Renter’s Insurance

What It Means

A person buys property insurance as a way of transferring the financial risk of losing his or her property, either through theft or damage. The company that sells the insurance assumes the risk of the property being lost and promises to reimburse the property owner for damaged or stolen items. Renter’s insurance is a form of property insurance for people who rent, rather than own, their homes.

When you rent an apartment, the landlord (or owner) of the building you live in is required to carry insurance on the building itself, but the landlord’s insurance does not cover the contents of your apartment, such as clothing, furniture, stereos, cameras, bicycles, and televisions. If you cannot afford to replace these personal belongings if they are ruined in a fire or stolen by a burglar, buying renter’s insurance will help protect you financially.

In addition to paying for your damaged or lost property, renter’s insurance will cover your additional living expenses (such as a hotel bill and restaurant meals) if your apartment is temporarily uninhabitable in the aftermath of a fire, explosion, windstorm, or other peril that is covered by your policy (an insurance contract is called a policy; in insurance terms, “peril” is defined as that which can cause loss).

Renter’s insurance also contains liability coverage, or protection against third-party claims. This means that if someone decides to sue you after tripping on your rug and breaking an arm, getting bitten by your dog, or otherwise being injured on your premises, renter’s insurance will pay for your legal bills and any payments to the injured party that are stipulated by the court.

U.S. statistics suggest that people who rent their homes are more likely to be victims of vandalism and theft than people who own their homes. Renters are also are also at risk for substantial losses caused by fire and other such perils. Renter’s insurance is inexpensive compared to homeowner’s insurance, because it covers only the contents of the home and not the home itself. The average cost of a renter’s insurance policy is about $20 per month (or $240 per year) for coverage of $20,000 in property and $500,000 in liability.

When Did It Begin

Property insurance as we know it today traces its roots to seventeenth-century London. Following the Great Fire of 1666, which destroyed more than 13,000 houses, fire insurance emerged as a vital business. Although some fire insurance was issued to individuals by private companies, it was more common for people seeking insurance to form a mutual company, a group of people in which each individual owned a share of the collective risk.

The first mutual insurance company in the United States, the Friendly Society of Mutual Insuring of Homes Against Fire, was established in Charleston, South Carolina, in 1732. Twenty years later Benjamin Franklin (1706–90) organized the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. As demand for fire insurance continued to grow, mutual societies multiplied across the eastern United States, and many companies that once had offered marine (shipping) insurance exclusively began to sell fire insurance as well. Whereas the mutual companies only insured real estate against fire, however, the private companies now began to insure the contents of the buildings, too.

In the nineteenth century the broadening scope and specialization of the types of insurance available in the United States ran parallel to the marked expansion of Americans’ personal economic prosperity. In addition to fire and other natural perils, for example, people began to seek financial protection from burglary and related crimes. Renter’s insurance was likely introduced toward the end of the century, as apartment living became fashionable among the wealthy in urban areas, especially New York City.

More Detailed Information

Before you buy renter’s insurance, it is a good idea to take an inventory. Make a list of all of the items you want to insure, including price estimates and dates of purchase (to the extent that this is possible). It is also wise to photograph each item, as this visual evidence will make it easier if you ever need to file a claim (to file a claim with the insurance company is to report that something has been lost or damaged and to request reimbursement). Once you have an idea of what your belongings are worth, it will be easier to decide how much coverage you need. Also, make sure to keep a copy of your inventory somewhere outside your apartment, such as with a friend or relative or in a safe-deposit box (a private locked box inside a bank that an individual can rent).

When shopping for a renter’s insurance policy, there are a few key variables to consider: the kind of policy, the deductible, and additional coverage for expensive items.

Renter’s insurance covers your possessions in one of two ways: actual cash value or replacement cost. A policy that covers actual cash value will determine the amount of reimbursement for any given item by considering the item’s original purchase price and then reducing this value according to the age and condition of the item at the time it was stolen or damaged. Simply put, a cash-value policy will only cover what your property is actually worth, not what you originally paid for it or what it would cost to buy a comparable item today. So, for example, if you paid $250 for a pair of designer boots three years ago, and you wore those boots every day of the winter for three years until they were burned in your apartment fire, the insurance company might determine that the actual cash value of those boots was only $20. A policy that covers replacement cost does just the opposite, by reimbursing you for the amount it would cost you to buy the same or a comparable pair of boots three years later. The replacement-value policy seems preferable, but it also costs more.

The deductible is the amount of loss you, the policyholder, are responsible for before the insurance kicks in. So, for example, if you have a $500 deductible, and someone breaks into your apartment and steals your $700 bike, the insurance will only reimburse you for the $200 that is over and above your deductible. Here again, the policy that offers the most coverage is also the most expensive (that is, the lower the deductible, the higher the cost of the policy).

A third important variable is additional coverage. Basic renter’s insurance policies have coverage limits on certain kinds of valuables, such as jewelry, silverware, and computers. For example, most policies cover only about $2,000 in stolen jewelry. Find out what these limits are and how they apply to your own belongings. If you need additional coverage for a certain category of valuable, it is possible to buy what is called a floater, an addendum to your policy that will cover the full value of the valuables in question.

When comparing different renter’s insurance options, it is also smart to ask about discounts. Oftentimes, for example, your auto-insurance company will give you a discounted rate if you buy your renter’s insurance from them, too. Insurance companies also offer discounts to renters who reduce their risk of peril, such as nonsmokers, and those who install dead-bolt locks and smoke detectors.

When you have found a policy that suits your needs and your budget, make sure to read it carefully, and ask the insurance agent to clarify anything you do not understand before you sign the papers.

Recent Trends

According to a national survey conducted by Trusted Choice, an alliance of independently owned insurance agencies in the United States, 25 million families who rented their homes in 2006 did not have renter’s insurance. Indeed, the survey found that, even while 89 percent of families that rented owned at least one valuable electronic device, only one in three carried rental insurance coverage.

The survey addressed the question of why so many Americans were going without rental insurance even though the overwhelming majority of financial advisers, realtors, and other industry professionals advised getting it. According to the survey 26 percent of those without coverage felt that it was too expensive, 17 percent did not know they needed it, and 8 percent had never even heard of renter’s insurance.