Tenant Default Captive Insurance: Security Without the Security Deposit

Tenant Default Captive Insurance: Security Without the Security Deposit

It is a situation landlords know all too well: Picking up the tab for their tenants.

The most common scenario is security deposits not paying the cost of damages after a tenant moves out. The property owner or operator is stuck picking up the difference.

Most landlords require a security deposit equal to two months’ rent at lease signing. However, tenants may not be able to afford the deposit, and paying for lost rental income if they default may cost more than just two months’ rent.

A landlord has little recourse to collect damages once the tenant has moved out. And that doesn’t cover other costs, such as loss of rents due to rent moratoriums and job losses, or legal costs tied to eviction.

But for landlords with many rental units, there is a solution: tenant default captive insurance, which eliminates the need for security deposits while providing enhanced protection to landlords.

How tenant default captive insurance works

Under a tenant liability default reciprocal captive, property owners charge tenants a small, non-refundable monthly fee (typically an additional $15 to $20) that goes to the captive.

Landlords can then dip into this pool of money for insured losses, including damage, loss of rental income and the cost of eviction.

The benefits of a tenant default captive insurance

Not only does a tenant default captive collect money for damages and other vacancy costs, it eliminates the need to collect and manage security deposits. The captive also widens the pool of potential tenants, including those who can’t pay a full security deposit.

The tenant default captive turns a cost center into a profit center. With good management, the excess proceeds in the captive can be returned to landlord.

And by spreading the risk of defaults across tenants, the insurance vehicle decreases default risk to near zero. These elements of a tenant default captive make a property more marketable, and landlords will spend less time on administrative duties, like chasing bad debt.

The ideal owner or landlord for tenant default captive insurance

Because risk is shared across all units, a tenant liability default captive works best for those owning at least 300 to 3,000 (and more) units.

Properties eligible for the captive should have good risk management measures such as fire and water protection, a well-maintained roof and processes to address claims. To get started, property managers need a list of locations, rental income per unit, a list of rental damage losses over the previous three years and a copy of the standard lease.