What does it mean when a surety bond uses “pooling”?

Traditional security deposits can be cost-prohibitive for renters and a hassle for properties. That’s why an increasing number of properties are turning to security deposit alternatives. 

Many of these alternatives take the form of surety bonds, and help properties maintain (or increase!) protection against damage and missed rent. But if you’ve spent much time researching deposit alternatives, you may have read that some surety bond providers rely on a practice called “pooling” that ultimately puts properties at risk. 

This is true! 

But at Jetty, we don’t use pooling—and our Partners are never at risk of not having claims paid due to a lack of funds. 

Keep reading to learn how surety bonds can be used to replace deposits, what “pooling” really means, and how we pay claims at Jetty. 

Most security deposit alternatives today rely on surety bonds to offer protection to properties. These bonds are “insurance-like” agreements between a renter, a property, and a provider. 

Here’s how it works, in a nutshell: 

• The renter purchases a policy from a provider instead of paying a traditional security deposit, and agrees not to cause damage to their rental home 
• The property is covered by the provider, in the event that the renter causes damage and fails to pay
• The provider (like Jetty!) provides coverage to the property up to the amount of the bond purchased by the renter 

Because a surety bond costs only a fraction of a standard security deposit, offering them as an alternative to security deposits lowers move-in costs for renters, without reducing coverage for the property. 

On the surface, most security deposit alternatives powered by surety bonds look exactly the same. But the underlying products have a few important differences—especially in the ways that they pay out claims. 

With some providers, all of the premiums from a property or portfolio go into a “pool” of funds. Then, when a renter causes damage or skips rent, the property manager can draw from that pool to cover the loss. In some cases, properties can even draw out the surplus from these “pools” as a source of ancillary revenue. 

But surety bond pools have one major downside: they can “dry up.” 

If a resident causes damage in excess of the premiums in their pool, it can be left without the necessary funds to cover that damage. This not only leaves the property at a loss, but prevents them from being able to cover subsequent losses until more residents move in and contribute new premiums to the pool. 

This ultimately defeats the purpose of offering a security deposit alternative, as it leaves the property without protection, and can negatively impact NOI.