Piggybank News

November 28, 2012

Rent Guarantee Insurance – does it really protect you?

Many Letting Agents are now routinely selling Rent Guarantee Insurance to their landlords and with reports of rising levels of arrears it sounds like a very good idea.  But to what extent does it really protect you?

The argument FOR Rent Guarantee Insurance

  • In theory, rent guarantee insurance is a landlord’s proverbial best friend: if your tenant fails to pay their rent, the insurer will pay you instead. The outstanding amount is then recovered by the insurance company from the tenants directly.  For around £120 a year rent guarantee insurance offers you piece of mind that your rent will be paid on time and in full when you most need it.
  • Most good insurance policies will also include legal cover of up to £50,000 for evicting your tenant. Given that eviction can be a lengthy and costly process, this can definitely provide landlords huge relief both in terms of time and money.
  • In addition, most policies will pay 50% of the rent for up to 3 months after eviction whilst you find a new tenant.

So what’s the catch?  What are the arguments AGAINST Rent Guarantee Insurance?

  • Your tenants will need to be thoroughly referenced and credit checked in order to be granted the policy. Usually DSS tenants will be excluded unless a rent guarantor is in place (and may attract an additional premium).  This means that insurers exclude the type of tenants that you would most likely need the policy for.
  • In addition, most insurers won’t let you claim for the first 3 months, and there is usually an excess to pay that is equivalent to one months’ rent. This means that in fact you are only guaranteed to receive 8 months’ worth of rent, and you often won’t receive anything without renewing if you are in the last month of your policy.
  • As the excess is equivalent to one months rent in any case, it means that there is little point in claiming for rent that is only a month late unless you are sure the tenant will continue to not pay and/or you want to evict the tenant. It may be better in some circumstances to agree a delay in payment or payment schedule with the tenant.  To make this decision even more difficult most policies only give you 30 days to claim after the rent became overdue. (If you do agree to delay payment by more than 30 days, make sure you keep all your correspondence otherwise there is a risk you won’t be able to backdate the claim if the tenant doesn’t end up paying.)
  • There is also a question as to whether you are ever likely to face a 3 month void whilst looking for a tenant. Couple this with a number of common caveats – such as requiring you to accept any offer over 85% of the previous rent – the expected benefit from 50% rent payments during void periods greatly decreases.
  • The final thing to remember is that policy renewals are by no means guaranteed. Unless you start eviction proceedings immediately, any tenant defaulting towards the end of a policy could stop you from being able to renew and so the eviction costs would be borne by you.

(Piggy says “What all this means is that the way that policies are set up stacks the odds heavily in favour of the insurance company. This should perhaps not be unexpected; insurance companies are businesses like any other and need to make a profit in order to stay in operation.  Despite all this, in a recessionary environment even tenants with a good credit history can face financial difficulties, and the losses sustained by the landlord through rent arrears and eviction proceedings can be considerable.  The argument for insuring yourself against this risk is a valid one but it is vital to read the small print and make sure that the policy you are being offered is appropriate for your circumstances.”)

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