Renter’s Insurance: What it Means, How it Works

What Is Renter’s Insurance?

The term renter's insurance refers to property insurance that protects tenants who live in a rented dwelling. Coverage is provided by insurance companies in exchange for premiums paid by people living in apartments, single-family homes, and condominiums. Policies provide coverage for an insured party's personal property as well as liability claims that are not due to a structural problem with the property. These kinds of policies also cover living expenses that need to be paid out when someone makes an insurance claim after their unit is damaged. Although renter's insurance isn't a legal requirement, some landlords prefer their tenants to have some type of coverage.

How Renter’s Insurance Works

Insurance policies cover different types of losses. Life insurance provides a death benefit for a certain amount to an insured party's beneficiaries. Health insurance mitigates the costs associated with routine and unexpected medical expenses. There are also insurance policies that cover properties. For instance, homeowners insurance protects policyholders against damage to their homes, belongings, as well as any claims filed against them by others for injuries sustained while on the premises.

Renter's insurance is a common form of property insurance that tenants take out when they rent a home, townhouse, apartment, condo, room, or another type of dwelling. It's also available to anyone who sublets a property from another tenant. Policies vary based on the type of coverage a renter chooses—the higher the coverage, the higher the premium.

These kinds of policies protect the insured party against losses to their personal property within the dwelling as a result of loss from theft, fire, and other types of disastrous loss events. The amount of coverage depends You should buy enough renter’s insurance to replace all of your personal possessions in the event of a loss event. The easiest way to determine this amount is to create a detailed list of all of your belongings with estimated values.

Policies also provide financial protection against liability claims and additional living expenses (ALEs). Policyholders are covered against lawsuits for bodily injury or property damage done by the renter, their family members, and pets. It also covers legal defense costs up to the limit of a policy. Additional living expenses coverage provides financial protection against an insured disaster that makes it necessary to temporarily live somewhere else. The coverage pays for hotel bills, temporary rentals, meals, and other costs while a rental home is being repaired or rebuilt. Most policies reimburse the insured for the full difference between the additional expenses and their normal living expenses. There is, however, either a dollar limit on the total amount an insurer will pay or a time limit on the ALE payments.

Special Considerations

Proof of renter’s insurance is required by many landlords. That's because personal belongings within a rented property are typically not covered under the owner’s or landlord’s property insurance. For example, if a flood or fire destroys all the personal property within a rented apartment, the structure would be covered under the landlord’s policy, but the personal property would only be covered through a renter’s insurance policy. Without this coverage, the tenant is responsible for the loss out of pocket.

Renters can choose between replacement cost or actual cash value (ACV) coverage. ACV policies only pay the value of an item at the time it was damaged or destroyed—not its original value. Replacement cost coverage costs more, but it does provide a large enough payout to buy a new item to replace the old one at its current full retail price. individuals with abnormally high-value possessions may want to add a floater, which is a separate policy that provides additional coverage for costly valuables if they are lost or stolen.

Although most renter's insurance policies cover losses from fire or smoke, lightning, vandalism, theft, explosion, windstorm, and certain types of water damage, the majority don't cover floods or earthquakes. Flood insurance is available from the National Flood Insurance Program and a few private insurers. Earthquake insurance may be purchased separately or added as an endorsement to an existing renter’s policy. For example, in California—obviously a high-risk state for earthquakes—the legislature created the nonprofit California Earthquake Authority to help people get affordable coverage.