Landlords: lower your costs

by Neil Faulkner on 19 September 2010  |  7 comments
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This is one of the most overpriced products a landlord can buy. But do you really need it?

Rent guarantee insurance pays out when a tenant doesn't pay the rent and usually comes combined with legal-expenses insurance.

It sounds promising, but it's only good if it's worth the cost. Let's see. 

A good price for insurance

The best way to gauge if an insurance is worth the price you're paying is using the claims ratio. Take car insurance, for example. The average claims ratio in the industry is around 80%, which means for every pound the car insurer takes in premiums, it pays out 80 pence in claims.

That's a very good ratio, because the insurer has other costs not linked to claims, such as salaries, heating, lighting and rent. Car insurance is so cheap (believe it or not!) that after all those extra costs are taken into account, insurers lose money from car insurance, on average. They make a profit mostly by cross-selling other, more expensive products and by investing premiums.  

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Home insurance doesn't get such a ringing endorsement. The average claims ratio is around 50%-55%, which means insurers are paying out just 50p-55p for every pound received in premiums.  

Rent guarantee insurance

Usually, the lower the claims ratio, the harder it is to get statistics, so it's worrying that I can't find the industry's average ratio for rent guarantee insurance.

However, I was lucky enough to get hold of the individual ratio for the National Landlord Association's (NLA's) rent guarantee insurance, which is provided by Hamilton Fraser Insurance (HFIS). It's a rather shocking 13.5%.

In other words, for every pound you pay, it pays out just 13.5p in claims.

That is rip-off territory to match payment-protection insurance, which has rightly been savaged by the press and the Financial Services Authority for its 10%-20% claims ratio.

The NLA admits that it pays out on just 1% of policies. I can think of just two reasons why this could be: either the need for rent protection is very low or there are so many exclusions that most people are unable to successfully claim.  

Talking about exclusions...

Turning to the small print, it doesn't take long to spot a load of exclusions, many of which are very similar to those in most payment-protection insurance policies:  

• The policy excess is the size of your tenant's deposit, which must be at least one month's rent.
• You can claim a maximum of £2,500 or six month's rent, whichever is lesser. However, you can't claim in the first three months of the first year if the tenancy began before the insurance start (inception) date.
• You won't receive a payout on this insurance whilst a tenant puts in a claim for Housing Benefit or Local Housing Allowance, which can take a long time, and you're not covered for any shortfall between those benefits and your rent. (However, if the tenant is unsuccessful at claiming a benefit, the insurer will pay out the backdated amount.)
• The legal expenses policy only covers fees 'prior to the issue of court proceedings'. Plus, maybe I missed it, but I could find no copy of the legal-expenses insurance policy on the websites of the NLA, HFIS, or ARC Legal (which provides the legal cover), so we don't know on what grounds it can reject your claim for legal expenses.
• If the exclusions to the legal protection policy are high as well, you're even less likely to make a successful claim for unpaid rent, because you can't claim unpaid rent unless proceedings are pursued on the legal expenses part of your insurance.
• After 14 days you can't get a refund at all, not even pro-rata. This is against standard practice across the industry for most insurance since around the middle of the noughties.

Did you think I was finished? 

To rub salt into the wound, you're tied in to more NLA products. You have to use the NLA's own full tenant check service on your tenants (which they must pass), plus you must do basic NLA tenant checks on each tenant at renewal.

And there is more small print. The contract says that you can claim lost rent until the end of the policy only. This means, if you make a claim on a 12-month policy in, say, the ninth month, you'll only be able to claim three months' rent at most, minus the excess of at least one month's rent. You can't roll your claim over into renewal.

HFIS tells me that if a claim is ongoing, insurers (it refers to all insurers, not just itself here) won't renew a rent guarantee or legal expenses policy. It also tells me that some insurers will be reluctant to offer cover if you've had a previous claim.  

What to do 

Those were just some of the 'highlights' of the small print, but ensure you read the policy completely and follow its instructions carefully as soon as you have a penny's unpaid rent, or the insurer may reject your future claim.   

Better yet, look for alternatives. Considering the claims ratio, I would say this insurance starts to become fairly priced at around £30 or less. It could be that other insurers deserve to charge more than that, provided they have fewer and less onerous exclusions. Please let readers know what you think of your own rent guarantee insurance policy below.   

If the risk to you of going without insurance is low, consider scrapping the over-priced insurance altogether, saving yourself perhaps £100pa, take a larger deposit (perhaps six weeks), and build up some emergency savings. You could supplement that with a budget version of the insurance; that is, buy some cheap legal-expenses insurance only.

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