City renters deserve alternative choices to a security deposit
For low-income people, the requirement of a security deposit can make it prohibitive to rent an apartment or house. These deposits are meant to protect landlords by offering a financial security blanket to pay for any damages a tenant may cause to their property. But many people simply don’t have the money in their budgets for deposits that can be hundreds of dollars. Paying such a large lump sum at one time to get into an apartment or house is out of reach for many people, which blocks them out of nicer neighborhoods. A recent Zillow survey found that 33% of renters said their biggest hurdle when looking for a rental was affording upfront costs, while only about half could afford an unexpected expense of $1,000.
Attempting to make decent housing more attainable, the Baltimore City Council passed legislation this week that provides alternatives to traditional security deposits. Under the bill, landlords with 10 or more units who charge a security deposit of more than 60% of a month’s rent would have to offer prospective tenants the option of paying the deposit in three monthly installments or allowing them to purchase “rental security insurance” — what some say is more accurately described as surety bonds. We encourage Mayor Brandon Scott to sign this legislation into law.
We’ve heard the concerns from fair rent advocates and some council members about rental security deposit insurance, and they are valid ones. The way it works is that a tenant will pay a premium, in monthly installments if that is more affordable, and the bond company pays damage claims made by the landlord. The company then bills the tenant for the damage costs. The premium typically comes at a significantly lower cost than the security deposit, but unlike a deposit, it is not refundable.
Critics worry this type of insurance opens up the doors for predatory practices by the insurance companies and landlords. It will make it too easy for the landlords to file claims for false damages and leave little recourse for tenants to defend them- selves, they say. Or tenants may end up paying more in damages than the potential cost of a security deposit. Indeed, unscru- pulous landlords may try to game the system, say, by making claims for normal wear and tear. But that is no different from what happens now. Stories already exist about tenant-landlord battles over the return of security deposits once someone moves out. Some tenants forego their deposits rather than get into a drawn-out disagreement that can wind up in court — because court can be costly.
Security deposit insurance should, in fact, provide more checks and balances. A landlord would typically have to file a claim with the insurance company to recoup any damages, and the tenant could dispute that claim with the insurance company. And we would think it is in an insurance company’s best interest to seek to avoid paying out frivolous, expensive claims. That should help keep them honest. A tenant could also file a complaint with the Maryland Insurance Administration.
Unfortunately, the city can’t legally tell insurance companies what stipulations to put in their policies. So, if tenants do choose the insurance route, which many will because it is the cheaper option, they need to make sure they read the details carefully. Advocates say some insurers who ask tenants to waive all rights to take a dispute to court are problematic. Others may ask tenants to waive the right to go to court if they don’t agree with the insurer’s decision for small claims, but not large ones. Some companies may report tenants who don’t pay damages to credit bureaus, others will not. It’s no different from other decisions we make in life, such as paying car insurance premiums in installments rather than a lump sum, even though it costs a little more. Tenants will have to decide which policy is best for them. But the important thing is, they will have choices under the City Council legislation.
In Maryland, this type of insurance is already being offered to renters. So far there is no clear indication of widespread predatory behavior. But while these policies aren’t new, they are now starting to become more widely used — Atlanta and Cincinnati are also requiring landlords to offer the policies — and will need to be monitored for potential problems down the road. The last thing we want to see is something meant to help tenants end up causing more financial problems. And we don’t think that is what the City Council wants either.