Non-payment of rent insurance: how does it work?

Non-payment of rent insurance protects the owner of a rented property against possible defaults on the monthly rent by the tenant. These are rising products, which provide extra peace of mind to people who are renting a home they own, and whose hiring has increased by 30% due to the approval of the Housing Law , which makes evictions due to non-payment more difficult to protect residents. 

In this article we explain all the details about non-payment of rent insurance: how it works, its coverage… Remember, however, that some of the best home insurance on the market has protection against non-payment, although it is generally more incomplete than which offers a dedicated policy.

What is rent non-payment insurance?

Non-payment of rent insurance fundamentally deals with three things:  recovering unpaid bills ,  offering legal protection to the owner  and  taking responsibility for any damage caused to the home  by the tenant, if it occurs. If the tenant stops paying, with this policy you will be able to collect the unpaid rent once there is a final ruling; and in the meantime, you receive legal advice and procedures related to the corresponding complaint.

What does non-payment insurance cover?

The basic insurance coverage  for non-payment of rent  is as follows:

• Claim for unpaid rent .
• Collection of monthly payments in arrears (six, eight, 12 or 18 months), provided there is a final ruling. You can choose the monthly payments that are covered by the policy: the more included in the insurance, the more peace of mind, but the fee will be higher.
• Cost of damages in case of acts of vandalism carried out by tenants, normally with a maximum limit that is usually 3,000 euros.
• Legal coverage in case you have to go to court.

There are also  other additional coverages  that can be purchased optionally, such as:

• Assistance in case of breakdowns.
• Claims to other insurance companies.
• Claim of damages.

Also Read: Quick Tips To Know Before Making An Insurance Investment!

What requirements does rent non-payment insurance require?

In order to contract non-payment of rent insurance, the insurer will first carry out a study of the financial solvency of the potential tenant. To do this, the company can ask the tenant for a  copy of their employment contract, their ID and the last three payslips . In exchange, the tenant will avoid having to pay a deposit or request a bank guarantee, which implies a fairly high cost of commissions.

Other  requirements  that must be met to be able to contract this type of insurance are:

• The prospective tenant cannot be included in any delinquency record.
• The annual rent requested from the tenant cannot be more than 45% of their net income.
• That the rental contract has a duration of at least one year. This means that they cannot be hired for seasonal rentals, business premises, subleases, rural rentals and homes that do not have habitable conditions.

Other formulas to protect yourself from possible non-payment

In addition to  home rental non-payment insurance , there are other formulas to cover a possible non-payment, which can be a complement to the insurance in case you are looking for extra protection: request a deposit, go to public institutions or include arbitration clauses They are usually the most used solutions. We detail them for you:

Request a deposit or guarantee

Currently, the deposit or the guarantee (or both) are the  most common formulas to ensure payment  in case the tenant does not pay a month’s rent. As established by law, a maximum month’s deposit must be requested, which is deposited in the corresponding autonomous community body, but the landlord can request up to two additional months of rent as additional guarantee.

When the tenant leaves the home, the owner is obliged to return the deposited amount, but can deduct the cost of any damage that has occurred to the property , as long as these were caused by the tenant. He can also use the deposit to pay outstanding electricity, gas or water bills.

On the other hand, if a bank guarantee is requested, it will be the tenant’s bank that undertakes to guarantee the debt if there is one. Normally, the landlord usually asks for the equivalent of four or five monthly rents.

Go to the town hall or your autonomous community

Some autonomous communities or city councils make formulas available to users to facilitate leasing and guarantee payment. For example,  in the Community of Madrid the Plan Alquila has been in operation since 2008 , which, among other things, offers insurance against non-payment of rent for one year. 

Include arbitration clauses in the contract

Including arbitration clauses in a rental contract implies that  both the landlord and the tenant waive going to court in the event of a conflict  and agree to submit, instead, to arbitration by the corresponding body. In general, arbitration proceedings last up to six months less than a dispute in court.