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 in rental agreements 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 article, 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  security deposit insurance premiums,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: 

Security deposit insurance pros

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. 

Rental deposit insurance cons

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 both property managers and 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. 

Best security deposit insurance providers

Now we have taken a look at what exactly security deposit insurance is, and its pros and cons, lets  say not all insurance providers andtake a look at some options:

Here's an overview of some leading security deposit insurance providers you might consider:

Jetty

Jetty offers a security deposit alternative called Jetty Deposit, which allows tenants to pay a small, one-time fee instead of a full security deposit, providing landlords with coverage for damages and unpaid rent.

Rhino

Rhino replaces traditional security deposits with a low monthly payment that tenants pay as long as their lease is in effect. This can free up cash for tenants while ensuring landlords are protected against damages or lost rent.

LeaseLock

LeaseLock operates differently by integrating directly with the property’s leasing process to eliminate deposits altogether. Instead, LeaseLock charges a fee and offers insurance that covers rent loss and damages, providing protection for landlords.

Obligo

Obligo uses Open Banking technology to preauthorize the amount of the security deposit, holding the tenant's account in a state that is ready to pay if needed. Tenants pay a fee for this service, and landlords receive the security without needing to hold actual cash.

Surety

Offering a slightly different approach, Surety provides a platform where tenants can purchase a surety bond in place of a traditional security deposit. This bond acts as a guarantee to the landlord for the lease obligations.

When considering a security deposit insurance provider, landlords should evaluate the coverage limits, cost (both to themselves and their tenants), and the claims process to ensure it aligns with their property management needs.

It's also essential to communicate clearly with tenants about the terms and benefits of opting for security deposit insurance over a traditional deposit.

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.

Security deposit insurance FAQs

What is a security deposit insurance policy?

A security deposit insurance policy is an alternative to traditional security deposits. Instead of paying a large lump sum amount upfront, tenants pay a non-refundable fee or monthly payments to an insurance provider.

This policy provides landlords with protection against unpaid rent or damages to the property, similar to traditional security deposits, but can be more cost-effective for tenants.

Is renters insurance the same as a deposit?

No, renters insurance and security deposits serve different purposes. Renters insurance protects the tenant's personal property in the case of theft, damage, or loss due to incidents like fire or burglary. It can also offer liability coverage if someone is injured in the rental property.

A security deposit, on the other hand, is a sum of money held by the landlord as collateral against damage to the property or unpaid rent by the tenant.

Should I get my security deposit back?

Yes, typically, you should get your security deposit back if you leave the property in the same condition as when you moved in, minus normal wear and tear. To ensure this, document the property's condition upon move-in and move-out. Landlords can deduct from the deposit for any damage beyond normal wear and tear or unpaid rent.

If deductions are made, landlords should provide an itemized statement explaining them. The specific rules and timelines for returning security deposits vary by jurisdiction, so it's important to be aware of local laws.

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.