On the (im)sense of rent deposit insurance

Sureties. Costs incurred due to loss of rent are often significant. Currently, agencies are entering the market with bail bonds. There may be black sheep among them. Bond insurance (see box on page 60) is on everyone’s lips at the moment.

“The real kicker here,” says Peter Schramm, an actuarial expert in Diethardt, “is that the tenant goes through a credit check.

In the event that he fails to meet his landlord’s demands, the tenant will end up in a blacklist of the deposit insurer. In the end, this tenant will never be able to get a bond in the future, and probably won’t get a lease.”

The dispute “about the usefulness of such products can be argued,” said Schramm.

“What good does it do the landlord if a bank takes over the security deposit guarantee – and subsequently the tenant does not pay any rent for 18 months until the costly eviction? The credit institution ultimately does not care about the creditworthiness of the tenant, because the tenant has deposited the deposit amount in a blocked account at the bank.”

On the other hand, a customer with a poor credit rating, a rental nomad, or someone who is on the insurer’s file as having a negative rating will no longer receive insurance. This saves the landlord the cost of a credit check, because the insurer already takes care of this when the application is made. If such a business practice became standard, many tenants would soon be sitting on the street.”

Caution:

“Five-minute surety” Instead of sending the landlord the security deposit or pledging a savings account, tenants are increasingly offering their landlord a surety bond as security.

If a loss occurs for the landlord, for example due to loss of rent or damage to the rented premises, the insurance company must pay for the loss up to the amount of the guarantee.

Resourceful businessmen from Starnberg founded an insurance brokerage for rental deposit insurance via the Internet and promise the “five-minute guarantee.” The Starnberg brokers are sales partners of the AIG Europa insurance company.

This well-kept secret was revealed by DIE WELT on 17 December 2008, adding that the American parent company of AIG Europe has already been in a multi-billion euro predicament for months. The founders of the exclusive brokerage gave their agency the name “DKK Deutsche Kautionsgemeinschaft AG” (German Bail Bonds Association) and gave themselves euphonious titles for the board of directors.

The Deutsche Kautionsgemeinschaft is targeting a customer base of around 1.1 million tenants with its bail bond fund by 2012, which corresponds to an insurance volume of around 1.8 billion euros. Additional sales partners are needed to implement such ambitious goals. However, the topic of rent deposit insurance is pretty old hat.

For years, companies in Switzerland have also been offering these via online registration. Matthias Walz, member of the board of directors of Deutsche Mietkaution Schweiz AG, is sure that the Starnberg bail bondsmen have copied this idea from Switzerland. A board member of Deutsche Kautionsgemeinschaft AG, Christian Marchsreiter, is obviously not an unknown quantity.

Data trading? Swiss journalists describe that Marchsreiter was for years a company and director of an apparent “letterbox company” for financial business e located in Switzerland.

He is also accused by former employees of aiding and abetting in the trafficking of personal and business data. At the same time, he held entrepreneurial responsibility as managing director of a financial services office for social security audits in Munich. The public prosecutor’s office in Munich is investigating Marchsreiter on suspicion of

Property and tax crimes. With the liquidation of both companies, the failed young entrepreneur left behind a host of advisors, intermediaries and business partners, all of whom feel aggrieved.

Oddities

A solvent tenant has no problem putting down a deposit, is the unanimous opinion of experts. The suspicions about such sales models even go so far as to suggest that it is not just about insuring rental deposits, but also about generating and exploiting sensitive customer and credit data.

This assumption is supported by the fact that on the provider’s website, under “Calculate monetary advantage”, interested parties cannot calculate possible costs themselves, but must first disclose their personal data. It forces itself the question, which tenant should pay apart from a 50-Euro-Vertragsabschlussgebühr, an annual account maintenance fee of ten euro (starting from second contract year) also still annual insurance premiums at a value of five per cent of the guaranteed rent security sum over an insignificant insurance selling and in addition still voluntarily without its interest from a rent security account.

An example calculation shows that for 2,400 Euro demanded deposit 600 Euro fees have to be paid within five years.

Legal concerns

The Munich lawyer Dr. Johannes Fiala is overcome by legal concerns about such business models:

“With the last tenancy law reform, the rule that the landlord determines whether a guarantee is sufficient for him or not has been in force since 1 September 2001.

In the case of a cash deposit or a pledged savings account, compound interest increases the accumulated assets and thus also the security deposit. Moreover, I consider costs of five percent plus X to be overpriced, possibly usurious. The usual costs at banks are mainly between 0.5 and 3.0 percent of the guarantee amount, plus a processing fee if necessary.

Usually, every reputable bank requires appropriate collateral or an impeccable credit rating from the tenant, for example in the form of securities or impeccable information on creditworthiness. Whether such providers will be solvent in the event of a claim is anyone’s guess”, warns the Munich lawyer.

In commercial leases, bank guarantees are one of the most common forms of security deposit. However, such guarantees are also common in residential tenancies. The disadvantage of the bank guarantee is that the deposit amount does not earn any interest or income.

However, both landlords and tenants should be interested in corresponding returns. For the landlord, this is important so that the deposit amount agreed upon at the conclusion of the rental contract grows or retains its value, and for the tenant, the corresponding interest is important because at the end of the contract, the tenant receives the rental security back with interest and compound interest.

There is no requirement for rental deposits to be created. Of course – and this is the rule – the rental deposit can also be invested in a call money or time deposit account.

From the point of view of the German Tenants’ Association, the model of the “online guarantee” neither really offers anything new nor does it appear to make sense for tenants and landlords to resort to this variant.

Risks

In our times, it does not take much imagination to think about what (unknown) surety s providers can do with the sensitive customer and bank data obtained on a large scale as part of a credit check. Banks usually require the deposit of the bail amount for a bail bond. In this case, any tenant – including any rental nomad – with an otherwise poor credit rating can obtain a surety bond.

The landlord risks that the tenant owes the rent until the eviction and the guarantee covers just a part of the lawyer’s fees and court costs. Bond insurers, on the other hand, use the sensitive data collected to check the creditworthiness of the tenant and, if necessary, reject the insurance application because they themselves bear the risk of being held liable for the tenant who is unwilling to pay.

Then the landlord also knows where he stands without having to go to the trouble of checking the tenant’s creditworthiness. So for the landlord there are definitely advantages. A renter will think twice about risking ending up on an insurance company’s negative list. If he does not reimburse the insurance company for the damage, then Schufa will also find out about it.

“The advertising message that even with existing rental collateral, i.e. paid rent deposits, can be switched to the online guarantee model is simply wrong,” warns Ulrich Ropertz, spokesman for the German Tenants’ Association (Deutscher Mieterbund e.V.) in Berlin. “This is only ever possible if the tenant and landlord amend their original agreement by mutual consent. So, in practical terms, a new contract between tenant and landlord is necessary.”

The conclusion from Berlin: “A lot of hot air and no apparent advantages for the contracting parties.”

According to Stefan Marotzke, spokesman of the German Savings Banks and Giro Association, the topic of “rent deposit replacement” is nothing new in principle.

In the Savings Banks Finance Group, the use of guarantees as “rental deposit substitutes” is rather exceptional. By default, the Savings Banks offer rental deposit savings accounts to private customers.

In the meantime very rare are also sureties or guarantees of a credit institution, so called rent guarantees, which are given to secure the claims of a third party. Guarantees are only granted to customers with a good credit rating in order to limit the risk.

“I assume”, says Eckhard Bachmann, legal advisor of the Federal Association of German Housing and Real Estate Companies (GdW) in Berlin, “that the housing companies affiliated to the GdW will mostly continue to prefer rental securities in the form of cash deposits or savings books. In the case of rent guaranties, the housing companies cannot be as sure with regard to the guarantor’s creditworthiness as they can with the usual forms of security deposit.”

Conclusion

The Munich lawyer Dr. Fiala advises tenants and landlords to pay particular attention to the fact that a deposit is invested as well and safely as possible. Then this security deposit does not cost “up to five percent” in fees per year, but still yields corresponding capital market interest, from which all lease partners profit. Upon termination of the contract

– if everything goes according to plan

– the rent deposit will be returned to the tenant together with compound interest.

The fees and insurance premiums paid in bail bond models, on the other hand, are lost to the tenant. Also, a rental deposit can never replace a rigorous credit check by the landlord.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.immobilienwirtschaft.de (published in Immobilien Wirtschaft 02.2009, pages 58-60)

and

www.experten.de (published in Experten Report 01/2009, page 22-25 under the headline: Rent deposit insurance: sense or nonsense?)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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