You might think, "I just rent my place and I don’t own much—why would I need an insurance policy?" But the truth is you might need one more than you think and you don’t want to learn the hard way why that is. This article provides a brief explanation of what renter’s policies cover and why almost everyone should have one.
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. 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 until the premises you lived in are repaired, if repair is possible. 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 travelling 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, 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 he or she recovers 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 up front 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 of dollars 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. Not 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 (the amount you pay to the company every month for your policy) 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!
If you are a renter, you really do need a renter’s policy. They are not so expensive and they cover so many things. You could take your chances without it but if your building ever goes up in flames, you will wish you had invested the few hundred dollars a year.
Talk to an agent or two and price some policies. Most companies have websites and you can begin the quote process online, from the comfort of your home.
In future articles, we will discuss other types of insurance and have a more in-depth look at renter’s and homeowner’s policies.