One of the direct consequences of the economic crisis caused by the coronavirus is that many tenants have not been able to afford the rent. A problem that several insurers were already contemplating even before the arrival of the pandemic with the implementation of a type of insurance policy dedicated to non-payment of rent. In fact, these policies had already been well received by apartment owners, having largely resolved their main uncertainty: non-payment of rent. Proof of this is that The contracting of this type of insurance grew by 35% in 2019 alone.
However, this new situation has meant a turn of the screw and has put many lease contracts to the test which, due to this extraordinary situation, has multiplied the delinquencies among the tenants. In fact, according to the latest data published by the Delinquent Tenant File, communications due to non-payment have increased by 68.4% since last September. This circumstance has helped a lot to hiring of rental insurance has doubled in the last six months of 2020.
And, despite the optimistic prospect of the arrival of the vaccine, there is still time to return to true normality. Many studies assure that Spain will not recover the levels of precovid economic activity until 2023 and even 2024. Thus, 2021 is seen as the star year for this type of product, whose growth forecast is in two digits. According to El Spanish Observatory for Non-Payment Insurance (OESA), 30% of new lease contracts will incorporate non-payment insurance, especially in Madrid and Barcelona, although they are becoming more frequent in provincial capitals and large cities.
What is unpaid rent insurance?
A few years ago, insurers detected the need in the rental market to protect owners who rented their homes against non-payment of rents. The usual thing is that this type of insurance is contracted at the same time a rental agreement is signed, but it could also be done at any time for the duration of the lease. On the other hand, the most frequent is that the owner of the property requests it, although sometimes the tenant himself could also do it as extra guarantee of your solvency.
The reality is that in previous years the contracting of this type of insurance was not so common. However, five out of 10 rental contracts signed during the past year already contemplated the contracting of one of these insurances. And it is that to a large extent the hiring of this service serves in turn to select the tenants, since before signing the insurance company makes a feasibility study to the candidate to verify their solvency.
In addition to non-payment of rent to the owner, this type of insurance also includes other coverages. The most common are protection by damage in the home by the tenant or even the robo from the continent of the property. Also sometimes lends legal advice to take legal action against the tenant if necessary. These additional coverages depend on each insurer, although the common is coverage for non-payment of rent, precisely the most requested.
In this way, the landlord insures his monthly rent and prevents the possible late payment by his tenant from dragging him into economic instability. The reason is that the non-payment of rent insurance covers the rent agreed with the tenant for up to 12 months of non-payment. On the other hand, coverage of this type can cost between 3% and 5% of annual income. According to the insurance brokerage Rent, the average rental price with non-payment insurance during 2020 was around 693 euros, compared to 661 euros in 2019.
When should non-payment be reported?
Like all insurance coverage, there are terms and conditions that must be given in order to execute what has been agreed. In this sense, it is important to differentiate between a default and a delay in paying rent.
It is considered a default when the corresponding payment has not been made past a month of the agreed date. Further, must have been notified the debt formally to the tenant. Although each insurer establishes its deadlines for claims, it is advisable to notify the non-payment from the moment it occurs.
According to the new Urban Leasing Law (LAU), until after 3 months or unpaid installments, the eviction process cannot be started. Even so, it is recommended that the insurance knows it so that the owner does not lose the possibility of advancing the rents. If the term established by the insurer is not met, the owner would have to wait until there is a final judgment of eviction to recover the home.
Beware of false insurance
This type of coverage has been very well received in the rental housing sector. Precisely for that, many real estate services and companies have begun to include these types of products in your offer to the owners. However, not all insurance available on the market is registered with the General Directorate of Insurance.
And it is that with the need, bad practices and fraud also emerge. Last June, Spanish Observatory of Rental Insurance (OESA), it warned of the proliferation of false non-payment insurance. The agency estimated at about 50,000 the owners who could be affected by these fraudulent insurance at that time. Considering the development of the last few months and the increase in delinquency cases among tenants, now this number could have increased dramatically, leaving many homeowners in a vulnerable situation.
According to OESA, many services of this type are offered masked with words such as policy, guarantee or coverage, but are not later endorsed by any insurance company. This has caused that when the owner has needed to make use of the contracted coverage, he has been scammed and unprotected in the face of a situation of non-payment of rent by his tenant.
In this sense, the same entity has recommended following these tips when hiring one of these insurances:
- Make sure that the company that offers you this insurance is registered with the General Directorate of Insurance.
- Check that behind this coverage there is a real insurer capable of dealing with the economic coverage that it should defend in case of need.
- Compare prices and coverage. Not all insurers offer the same coverage and at the same prices. Study the proposals carefully.
- Do a previous market study and be suspicious of too aggressive prices.
According to market data, almost 70% of owners who have taken out rental insurance renew it and everything indicates that in 2021 the demand for this type of insurance will continue to grow strongly, driven by the still complicated and uncertain economic situation and with an unemployment rate that continues to grow. In addition, we cannot forget that the vast majority of rental homes in Spain are in the hands of private owners, who seek to maintain their sources of income in times of instability.
A situation that confirms the increased requests for risk reports seen since the end of the confinement in May, which stands at 24%, and which puts on the table that the owners are increasingly cautious.