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How does rent guarantee insurance work?

Thursday 23 April 2015

Unless you are one of those landlords who is fortunate enough to be able to buy properties outright then you will have mortgage payments to meet and usually at a higher rate than a domestic mortgage. And while most landlords do their best to ensure they secure reliable tenants people do fall on hard times and are often unable to pay the rent as a result.

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Rent guarantee insurance covers landlords in this event but arranging the cover is dependent on a number of factors, including tenant type, whether or not an assured shorthold tenancy agreement is in place and whether sufficient background checks have been made.

And so, Simple Landlords Insurance has put together a guide to the intricacies of the cover.

Most policies will pay their holders the rent on their properties up to a specified value or for 12 months, whichever is the lower.

With a few exceptions, the premium payable is generally standard for rentals of up to £2,500 per calendar month. This means that the landlord who is protecting themselves against default of a tenant on a rent of £450 per calendar month pays exactly the same as one protecting a rent of £2,000 per calendar month, despite the financial risk in the former case being only a fraction of that in the latter.

Policies are normally taken out to cover a single tenant or a joint tenancy where, for example, the tenants are a married couple where only one partner is contributing financially to the rental payment.

One thing to be carefully noted is that the guarantee generally only remains valid until the Assured Shorthold Tenancy (AST) rolls into a statutory periodic tenancy, as any ongoing claim under the policy will terminate at this point.

Tenant referencing

Rent guarantee insurance providers will ask you to have your tenants referenced by a professional company.  References offer different levels of scrutiny – from the most basic credit check to the more enhanced which also asks employers to verify income and contact previous landlords for references.

Virtually all insurers refuse to cover tenants whose checks reveal any county court judgements which are outstanding or any which have been made in the last three years. In the case of tenants who are unemployed and reliant on state benefits or self-employed, a guarantor may often be necessary to vouchsafe payments on behalf of the tenant. Guarantors are subject of a credit check themselves.

Legal fees

The majority of rent guarantee insurance policies include legal fees cover, which is designed to assist landlords in meeting the legal costs of evicting a defaulting tenant.

For obvious reasons, no rent guarantee will be paid out until it is clear that legal action is required to remove the tenant.

Lewis Thorley, Underwriting Manager at Legal Insurance Management, a specialist in legal expenses and professional fees insurance, said: “There has to be a reasonable prospects of success in claiming the rent back.

So, as soon as we receive a claim form, our solicitors have to decide whether certain key processes have been followed. For example, has the tenant been adequately referenced? Has the landlord issued all relevant written notices or has everything been done verbally?”

“The most important thing is to make sure you contact your insurer’s legal team as soon as your tenant defaults and before you do anything else. They will tell you exactly what to do to avoid prejudicing your legal position further down the road.

The legal helplines are invaluable in helping people to know what is required of them, so before you do anything you should get advice and make sure your back is covered.”

In order to comply with the conditions of the rent guarantee, legal advisors will tell landlords to write to their client within a certain time limit and then submit a claim form to start the legal process.

Insurers normally appoint their own specialist solicitors to represent policy holders in court.

If you found this guide useful then please visit the Simple Landlords Insurance News section for more helpful tips and advice.

For more information on LIM visit www.legalim.co.uk.

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