Types of Renters Insurance and Why It's Important

Insurance is one of those things you don’t want to think about but undoubtedly need. For example, if you own a car, you are required to carry auto insurance to protect yourself and others in the event of an accident. Mortgage lenders require homebuyers to carry homeowners insurance to protect their property and to cover visitors in case of an accident. However, many renters don’t see the need for renters insurance, especially because they don’t own the property. That’s a mistake.

Whether you rent or own your home, having insurance is extremely important. You need protection, not just for yourself but also for liability or losses, even if you are renting. In fact, many landlords insist that tenants carry some form of renters insurance to mitigate risk (and weed out bad tenants).

Renters insurance is probably one of the least expensive types of insurance available, and it is great value for the money. However, not all rental policies are the same so when shopping for insurance, be sure you understand what’s covered and how much liability you should carry as a tenant.

What to Expect from Rental Insurance

Most people think that rental insurance only covers their belongings in case of fire or theft. But it actually covers so much more. Renters insurance also covers your liability in the event of an accident, and it can be a godsend if you suddenly find yourself homeless. Let’s consider the basics.

All renters insurance policies will cover damage and theft of personal property. A standard renters policy, called an HO4 insurance policy or perils policy, covers your personal property but not the dwelling itself. The perils policy will cover loss in the event of 16 specific events or perils: fire or lightning, windstorm or hail, explosions, riots, aircraft, vehicles, smoke damage, vandalism, theft, volcanic eruption, falling objects, the weight of ice or snow, water or steam overflow, accidental fire, building cracking or freezing, and electrical damage. Any property damage caused by something other than one of these 16 perils won’t be covered by an HO4 policy.

Many renters insurance policies also will cover living expenses if your apartment or rental home is destroyed or damaged. Living expenses can include hotel costs, meals, even laundry depending on the policy.

Even the best renters insurance policy won’t cover everything. For example, damage or loss from an earthquake or flood is normally not covered, although there are separate policies available that cover flood and earthquake. You also may consider an addendum or “rider” on your rental policy, depending on where you live.

Reimburse or Replace?

Most HO4 policies can be written to provide cash value or replacement cost of any items damaged or lost. If you opt for a cash value policy, you have to account for depreciation. For example, if you have an aging computer system that you bought years ago for $1,000, that system may only be worth a few hundred dollars after depreciation. If you opt for a replacement cost policy, the insurance company will pay to replace lost property at the price you paid.

Most renters policies also cover property “in transit,” which means if your laptop is stolen from your car, it is covered by insurance. However, in these cases, coverage is a fraction of the value of the lost property, typically about 10 percent.

If you are renting, it’s a good idea to take inventory of everything you own in case you need to replace it. Also, keep receipts to keep track of what you paid for big-ticket items, such as furniture or home electronics. You will want to list these items for your insurance carrier and having backup proof of purchase value is always helpful.

Know Your Liability

Even if you aren’t concerned about loss of property, you should have renters insurance to protect yourself from a lawsuit. If someone is hurt on the premises because of your negligence then you may be liable for damages. For example, if you have a party and one guest has too much to drink and hurts themselves or someone else, rental insurance will cover bodily injury and property damage. Dog bites also are a common claim covered by renters insurance, although some insurance companies exclude dog bites in their policies and others list specific breeds of dogs that they won’t cover.

When assessing renters policies, be sure you know what your liability coverage limits are. Most renters policies have limits that start at $100,000 and some go as high as $500,000. Some insurance agents suggest you carry liability coverage that is worth three times your annual salary, plus any assets and savings. Others suggest coverage around $300,000 is adequate. Talk to your financial advisor or credit union agent and see what he or she recommends.

Most HO4 policies also include no-fault medical insurance. That means anyone injured on your rental property can submit medical bills directly to your insurance company for payment, so payments can be made without liability to the policy holder.

When shopping for renters insurance, be sure to get the best coverage for your money. The average renters insurance policy costs about $185 per year, so getting the best insurance is still relatively inexpensive.