Security deposit insurance isn’t the kind of support city’s renters need
Members of the Baltimore City Council, renters, and consumer and housing advocates can agree on two things: Security deposits can be a costly barrier to securing housing, and alternatives to security deposits can be a good thing. Unfortunately, that’s where the agreement ends.
Council Bill 21-0022, passed on April 5, is an attempt to address the high cost of lump-sum security deposits. This ordinance requires landlords with 10 or more properties to offer at least one of two alternatives: Either allow the tenant to pay the security deposit in installments or allow a tenant to purchase what is being labeled “rental security deposit insurance” in lieu of the security deposit.
The Baltimore City Law Department says that, as passed, the bill does not require the landlord to offer both options, contrary to the interpretation in news reporting and an editorial published by The Baltimore Sun.
Advocates support installment payments because this option makes the total security deposit more affordable by enabling a tenant to spread the total cost over at least three months. If the council had introduced legislation to only require installment payments to be offered as an alternative for security deposits, renters and advocates would be supportive.
We are disturbed that the bill includes the second option, the so-called rental security deposit insurance. We believe this option is financially detrimental to vulnerable tenants, particularly if it is the only option a landlord chooses to offer potential tenants. As consumer advocates justly caution: If something sounds too good to be true, it probably is.
Security deposit insurance is a product primarily offered by Rhino, launched by a venture-capital fund in 2017. This new product is not “insurance” as consumers understand that term; it is in fact a surety bond. Rhino’s terminology is, to our reading, deceptive and confusing.
Renters pay Rhino, but the company provides no financial protection for renters; in fact, it leaves them more exposed. The “insurance” benefits landlords, who may submit claims for damages to the company. To our understanding, Rhino will pay those claims, without any mechanism for tenants to dispute them, then charge the tenants for the payout, plus the company’s added fees and costs. Furthermore, even if a claim is never made by a landlord, the tenant will never receive any of their money paid to Rhino back when they leave, as required with traditional security deposits.
More troubling, a Rhino contract includes coverage to protect the landlord from unpaid rent, fees, costs, cancellations and other penalties, yet none of these terms are defined in the contract nor in the City Council’s ordinance. This opens up a Pandora’s box of potential problems. Unscrupulous landlords could claim a host of fabricated fees, penalties and other charges that could damage tenants’ credit and leave them vulnerable to a lawsuit.
We recognize that relying on traditional security deposits is costly and may be difficult for tenants to afford, but they provide some protections the Rhino product does not. If there’s a dispute, the tenant has the right to sue the landlord under Maryland law. By purchasing the Rhino product, should a dispute arise with Rhino or the insurance company, the tenant is subject to an arbitration clause, which could limit their right to seek a jury trial. A January 2020 Consumer Reports’ article states mandatory arbitration also means there is less need for a company to present evidence, and it does not have to follow legal precedent. Not surprisingly, research shows that, through arbitration, a business almost always prevails over the consumer.
Although the tenant is bound by mandatory arbitration in disputes with Rhino, the company can still pursue debt collection actions prior to arbitration. In fact, by signing the agreement, the tenant authorizes Rhino to pursue anyone for any information that will assist in debt collection activities against them. Most tenants would never provide such a blanket authorization were it not already embedded within the agreement.
In 2005, former Attorney General Joe Curran sued SureDeposit LLC over deceptive practices in selling surety bond products to renters in lieu of a security deposit; that case was settled in favor of the state of Maryland. Just weeks ago, during the Maryland General Assembly’s legislative session, the Office of the Attorney General Brian Frosh cited consumer protection concerns in opposing proposed legislation (Senate Bill 892) about a product less predatory than Rhino’s.
Why is the City Council passing legislation that does not help Baltimoreans, but expands the market for a wealthy venture capitalist’s product? Surety bonds branded as insurance is not the kind of housing support Baltimore renters need — now or ever.
Mayor Brandon Scott knows the difficulty Baltimore renters have moving into affordable and safe housing. We hope he will heed our warning that this fake insurance product is bad for Baltimore consumers and bad for the city. To truly help tenants, the mayor should veto this ordinance and propose a new one where the only alternative to the traditional security deposit landlords are required to offer is a straightforward installment plan.