‘No deposit’ insurance product debate

With tenancy deposits coming under fire recently, Eddie Hooker, CEO of Hamilton Fraser, parent company to mydeposits, looks at whether alternative insurance products, offering a deposit free solution, protect both landlords and tenants, and if they improve the Private Rented Sector (PRS).

To address these questions and many more potential issues, mydeposits has today released a 14-page Whitepaper that reviews how these insurance products operate versus traditional cash tenancy deposits. You can read the Whitepaper in full here.

When paying a deposit at the beginning of a tenancy, a tenant is presented with a fairly substantial cost – the equivalent of six weeks’ or two month’s rent. According to Eddie Hooker, a cheaper alternative would, of course, seem very appealing to many tenants. He says: “There are now several no deposit insurance products that offer a solution whereby a tenant can rent a property without having to put down a deposit. Despite the initial attraction, I have been unable to find clear answers to some pertinent questions. Landlords and tenants entering into such contracts should do so with their eyes wide open.

Tenancy Deposit Protection was introduced as a legal requirement in 2007 following government statistics which suggested that 20% of deposits were being unfairly withheld from tenants. Some ten years later, over four million individual deposits are protected by tenancy deposit protection schemes and dispute levels have fallen to less than 2% of all ending tenancies.

“The no deposit products use the 2% dispute levels as proof that they can keep their claims and premiums low, but they are misusing the statistics. In fact, more than 40% of deposits are returned to the tenant with an agreed deduction. That means at least 40% of landlords will have to make a claim on their insurance to cover costs. Processing claims costs money and claim costs get added to the overall premium.” states Eddie. “Like most insurance products, the no deposit options reserve the right to subrogate their losses from the party responsible, so does that mean the tenant will be pursued for a claim that they may or may not be responsible for? Will tenants start to receive red letters, black lists and court judgements for missing payments?”

The Whitepaper also reviews how tenancy deposit protection has boosted transparency in the sector.

Eddie continues: “The Prescribed Information requirements and formal dispute resolution service are set in stone by legislation and are monitored by government set timescales. In complex deposit disputes which require an understanding of the Housing Law and Consumer and Agency Law, would landlords and tenants prefer an impartial adjudicator employed by a deposit scheme reviewing their case, or an insurance claims handling process? Disputes raised through deposit protection schemes are free and the process must be fair for both parties. The no deposit insurance products remove these safeguards leaving landlords and tenants to rely on the insurer’s terms and conditions.”

In the light of the Queen’s Speech, where it was announced that deposits will be capped at no more than one month’s rent, Eddie says: “Following this news, I question whether the no deposit products will be as interesting to tenants as they may have been. These products command a premium the equivalent to one weeks’ rent. This will now equate to 20-25% of a deposit and is non-refundable, whilst also leaving a tenant liable for reimbursing the insurer for any claims they pay out. I struggle to see how this is a viable option for the hardest pressed tenants and is not just another fee they will have to pay.”

Eddie concludes by reiterating that he can see the merits of an alternative to deposits, but believes the current crop fall foul of the most basic protection that tenancy deposit protection schemes were created to administer in the first place. “The Whitepaper goes some way in voicing my concerns. I do welcome change for the PRS and new products that make people’s lives easier. However, the sector needs absolute transparency and fairness, particularly when tenancy deposit protection has been so successful in raising standards.”

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