All insurance, including renter’s, is a hedge against risk. The problem with renter’s insurance is that not many understand the risks it can cover. That might be the reason, according to the Insurance Information Institute (III) survey conducted by ORC International, only 31% of renters have it. Because it is not mandated by law or lenders, as with cars and homes, many never take the time to investigate this financial matter.
The reality is that renter’s insurance covers a broad spectrum of risk. The most basic is the cost of replacing personal property lost through fire, broken pipes, lightning, vandalism, car crashing into the premise, electrical surge, civil unrest, or volcano. Not until renters take an inventory of their belongings do they realize replacing them may total about $20,000. If the rental is of a house, not an apartment, that could be far more.
However, also to be factored in is the cost of alternate lodging if the premise is not habitable. That could put the average middle-class person in a financial hole. If the destruction has been caused not by water damage such as from a broken pipe but from a flood, then the renter is not protected by the standard policy. Hurricane Sandy victims found that out too late. Lesson learned: Read the policy. Separate flood insurance has be purchased. Although provided by the federal government, it is available through insurance companies.
A third kind of risk is legal liability, the kind that could trigger bankruptcy. That could result from an injury which occurs on the premises. According to the National Safety Council, one in 17 Americans had an injury indoors that required medical care. Victims could sue not only for reimbursement for medical care, ongoing therapy, and permanent disability, they could also claim there was negligence in how the renter maintained the premise.
Given the financial implications of the risks, the cost of renter’s insurance is relatively small. In a non-urban area that does not have a high crime rate, according to III, that could be about $200 annually. By bundling that with auto and other kinds of insurance, the price could be lower. Also, there are discounts for having security measures such as burglar alarms, deadbolt locks, and smoke detectors, as well as for those over 55 and the retired.
The hard work is the decision-making about the terms and conditions of the policy. Research can be done on the web under the keywords “renter’s insurance.” Essentially the main decisions deal with:
Policies are written for a fixed amount, not for coverage of certain individual items. To make this decision it makes sense to take a detailed inventory of the value of property, taking into consideration what the cost of replacing it would be. The desk which cost $20 at a flea market 20 years ago, now considered an antique, might have a replacement cost of $5,0000. To ensure proper payment, it is common sense to save receipts, get appraisals, and do a video recording of the content of the premises.
Actual versus replacement value
Some insurers write policies based on the value of the item when the loss occurred. That is known as Actual Cash Value. The laptop purchased for $700 may be worth only $100 four years later. The other option is Replacement Value. That same laptop might cost $545 today.
As with all insurance, the higher the deductible, the lower the premium. This makes especially good sense with renter’s insurance since a claim is not usually filed for petty losses. That is because filing claims or multiple ones within a certain time period frequently flags the buyer as a poor risk. In the near future, it could be impossible to get any kind of renter’s insurance.
Some insurance companies will not write policies covering certain breeds of dogs. Research on this is as simple as contacting a few and finding out their contract stipulations. If pit bulls are not covered, then the renter has to decide whether to go without insurance or to negotiate a special contract.
Property of high value, ranging from collectibles to diamond rings, requires riders to standard policies. The cost is high. There are alternate risk reducers, such as maintaining the items in containers which are fire- and waterproof, and kept where thieves are unlikely to search.
Rational people can have very different attitudes toward risk, points out Ken Binmore in his book Game Theory: A Very Short Introduction. If one agrees with that, there are no right or wrong answers about purchasing renter’s insurance, how much, and with what terms and conditions. However, if disaster strikes, the victims without renter’s insurance might conclude they operated on a bad set of assumptions.