security deposit vs. insurance

[David Adams]

Interested in BP community opinions and experience on security deposits versus landlord insurance. Obviously as the landlord, you don't have to pay to collect a security deposit whereas you'd have to pay for a landlord insurance policy if you decided to go that route. But might the convenience of not having to deal with a security deposit outweigh the cost of the insurance premium?

[Dan Perrott]

Can you explain what landlord insurance is?

I have property insurance and security deposits.  Not sure what your question is.  Both of these are required is you ask me.

[Thomas S.]

Insurance does not cover general tenant damage. If they burn down the property you are covered. If they kick in walls, break windows and tear down kitchen cupboards you are not covered. You must have a deposit to cover the costs of "repairs".

[Mark H.]

I did live in an apartment complex once that instead of having the typical deposit had a non-refundable deposit bond.  I think it cost me $80 and that paid the apartment complex had we damaged anything.  Wonder if that's what he's talking about?

[Anthony Lee]

@David Adams I could be mistaken, but I believe what you are referencing is a form of Tenant Liability Insurance. In essence, its a flat amount per month, per unit, and provides liability coverage for the tenant in the event that something happens that they are liable for. e.g. kitchen fire, smoke damage, etc. 

There are some companies, i have a few, that will offer coverage for things like incidental tenant damages, pet damage, bed bug remediation, insufficient security deposits, etc. In addition to the Tenant Liability Coverage. 

There are several options for this sort of coverage. I just sent you a PM 

[David Adams]

@Dan Perrott @Thomas S. We're looking into whether an insurance policy could provide the property owner with the same or better protection as a security deposit, while being less bothersome to the renter. The policy we're considering now covers Accidental Damage to the property, among other things. As you rightly point out though, property owners are also interested in a safety net in case of intentional or negligent damage as well.

[Cary F.]

@David Adams You can talk about insurance products vs deposits if you like. I look at this as more of an incentive issue. The security deposit is a way to make sure the tenant has some skin in the game. The tenant will undoubtedly want the deposit back which will give them incentive to take care of the property.

This is why the deposit makes more sense to me. The real question is this...

Does low or no security deposit reduce vacancy expense more than the AVERAGE cost of repairs associated with a low or no security deposit. This is an empirical question of which I am not sure what the answer is. 

Thanks,
Cary

[Maurice Colbert]

@Anthony Lee can you pm me the information about the Tenant Liability Insurance please. 

[Thomas Richter]

I've been looking into this over the last week, and here's what I've come up with. 

There are several kinds of products, but you've got to be real careful, because each provider does it slightly differently. There are variations on all of the below.

Renter's Insurance covers the renter's PERSONAL property as well as liability if the renter is found liable for damage to someone or something (but only related to the five major perils in terms of your property).

Some renter's insurances cover damage to the unit but it is extremely limited. It has to be accidental, and derive from one of the major perils: fire, water, smoke, etc.  Things like vandalism, negligence... none of that is included. Some providers go a bit further and cover pets, cigarette burns, bed bugs etc  But the stuff we really want to be covered for as landlords, vandalism, destruction etc no one will cover. 

A surety bond replaces (or augments) the security deposit. IT IS NOT INSURANCE. The renter pays a non-refundable fee of around 10% of the security deposit. This fee goes into a aggregate bucket made up of all the fees your units "produce" (this is why you need usually 100+ [for some providers 1,000+] units to make this work). The providers take a cut from those premiums as well. You then use funds from this bucket to repair damages left by a tenant. If damages go beyond the amount guaranteed by the bond (in other words what would have been the security deposit), the provider will/can start collections. However, the collections agency will take a 60% cut from what they collect (and they usually don't collect more than 10-30%). In other words, the provider carries zero risk, it's all on you. If you have 1,000+ units this might make sense, but you may as well administrate it yourself.

Anything that is called a security deposit insurance is - inmho - a misnomer. It is pretty much always a surety bond. There is a new company out of NY that seems to be doing it as an insurance, but they are a startup and they only serve NY. 

Some people claim that you can make a claim against your property insurance and tell them that the tenant has renter's insurance; and that then your insurance will go after the renter's insurance. But I'm not sure if that is not an urban myth. 

Conclusion: willful, negligent damages by a tenant (punched holes in walls, broken windows, graffiti etc) is is not covered. 

[James Wise]

Originally posted by @David Adams:

Interested in BP community opinions and experience on security deposits versus landlord insurance. Obviously as the landlord, you don't have to pay to collect a security deposit whereas you'd have to pay for a landlord insurance policy if you decided to go that route. But might the convenience of not having to deal with a security deposit outweigh the cost of the insurance premium?

 Do not rent to someone without a security deposit. I repeat, do not rent to someone without a security deposit. Outside of being used to cover damages a security deposit is another screening tool for you. If someone isn't financially responsible enough to pay 1st months rent & a security deposit they are not someone you want to have in your property. Your odds of evicting that person are going to go through the roof when they are that cash poor.

[James Herbert]

We are looking for options with the Covid 19 and deposit insurance is one of the options we are looking at. Can anyone recommend a company? Why? Please post here or pm me. Thank you 

[Kenneth Garrett]

@David Adams

You need everything liability insurance (landlord insurance); this covers fire, injury on the property, loss of rents etc, security deposit ( do not make the deposit the same as the monthly rent - it is not the last months rent it is security for the property), and renters insurance (require min. 30K personal and 100K liability).  @James Wise is correct.  The security deposit works as responsibility and accountability to the tenant.