a discount for lease renewals)
- Expectations need to be adjusted because surety bonds are not governed by the same state laws that govern security deposits. It will be important to clearly inform tenants of the differences.
Costs and Considerations
Depending on the provider the cost to the renter can range from $5 to $50 a month. Premiums are non-refundable, even if a tenant leaves the unit in good condition. And, tenants remain responsible to cover damages or nonpayment of rent. They can either pay the landlord directly or the landlord can file a claim. If a claim is filed and approved, the tenant would then need to repay the carrier what they paid to the landlord.
Security Deposit Insurance Wrap Up
A security deposit insurance policy is a contract that secures a bond that is held in the event a landlord needs to make a claim against a tenant.
The tenant pays a monthly premium. That premium fee is a promise that the tenant will take on the responsibilities of paying their rent in full and not cause damage to the rental property.
In exchange, the renter is not required to put up thousands of dollars upfront for a security deposit. Instead, they pay a non-refundable monthly fee to a provider who holds a bond that will guarantee to cover the landlord’s risk, up to the value of the bond. This allows the tenant to move in without having to put down a deposit while keeping the landlord’s interests protected.
The tenant’s obligation to pay for damages and unpaid rent remains the same. Instead of the landlord holding back funds from a security deposit to cover the repairs, cleaning, unpaid rent, etc. the renter will be responsible to pay the carrier directly.
As of December 2020, there were over $45 billion dollars trapped in security deposits across the country. Some have called security deposit alternatives the new Renter Stimulus Plan because they have already unlocked over $200 million in cash deposits over the course of the pandemic.
As more landlords and tenants take advantage of these types of security deposit alternatives, more of those funds will be released back into the economy. And this paradigm shift in the process of tenant turnover and security deposit alternatives is a win-win for landlords and tenants alike.