What You Need to Know About Eviction Insurance, Surety Bonds and Rent Loss Insurance
Published on: Monday, December 14th, 2015
Eviction is an expensive proposition. Landlords forced to evict a tenant for nonpayment of rent lose more than just the rent money they don’t get. They also have to pay for court costs, filing fees, attorneys’ fees and the probability that the unpaid rent will not be recoverable. (After all, if the tenant had enough money to pay their rent, they probably would have just done so!)
Meanwhile the eviction process can take a significant amount of time. It typically takes 1-2 months from the filing date to get a decision and judgment, and then possibly weeks more for the sheriff to show up to assist and supervise the eviction. The longer this process takes, the more money rent doesn’t get paid.
At the end of the lengthy eviction process, you still have to find another renter and rehab the rental property (and perhaps repair damage caused by the evicted renters if they vandalized the property on their way out the door). This can take another couple of months.
From start to finish, going through the eviction process doesn’t make your mortgage, insurance payments or taxes go away. Add it all up and an eviction can cost $5,000-7,000, even for landlords who rent out relatively modest dwellings.
Unfortunately, most rental property owners’ insurance policies don’t cover the risk of tenant nonpayment and/or eviction costs. Landlords often must pay these costs out of pocket, or transfer the risk to an insurance company or bond company for a premium.
Here are three effective ways rental property owners can manage their risk of losing rental income:
Protect Yourself With Eviction Insurance
Eviction insurance is rental property owners’ first defense against nonpaying renters. Of course, eviction insurance premiums must roughly reflect lease default rates, and so it might not be a big money saver in the long run. But if a rental property owner can’t afford a tough eviction, but can afford eviction insurance premiums, insuring their risk can help them avoid cash flow disasters that are tough – or maybe even impossible – to recover from.
Surety Bonds Pay for Nonpaying Renters
Landlords can purchase a surety bond or certificate from a number of vendors. This protection generally costs about one month’s rent per year of protection. If a renter can’t or won’t pay rent, the company issuing the surety bond will pay it for them – and then attempt to collect from the renter. The alternative is to attempt to collect yourself, or sell the debt to a collector for a fraction of the amount owed.
These surety bonds won’t allow you to skip background checks and basic due diligence on every tenant. The surety company won’t issue a bond on just anybody; they’ll run a credit and rental history check on every individual.
Generally, surety bonds will not cover legal fees or court costs. The bond is strictly there to cover nonpayment of rent, and will generally do so for anywhere between 1-6 months or until the lease expires.
You do not need tenants’ consent to obtain a surety certificate or bond.
Pro tip: Consider this option if your tenant needs a cosigner but is having trouble finding one. The security deposit can be used to defray the costs of issuing the surety bond.
Get Additional Protection With Rent Loss Insurance
Rent loss insurance provides some of the advantages of surety bonds, but usually offers more limited coverage. Insurance carriers that offer rent loss insurance will often exclude renter-initiated defaults. This coverage, often called “fair rental value” coverage, is limited to events that make the property unlivable and therefore force the tenants to move out. Claims are generally paid each month the renter doesn’t pay.
Some rent loss insurance carriers require an annual premium. In other cases, monthly premiums are required, perhaps added as a rider to an existing landlord insurance policy.
There is frequently coverage available to partially defray legal fees. Insurance carriers frequently negotiate discounts on legal services with the attorneys they provide to assist their customers.
Plug the Holes in Your Risk Management Program
As you develop your risk management program, take a look at what your rent protection insurance policy covers, including exemptions. Ensure you know what you’re buying, and clearly identify whether the policy covers lost rent as a result of lease and credit defaults, lease breaking, bounced checks and the like.
What happens in the event you have a rent loss that’s not due to tenant default? For example, are you covered if a flood, fire damage or some maintenance issue releases a tenant from their rental obligation? Does the insurance company or bond issuer pay in those circumstances? Check your landlord insurance policy, rent loss insurance and/or surety bond company’s documents to make sure this gap is plugged. Otherwise you’ll be out the premium and potentially thousands of dollars in lost rent revenue.
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