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Deposits -v- insurance

New insurance products claim to negate the need for a deposit. Eddie Hooker, CEO of Hamilton Fraser has reservations.

Eddie Hooker
Eddie Hooker image

Eddie Hooker

Tenancy deposits have recently been coming under fire, so our team at Hamilton Fraser, parent company to mydeposits, has been looking at whether alternative insurance products, offering a deposit free solution, protect both landlords and tenants, and whether they improve the Private Rented Sector (PRS).

mydeposits white paper imageTo address these questions and many more potential issues, mydeposits has published a 14-page Whitepaper that reviews how these insurance products operate versus traditional cash tenancy deposits.

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.

Companies such as Dlighted, Flatfair, Reposit and InsureStreet, suppliers of these insurance based products, all claim that one of the biggest barriers to renting is the amount of deposit that the tenant has to find at the start of the tenancy.

We believe that a cheaper alternative would, of course, seem very appealing to many tenants. There are now several no-deposit insurance products that offer a solution where 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 and I believe that landlords and tenants entering into such contracts should do so with their eyes wide open.

TENANCY DEPOSIT PROTECTION

Tenancy Deposit Protection was introduced as a legal requirement in 2007 following government statistics that suggested that 20 per cent 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 per cent of all ending tenancies.

The no deposit products use the 2 per cent dispute levels as proof that they can keep their claims and premiums low, but I say that they are misusing the statistics. In fact, more than 40 per cent of deposits are returned to the tenant with an agreed deduction. That means at least 40 per cent 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.

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?

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

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.

DEPOSIT CAPS

In the light of the Queen’s Speech in June, where it was announced that deposits will be capped at no more than one month’s rent, I question whether these 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 per cent of a deposit and it 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.

There is, of course, some merit in having an alternative to deposits, but 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.

You can read the Whitepaper in full at www.mydeposits.co.uk/wp-content/uploads/ nodeposit.pdf

August 30, 2017

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