Seguro Fiança: como funciona e o que é?

Surety Bond: how does it work and what is it?

Did you know that surety insurance is considered one of the most affordable rental guarantees for tenants?

We all know that renting a property requires a huge amount of bureaucracy. There are so many documents to sign, precautions to take, inspections to be carried out, that it can be a huge headache! Even more so when there is some uncertainty on the part of the tenant.


In the real estate market, this security is achieved through what we call rental contract guarantees. For many years, one of the most common was the use of a guarantor, that is, a person who was in a good financial situation and guaranteed any financial delays or non-payment of the property's rent.

But today, the guarantor is no longer the most commonly used measure, giving way to surety insurance. It works in a very similar way to other insurance policies, such as vehicle insurance. However, its main difference is that it does not depend on the goodwill of third parties and has the real financial condition of the tenant as its main focus.

These and many other benefits of surety insurance led to a 76% increase in revenue in Brazil in 2020, according to the National Federation of General Insurance (FenSeg). More than R$813 million had been collected by November 2020, a huge amount!

If you are renting an apartment or studio apartment and are trying to understand whether a surety bond insurance is right for you, then you need to read this article. Here, we will explain everything about surety bond insurance, its advantages and how to use it in the rental process.

Before we begin, here are the topics that will be covered:

  • What is surety insurance?
  • How does surety insurance work?
  • Who is surety insurance suitable for?
  • What are the advantages of surety insurance?
  • What are the disadvantages of surety insurance?
  • Types of guarantee in rental contracts;
  • What is the best type of guarantee for the rental contract?

Let's go!


What is surety insurance?

The surety bond insurance is one of the most commonly used guarantees by tenants when renting properties. It works in a very similar way to other insurance models, that is, it has a cost to take out the insurance that can be paid in monthly installments according to each person's needs.

Surety bond insurance: what is it and how does it work?


Its main purpose is to serve as security for the landlord to receive the rental amounts. In other words, in cases of non-payment of rent, the surety bond is activated so that the landlord is not financially harmed.


Here, it is important to remember that the use of surety insurance is permitted by the Tenancy Law , the main law that involves the rental of properties. According to this law, all guarantees are only valid until the end of the rental term, including surety insurance.

In recent years, this insurance has been gaining ground in the real estate market. This is not only due to the preference of tenants themselves for its flexibility, but also of property owners themselves.

The reason for this trend? Convenience and greater security. We have set aside a special topic to talk about these advantages so that you can understand better. But first, we need to clarify some important points about surety bond insurance.


How does surety insurance work?

The surety bond insurance offers specific coverage for the rental value and all fees related to it, such as property tax and condominium fees, for example. In addition, it can also cover other policies that cover taxes, water and electricity bills, or legal fees in eviction proceedings.

In practice, the process for requesting it is quite simple. If the owner does not receive the rent payment, he/she contacts the insurance company and explains the problem. To resolve the problem, the company will compensate the owner for the loss, paying the overdue amount and other installments that may also be overdue.

If this situation continues for months, the tenant may be evicted from the property. But be careful, do not think that the fact that the insurance company pays the debts exempts the tenant from paying these amounts.

In these cases, the tenant will owe money to the insurance company. If they continue not to pay, they will be taken to court to resolve the situation. It is a complicated situation that no one wants to go through, so be careful and pay close attention to payment deadlines!


How much is the surety bond?

Regarding its value, it will depend mainly on the type of coverage chosen. In most cases, the landlord is the one who chooses the coverage of the insurance, that is, he or she must say what will be covered by the surety bond insurance so that the insurer can present the proposal to future tenants.

This is one of the advantages of surety insurance. It will be signed based on consent between all parties involved, when everyone is in agreement about what it will cover.

Furthermore, this value will also vary according to the rates offered by each insurance company. In the end, the price usually varies between one and two times the rental value of the property.


How does the surety bond insurance work for the landlord?

One of the main features of the surety bond insurance for the landlord is that it must be agreed with the owner of the property. Therefore, when renting a property, the tenant must pay close attention to this detail.

When a homeowner chooses to use surety insurance, he or she will decide which items will be covered (condominium fees, property tax, bills, any damage to the property). This does not include all the fees that will be charged by the insurance company. Broader coverage will result in a higher surety insurance value, and vice versa.

Once this value has been proposed and accepted by the chosen insurance company, the tenant must be informed of the price. This must be made very clear to all parties involved, as a slight delay may be grounds for the owner to contact the insurance company to receive the agreed amount.

In fact, this is one of the obligations of every tenant as set out in the Tenancy Law. It is very clear when it states that every tenant is responsible for paying the security deposit. Otherwise, they will be subject to serious legal penalties. So don't forget to include this cost in your budget if you are deciding how much it costs to live in São Paulo.


Who is surety insurance suitable for?

Bond insurance is recommended for both tenants and property owners. There are many benefits and facilities, especially for owners who no longer want to have problems involving non-payment of the rent amount.

It can be used for the vast majority of property rentals, whether commercial or residential. The few cases where it cannot be used are, for example, for spaces rented for parking lots, hotels and similar properties.


For the tenant

Firstly, surety insurance is recommended for any tenant who wants to choose a more affordable and flexible guarantee when renting a property. And, above all, who is looking for a more peaceful option that does not cause so many headaches during their stay.

Furthermore, it is a great option for those who do not have a guarantor or are unable to offer a deposit in their place.


For the owner

For owners, surety insurance is also a great option to avoid headaches and financial losses!

Surety bond insurance: what is it and how does it work?


Anyone who owns a property knows the huge problems that can arise if rent is late. However, with this insurance, the risk of defaulting on payments is much lower, providing you with an important and reassuring guarantee that you will receive your payments on time.

After all, even if the tenant does not pay the rent, the insurance company will cover the loss and pay all outstanding amounts.


Just as important as ensuring that you will receive your rent on time, the surety bond also transfers the responsibility and costs of a legal collection and eviction process to the insurance company. The landlord is guaranteed that he will receive the rent until the eviction process is completed.

Now, enough talk about bureaucracy! We made it clear at the beginning of the text that surety insurance is a guarantee option precisely because of its greater flexibility, peace of mind and advantages. So, how about we finally find out what they are?


What are the advantages of surety insurance?

The mystery is over! We have emphasized several times that surety bond insurance is one of the most commonly used guarantees when renting properties, and there are several reasons that justify this preference. Let's look at each of them.

Advantages of surety insurance for tenants

The main advantages of surety insurance for tenants are:

  • Exemption from guarantor
  • Greater payment flexibility
  • Greater practicality

The first advantage to be highlighted is the elimination of the need to use a guarantor as a guarantee when renting a property. Although guarantors have been used for many years, they are no longer preferred by many tenants.

This is because having a guarantor is difficult. First, often it is not enough to indicate a person who demonstrates financial stability to be considered capable of covering the tenant's possible debts. Many real estate agencies require the guarantor to own a property that is paid off. Some require the guarantor to own at least two properties in the same city where the rent is being rented! In short: very difficult.


Not to mention that the chosen person, if sued, would be responsible for covering all outstanding expenses and suffering serious financial losses. Therefore, asking someone to be your guarantor can be uncomfortable and many people would not even accept!

If we compare this insurance with other available guarantees, it is also more viable from an economic point of view - even though it is not exactly cheaper.


I explain:


The security deposit generally costs 1 to 2 months' rent per year and this amount can sometimes be paid in installments over the months. Compared to the security deposit of 3 months' rent that needs to be paid all at once, right when the tenant moves in, it seems much cheaper, right? Not really...


The security deposit itself is the guarantee, that is, the amount deposited still belongs to you and must be returned by the landlord when the apartment is returned. You can use the amount again in the next rental, for example.


The surety bond insurance is a cost, that is, you do not receive the amount back at the end of the contract. If we consider that the insurance needs to be renewed (and paid again) every year, in the long term it ends up representing a very high cost. So, although it weighs less on your pocket in the short term, in the long term it is a very expensive product!

Finally, surety bond insurance offers much greater practicality than other guarantees. The credit analysis is carried out by the insurer, which often uses more sophisticated and rational methods to carry out the credit analysis, so the bureaucracy involved in granting it is less. Typically, the insurer responds quickly and the list of documents that need to be presented is standardized.


Advantages of surety bond insurance for landlords

For the landlord, the main advantages are:

  • Security in receiving the rental amount and other fees
  • Secure and specialized credit analysis
  • Transfer of liability and costs of eviction and collection lawsuits

As we said, surety insurance is also highly valued by landlords, mainly because it offers great financial security. If the tenant does not pay the rent, the insurance company will cover the delay as soon as it is called.

Surety bond insurance: what is it and how does it work?


This way, the landlord will not be economically harmed in cases of default. And of course, we cannot forget that this coverage may also involve other fees that are also late.

Everything is very quick and simple, without much bureaucracy and much less headaches.


The best thing of all is that the insurance companies themselves take care of filing an eviction or collection action if necessary and the owner does not need to worry about these issues.


This speed also helps to ensure that the property does not remain idle for too long without generating income. It is a domino effect: with less bureaucracy, interest in the property is greater and, consequently, the rental process is more optimized.

Finally, landlords can also count on a credit analysis carried out by insurance companies.


What are the disadvantages of surety insurance?

Unfortunately, not everything is a bed of roses. Although surety bond insurance brings enormous advantages, it also has certain disadvantages that need to be highlighted. Among them, the main ones are related to the value of the policy and the approval of the tenants' documents.

If we compare it to other guarantees such as the deposit, the amount paid for the policy is not returned to the tenant. This happens because the insurance company acts as a kind of guarantor in the rental of the property, is providing a service, and charges for it!

Furthermore, the owner may encounter some difficulties in renting out their property, due to the tenant's documents not being approved in the credit analysis carried out by the insurance company.

Any blemish on your name or the slightest suspicion can be reason enough for your documents not to be approved. On the one hand, it is a security advantage. But on the other, it can delay the time until the property is rented.


Types of guarantee in rental contracts

In addition to the surety bond, there are other types of guarantees in the rental agreement provided for by the Tenancy Law. They are:

  • Guarantor
  • Security deposit
  • Contract without guarantee

Some of them have already been mentioned briefly, but let's go into more detail so that you can better understand the difference between each one.


Guarantor

The guarantor is a person specially chosen to act as a kind of insurer for the tenant. If the tenant fails to pay the rent, the guarantor will be called upon to cover the debt.

Guarantors are often people close to the tenant, such as a family member or friend. In addition, they must meet certain criteria in order to be chosen. Although not mandatory, many landlords require that the guarantor:

  • Own a property that is paid off and regularized. And preferably, it should be located in the same municipality as the property to be rented;
  • Do not have any credit restrictions in your name;
  • Prove income through legal documents.


Security deposit

Surety bond insurance: what is it and how does it work?


The security deposit is nothing more than an advance deposit of the rent amount to the landlord. If the tenant is late in paying the rent, the landlord can use this money saved to pay the rent.

However, for this to be allowed, there are some rules. Among them, the security deposit cannot be worth more than three months' rent and must be returned at the end of the corrected contract!

If a rent is worth R$1,000.00, for example, the security deposit can be up to R$3,000.00. This amount ensures that the landlord will be reimbursed if the tenant fails to pay the rent.


Contract without guarantee

Finally, we have the no-guarantee contract. It is not one of the most common options in the real estate market, but it also offers great security to the owner. This is because the owner can demand payment of the rent amount in advance, month by month.

With it, the tenant does not need to make an additional deposit as a guarantee, nor does he need a guarantor to assume the payments for him.


This type of contract without guarantee offers a legal benefit that many landlords are unaware of - it allows for an expedited eviction process. The courts understand that since the landlord did not require a guarantee from the tenant, any eviction process must be looked at with preference and agility, in many cases being resolved within 15 days!

Now, out of all these options, is there one that is best? And is there one that is best suited for any tenant and any type of lease?


What is the best type of guarantee for a rental contract?

There is no single answer to this question. Every tenant has a completely different financial situation, as well as preferences and payment possibilities. Therefore, each person should carefully analyze the types of rental contract guarantees available to identify which one is best for their situation.


See the summary below to help you make your decision:


Guarantor

Best for those who have a close family member with good credit and property, as it is the cheapest type of guarantee - it's free, in fact!


Security Deposit

Ideal for those who have managed to save money and have invested amounts greater than 3 months' rent. Part of these savings becomes a guarantee and the amount remains invested. This type of guarantee also does not represent any cost to the tenant, although it requires a more stable financial situation!


Surety Bond

Ideal for those who don't want to ask anyone for a favor and don't have any savings saved.


No Warranty

Good for everyone, but unfortunately there are few owners who accept. By the way, take a look at our apartments , we rent them all without guarantee!

Despite this, it is possible to notice a certain trend in recent years. As rentals become more modern, we see less and less the figure of the guarantor and the surety bond insurance is gaining ground.

In an interview with Revista Exame , the executive manager of Too Seguros , Priscila de Cunto Mckenzie, states that surety insurance gained ground with the pandemic .

According to her, guarantors became more fearful of taking risks during the crisis, which meant that tenants had to look for other guarantees so that they could rent a property.

As a result, even though guarantors and security deposits are still the most common forms of guarantee among tenants, surety insurance is gaining ground. Between January and August 2020, R$536 million in surety insurance policies were issued. This corresponds to 60% more than in the same period last year, according to the Superintendence of Private Insurance (Susep).


Conclusion

What did you think of surety insurance? Did you know everything about this guarantee model, its advantages and disadvantages?

We don't want you to have problems when renting a property, much less legal losses due to non-payment. It is important to choose a guarantee that is affordable and, above all, that does not give you headaches.

We know that there are several guarantee options, and now you know more about surety insurance. It has several benefits that can certainly help you rent properties quickly and without bureaucracy.

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