Everything You Need to Know About Security Deposit Insurance
Before moving into a new apartment, tenants are usually required to pay the landlord a security deposit to cover future property damage. In most states, security deposit limits are set to a maximum of one month’s rent.
However, paying the first month’s rent, a security deposit, and applicable fees could easily amount to thousands of dollars for tenants, making it difficult for tenants to afford certain apartments and reducing a property owner’s pool of rental applicants.
Additionally, property owners may end up short on funds if their tenant causes damage beyond the agreed-upon security deposit. If a tenant is unwilling to pay for the difference, a property owner may need to take their tenant to court. In the meantime, the property owner would either have to pay for the uncovered property damage out of pocket or wait until the tenant pays, which could take several months.
Security deposit insurance has emerged as a security deposit alternative that could benefit both tenants and property owners. In this blog, we’ll discuss everything you need to know about it, including what it is, how it works, its pros and cons, and how to decide if requiring security deposit insurance is better than a traditional security deposit.
What is security deposit insurance?
Security deposit insurance is a type of insurance policy that covers property damage and unpaid rent throughout a lease term. Security deposits work like a rental surety bond, establishing an agreement between the property owner, the tenant, and a third party, in which the third party agrees to hold the renter accountable for property damage and unpaid rent during their stay.
Unlike a traditional security deposit, security deposit insurance is not returned at the end of a tenant’s lease agreement. However, premiums are relatively cheap when compared to traditional security deposits, costing between $10 and $50 a month. Property owners can ask a tenant to pay either a security deposit upfront or a security deposit insurance policy, which can be paid either upfront or monthly.
How does security deposit insurance work?
Property owners should understand how this works before requiring tenants to take out policies with security deposit insurance providers. This kind of insurance isn’t meant to protect the tenant against a claim they receive from their landlord, but rather protect the landlord against a tenant’s negligence. Tenants remain liable for any property damage or rent they fail to pay.
Instead of using a security deposit to cover unexpected damage, property owners can file a claim with the insurance company. The insurance provider would then review the claim and use the surety bond to make a payment to the property owner for their losses. The tenant would then be billed for these losses and have to pay the insurance company back for their coverage.
Traditional insurance policies are intended to remove risk from the policyholder. Security deposit insurance policies don’t; they simply protect property owners from a tenant evading their financial responsibilities. Similar to a traditional security deposit, security deposit insurance covers property damage, late rent, and unpaid fees. However, it doesn’t cover normal wear and tear.
Pros and cons of security deposit insurance
Security deposit insurance can help level the playing field for property owners and tenants. However, as a relatively new product, it can be difficult to manage. Consider the following benefits and drawbacks of asking a tenant to purchase security deposit insurance:
It covers unpaid rent
When a tenant fails to pay rent, there’s little a property owner can do to get their money. In some states, rental owners aren’t allowed to take unpaid rent out of a security deposit, even if it was a cash security deposit. Instead, they have to return cash deposits to the tenant in full and file a separate judgment against the tenant in small claims court.
While you may be able to evict the tenant, there’s no guarantee the tenant will end up paying you back in full. This is where security deposit insurance comes in, covering any unpaid rent. If a tenant fails to pay rent, you can file a claim with the insurance company instead of the courts, receive your payout, and let the insurance company deal with the tenant from there on out.
Claims can be filed before a tenant moves out
Security deposit insurance companies allow property owners to file a claim before the tenant moves out of the apartment. When a tenant pays a traditional security deposit, owners aren’t allowed to deduct any losses or file a judgment in small claims court until the tenant moves out and a walkthrough of the property is conducted.
Even if your tenant is actively damaging your property, you’ll need to first legally evict them and then attempt to recover your losses in court. With a security deposit insurance policy, property owners can file a claim at any time during the tenant’s stay. This reduces the amount of time it takes to get paid and could eliminate the need to go to court.
Property owners have a competitive edge in high-demand rental markets
Allowing tenants to pay a monthly premium on a security deposit insurance policy instead of paying a hefty security deposit upfront makes your rental more attractive. Many tenants struggle to pay move-in costs, especially in rental markets where demand is high and so are rent costs. By offering a more flexible option than cash security deposits, you can advertise rentals to a wider pool of candidates. This helps property owners minimize vacancies without having to sacrifice financial security.
Some claims may be rejected
Like all insurance policies, there’s a chance an insurance claim will be rejected. This can make it difficult for a property manager to recover unpaid rent or repair property damage. Since security deposit insurance is held by the tenant, it's important for property owners to familiarize themselves with the policy before accepting security deposit insurance in lieu of a traditional security deposit.
The claims process can be time-consuming
Although filing a claim with an insurance company is usually a lot faster than filing a judgment in small claims court, the claims process still takes some time. Depending on how many claims are filed, the extent of damage to the property, and the number of missed rent payments, it may take several weeks (or months) to get paid.
How to decide between security deposits and security deposit insurance
So, in a nutshell, security deposit insurance is a game-changer for renters and property owners alike. It simplifies things, lightens the initial financial load for renters, and provides a safety net for property owners in case things go awry.
It offers a quicker way to handle damages or unpaid rent while the renter is still around, but there are a few quirks to consider, like possible limitations and the time it takes to get reimbursed.
Choosing between regular security deposits and these new security deposit alternatives depends on how much you trust your renter and the condition of your property. It's about finding the right fit that ensures everyone's peace of mind in their renting journey.
Disclaimer: The information provided in this post does not, and is not intended to, constitute insurance advice; instead, all information, content, and materials are for general informational purposes only. This content may not constitute the most up-to-date insurance information. Readers must contact a licensed insurance agent or company to obtain quotes, advice, and guidance with respect to any insurance matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information herein without first seeking the advice of a licensed insurance producer.