Landlords traditionally require a renter to pay a cash security deposit when they sign a lease to rent an apartment or a home. In most parts of the U.S., your security deposit is an expected expense if you’re planning to live in a rental. You may be wondering, why do property owners and managers collect cash security deposits in the first place? The answer is: to protect themselves against the possibility that a resident may fail to pay rent sometime during their lease or cause excessive damage to the rental property. Collecting a cash security deposit allows property owners to have cash “security” to fall back on and withdraw if their resident misses rent or causes excessive damage to their property.
Security deposit requirements are typically included in lease agreements that renters must sign to rent a home. By moving into new homes and signing lease agreements, renters are committing to paying rent and preventing excessive damage to the best of their abilities, and these transactions occur each and every day.
So why a cash deposit? Well, the “cash” part is a long-established convention. Cash is the mechanism that’s been used for security deposits by owners and renters for decades, if not centuries. “I’ll hold your money and return it to you after you meet all of your responsibilities.” It may appear straightforward, but when you consider the inefficiency of writing a physical check to pay or refund a deposit, it’s certainly an idea that’s worthy of a tech-enabled update.
Now, let’s turn to insurance. Insurance is meant to protect against specific risks like property damage, personal injury, financial losses, etc. In fact, the list of risks that can be covered by insurance is so vast, I won’t try to detail them all here. Another important component of insurance is that the risks are “quantifiable,” which really means there is some predictability or pattern to them. This allows us to develop accurate prices and appropriate risk management for insurance policies.
So, what’s the connection between security deposits and insurance? You’ve probably already guessed it by reading this far — the failure to pay rent or causing excessive damages are specific risks that are predictable at scale. This creates a great opportunity to advance the conventional system of holding cash by introducing a brand new insurance product.
With security deposit insurance, property owners and managers receive the same security and protection as cash, while renters enjoy a new security deposit option and lower upfront costs. (Insurance costs are a fraction of the equivalent cash deposit.)
In closing, the availability of security deposit insurance is an advancement for the conventional cash deposits system. So, while cash deposits remain the default method to create security for owners and managers, insurance is a newly available protection for property owners that also provides financial flexibility for renters.