What Is Rent Guarantee Insurance?
Rent guarantee insurance is a risk-management product that protects landlords against loss if a lessee defaults. This insurance pays the monthly rent for a set period of time if the covered tenant stops making payments.
- Rent guarantee insurance protects landlords against loss of income if a tenant falls behind or defaults on rent payments.
- Landlords typically pay for the premiums, though it is also possible to require the tenant to pay for it instead in extra rent or if the lease specifies it in writing.
- Insurers will look to the financial stability and creditworthiness of the tenant(s) to underwrite the policy.
Understanding Rent Guarantee Insurance
A tenant who cannot or refuses to pay rent is a landlord's worst nightmare. In most cases, individuals and companies who lease property have several policies to choose from, including the option to insure buildings and their contents as well as the legal expenses of getting a tenant evicted. Some of these policies might refer to something called "rental cover." However, that does not mean that they will be reimbursed if the tenant falls into arrears.
Rent guarantee insurance, a relatively new import from the United Kingdom, is now being sold in the United States to fulfill those particular needs. These products are specifically designed to protect a landlord's income in the event that their tenant defaults on payments.
Much like private mortgage insurance (PMI), rent guarantee insurance offers protection to the landlord, rather than the tenant. If the tenant stops paying rent, the insurance carrier, acting as guarantor, covers the rent for the period of time specified in the contract.
Tenants who stop paying remain liable for the rent owed and any legal fees. The guarantor can start legal proceedings against a delinquent tenant, including eviction and reporting to credit agencies.
Some landlords might opt not to fork out additional money on rent guarantee insurance, confident that the screens and credit checks they ran on tenants before leasing them their property and handing over the keys prove that they are financially capable of making monthly rental payments. Circumstances can change, however.
For example, an economic recession could result in the tenant losing their job and income. Alternatively, they may get divorced or be offered a job in another state and opt to relocate immediately without respecting the tenancy agreement.
When a landlord relies on rental income, whether to pay the mortgage or fund any other expenses, a tenant's failure to pay can have serious implications.
Rent guarantee insurance should not be confused with guaranteed rent schemes. Guaranteed rent schemes enable landlords to sign over the management of their property to a company or real estate agent in exchange for a pre-agreed payment. In such cases, the owner would be paid, even if the property is empty or the tenant does not pay rent.
The cost of coverage can be absorbed in the monthly rent paid by the tenant, ensuring that the landlord doesn't have to foot the bill.
Limitations of Rent Guarantee Insurance
Insurers do not hand out rent guarantee insurance without doing their due diligence. That means that if a tenant has a history of defaulting on payments, an application to protect their rental payments will likely be rejected.
Moreover, in order to qualify for such a policy, the tenant will need to have a steady job, earning enough to comfortably pay the rent on the property they wish to lease. Failing that, insurers will demand that there is a guarantor in place with sufficient financial means to cover any shortfalls.
Another thing worth pointing out is that insurance payments generally kick in after one month of non-payment. It is sometimes possible to buy a policy without any excess, though premiums on these products typically cost a fair bit more. It could also be argued that the tenant's security deposit should be sufficient to cover this month of no income.
Finally, rent guarantee insurance can be costly, equating to 5–7% of the annual rent payments. When possible, landlords will seek to get tenants to pay for this, although adding this extra cost might price them out of the market.