Do You Need Renters Insurance?

Homeowners procure homeowners insurance to protect themselves from hazards that damage their home. Renters should do the same through property and liability insurance policies. However, according to JD Power, 46% of renters do not.

Additionally, according to a Harris Interactive Poll conducted on behalf of Nationwide Insurance, 56% of millennials who rent do not carry renter’s insurance.

There are two main reasons why individuals who rent do not carry renters’ insurance. The first is price. Many renters believe that they can’t afford to insure their belongings. They would be pelase to know that renter’s insurance is actually not that expensive and provides a substantial amount of protection for little money (as little as 50 cents a day).

The second reason is that many people assume that their landlord’s insurance will cover their personal property. But the landlord’s policy only covers the building and the property of the landlord. The landlord, moreover, has no insurable interest in the tenant’s personal property.

The other thing that tenants miss when they provide this answer is the fact that there are many more risks other than property damage or loss when renting an apartment. This article will examine the risks that a renter faces and that are covered by renter’s insurance.

What Renters’ Insurance Covers

As mentioned earlier, the first thing that comes to mind when individuals think of renter’s insurance is coverage for the personal property of the insured. Many people underestimate the amount of personal property they have in their homes and because of this find the cost of replacing their possessions significantly higher than expected.

Renters’ insurance covers property damage in one of two ways: property and liability. Most policies afford coverage for a specified set of perils. They are:

• Fire or lightning
• Windstorm or hail
• Explosion
• Riot or civil commotion
• Aircraft
• Vehicles
• Smoke
• Vandalism or malicious mischief
• Theft
• Falling objects
• Weight of ice, snow, or sleet
• Accidental discharge of water

In some cases, the policy can be endorsed to cover all risks of direct physical loss except those that are excluded by the policy and subject to limitations for certain items.

In addition to personal property, there is also additional coverage for:

• Debris removal
• Reasonable repairs to protect covered property
• Trees, shrubs, or plants
• Any fire department service charge
• Property removed as the result of a loss
• Credit or debit card fraud, forged checks, and the receipt of counterfeit money

This last coverage has an additional component: should an insured be sued for an incident that triggered the coverage, the insurer will provide an attorney and pay the expense to defend the insured.

Other coverage includes:

• Loss assessments by a homeowners association
• Collapse
• Glass that is part of a tenant’s improvements or betterments
• Building alterations and additions made by the insured
• Expenses to comply with ordinances or laws when repairing an addition or alteration made by the insured
• Grave markers that are not on the premises
• Refrigerated property
• Inflation coverage

There is also a provision that provides for a reward for information leading to the arrest and conviction of an arsonist.

Reasons Why You Need Renters Insurance

A renter’s policy is similar to a homeowner’s policy or a landlord’s policy but with one key difference: it does not cover the building—the structure—that you reside in. But there many more things worth insuring than just the structure.

1. Your Possessions Are More Valuable than You Think

Your possessions include your computers, televisions, and other electronic devices; furniture, clothing, books, stamp and coin collections; jewelry, firearms, and sports equipment; silverware, appliances such as refrigerators and washing machines (if you, and not your landlord, own them), and more.

In some cases, high-value items like expensive artwork need to be covered separately (see Personal Property Floaters 101 to learn more about additional coverage). Even if you don’t have anything so pricey, chances are your possessions are worth more than you would guess.

If you came home from work one day and discovered that you had lost everything you own due to a fire, you would soon realize how much they are worth when you start thinking about going out and buying everything again! A typical small, modest apartment dwelling can easily contain more than $10,000 worth of possessions. In some cases much more.

2. Emergency Relocation

Imagine again that you arrive home from work one afternoon and the building you lived in has burned to the ground. Where will live for the next month or so? Perhaps you can stay with friends or relatives, but even if you can you will soon have to find another place to live.

A renter’s policy will pay reasonable costs for a hotel or motel room for a reasonable period of time, until you are able to relocate or the premises you lived in are repaired. The definition of “reasonable” will vary from place to place. If the area you live in has many vacant apartments, then a few weeks or a month at most might be considered reasonable. On the other hand, if vacant apartments are scarce, staying in a hotel for a couple of months might be considered reasonable.

Note that in areas where forest fires occur, this relocation coverage usually also applies to mandatory evacuations.

3. Theft Coverage

Theft coverage under renter’s insurance extends to the items mentioned above (in item #1). This coverage typically applies regardless of where the theft occurs. So, if you are traveling and someone breaks into your motel room and steals your laptop, this would be covered in almost all cases.

4. Identity Theft

Identity theft is still blessedly rare but, unfortunately, it occurs more and more frequently. Some renter’s policies—but not all—provide coverage for losses due to this. If your policy doesn’t cover it, be sure to get separate insurance that does (see Identity Theft Insurance: Is It Worth the Price? for more information).

5. Liability Coverage

Liability coverage is perhaps the least understood aspect of this, yet in extreme cases can be the most financially devastating.

Here’s an example of such a case: on the way home from school one day your 10-year-old son and a group of neighborhood boys sneak onto a construction site, get into a argument, and start throwing stones at each other. A stone thrown by your son hits another boy in the eye.

He is permanently blinded in that eye and, to make things worse, after being hit he falls off of the structure under construction and suffers other significant injuries. A few weeks later, you get a letter from a law firm: you are being sued by the other boy and his family.

The plaintiffs (the boy and his family who are suing you) will hire a lawyer who will work under a contingency agreement, which means that the lawyer gets a percentage of whatever they recover in the lawsuit. The plaintiff family will pay nothing to the lawyer in advance and will owe nothing if the lawyer doesn’t recover anything in the lawsuit.

You, on the other hand, will need to hire a lawyer on an hourly basis. Fees vary widely but, if you are lucky, you will find a competent lawyer who will take the case for $150 per hour. Your lawyer will want an advance that will be placed in a trust account.

The advance might be something on the order of $5,000 or more. If you don’t have the money to do this, you will be forced to represent yourself, which is a huge mistake. If a judgment is entered against you, or if you are pressured into a settlement because you can’t afford or fear the results of a trial, you could end up owing the plaintiffs thousands of dollars or, in extreme cases, tens of thousands or more.

But if you have a renter’s policy, you have liability coverage. This coverage provides payment of all legal fees and costs—the insurance company will hire a law firm to represent you and all of the fees and costs incurred by the law firm will be paid by the company. Moreover, any judgment or settlement up to the policy limits will be paid by the company.

What are policy limits? They are the maximum amount payable for a single incident by the company under the particular coverage. In this case, liability coverage. Typically, you will be offered coverage in several different amounts when you discuss buying a policy with the company’s agents.

Be aware that, while hardworking and honest, the vast majority of these agents have little familiarity with the litigation system and in many cases will tell you that a relatively small liability limit is sufficient. Do not believe this, and note that the difference in premiums for a policy that provides for $100,000 in liability coverage versus one that provides $1 million in liability coverage is minimal.

I strongly recommend a minimum of $1 million of liability coverage. With this much coverage backing you, you are highly unlikely to be concerned about owing more than the policy limits and can rest assured that this much coverage is a powerful settlement tool in the hands of the lawyers the company will retain for you.

6. Peace of Mind

With a little luck, years from now you will look back and ask, “Why did I spend all that money on renter’s insurance?” In fact, it’s not that much—usually only a few hundred dollars a year. But regardless of whether you ever make a claim on the policy, your peace of mind is worth a lot.

If the building you live in burns down, if you are robbed while you are traveling, if you are sued over some frivolous—or not so frivolous—issue and need a lawyer, knowing that you have an insurance policy that will cover most or all of your losses lets you sleep easy!

Insuring Renters’ Risks and Expenses

Another risk that a tenant takes on when they rent a home is the risk that the home will be rendered uninhabitable should a loss occur. In that event, the renter would need to find an alternative place to live until repairs are made to make the building habitable again.

Additionally, there is the risk of a governmental authority requiring that a tenant leave due to a loss occurring in a neighboring building.

In either case, the tenant will incur additional expenses related to being displaced temporarily. Renters’ insurance covers the additional expenses required to maintain one’s standard of living while being displaced. These expenses include such things as accommodations while the building is being repaired, storage expenses for property, and meals out that would not have happened had the loss not occurred.

Renters also encounter situations where others allege that an occurrence resulting in bodily injury or property damage is the renter’s responsibility. Renters’ insurance provides coverage for these occurrences.

Renters are not exempt from being sued because an aggrieved party believes the renter is responsible for bodily injury or property damage. An example of bodily injury for which a renter may be liable would be when the renter accidentally collides into another person because they did not see them and the person is injured as a result.

An example of property damage in the same vein would be if the renter threw a baseball and damaged a window on another property. Renters’ insurance affords an indemnification for these kinds of losses. In addition, the policy can be endorsed to provide coverage for personal injury.

The indemnification for a loss, however, may not be the most important part of this coverage. Liability coverage also includes a defense provided for on your behalf with the costs borne by the insurer. This is done even if the claim made against the insured is groundless.

Given the fact that the costs of an attorney and his or her staff to defend the claim can be very high, the provision of a defense by the insurer may be more valuable than the provision of an indemnification.

Should an accident resulting in bodily injury occur to a guest in the insured’s home (tripping over a rug, for instance), should the insured do something that would injure another person, or should the insured’s pet injure another person, that person would be paid for reasonable and necessary medical expenses up to the policy limit.

This coverage is afforded without regard to fault, and the intent is to avoid further legal action related to the accident.

As you can see, just because a renter doesn’t own a home doesn’t mean they aren’t exposed to a variety of risks. The costly risks of property loss, loss of use of property, and liability are all addressed inexpensively through a renter’s insurance policy.