One of the direct consequences of the economic crisis caused by the coronavirus is that many tenants have been unable to pay their rent. A problem that was already being considered by several insurance companies even before the arrival of the pandemic with the launch of a type of insurance policy dedicated to non-payment of rent. In fact, these policies had already been well received by flat owners as their main uncertainty, non-payment of rent, had been resolved to a large extent. 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 rental contracts to the test, which, due to this extraordinary situation, has multiplied default among tenants. In fact, according to the latest data published by the Fichero de Inquilinos Morosos, communications for non-payment have increased by 68.4% since last September. This circumstance has helped a lot in the hiring of rental insurance to double in the last six months of 2020.
Despite the optimistic outlook for the arrival of the vaccine, there is still time to return to true normality. Many studies claim that Spain will not recover precovid levels of economic activity until 2023 or even 2024. This being the case, 2021 looks set to be the star year for this type of product, with double-digit growth forecast. According to the Observatorio Español del Seguro de Impago de Alquiler (OESA), 30% of new rental contracts will incorporate non-payment insurance, especially in Madrid and Barcelona, although they are becoming increasingly common in provincial capitals and large cities.
What is rent default insurance?
A few years ago, insurers detected the need in the rental market to protect landlords renting their properties against non-payment of rent. This type of insurance is usually taken out at the same time as a rental contract is signed, but could also be taken out at any time during the duration of the rental contract. On the other hand, it is most often requested by the owner of the property, although sometimes it could also be requested by the tenant himself as an extra guarantee of his solvency.
The reality is that in previous years the contracting of this type of insurance was not so common. However, five out of every 10 rental contracts signed last year already included the contracting of one of these insurances. To a large extent, the contracting of this service also serves to select tenants, since before signing, the insurance company carries out a viability study on the candidate to check their solvency.
In addition to non-payment of rent to the landlord, this type of insurance also includes other coverage. The most common are protection against damage to the property by the tenant or even theft of the building. Legal advice is also sometimes provided to take legal action against the tenant if necessary. These additional coverages depend on each insurer, although the most common is the coverage for non-payment of rent, which is precisely the most requested.
In this way, the landlord insures his monthly rent and avoids being dragged into financial instability by the tenant’s possible default. 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 the annual rent. According to the insurance broker Arrenta, the average price of rent with non-payment insurance during 2020 was around 693 euros, compared to 661 euros in 2019.
When should non-payment be reported?
As with all insurance coverage, there are deadlines and conditions that must be met in order to be able to enforce what has been agreed. In this sense, it is important to differentiate between a non-payment and a delay in the payment of rent.
A non-payment is considered a non-payment when the corresponding payment has not been made one month after the agreed date. In addition, the tenant must have been formally notified of the debt. Although each insurer establishes its own deadlines for claims, it is advisable to notify the non-payment as soon as it occurs.
According to the new Urban Leases Law (LAU), eviction proceedings cannot be initiated until after 3 months or unpaid instalments have passed. Even so, it is advisable that the insurance company is aware of this so that the landlord does not lose the possibility of the advance payment of rents. If the deadline set by the insurer is not met, the landlord would have to wait until there is a final eviction judgement to recover the property.