Dear Kirk: The lease for my next apartment requires that I hold $100,000 in renters insurance, but I’m not sure what that covers exactly. How does renters insurance work? If it wasn’t a requirement of my lease, would I really need it?
Kirk Says: Let’s take a look at the component coverages of a typical renters policy. First, there is the coverage for your personal property, which would pay to replace your belongings in the event that something happened to them. Let’s further define “in the event something happened to them.” Your personal property is covered for certain named perils. The most common of these named perils are fire, wind, hail, theft, vandalism, smoke and accidental discharge of water.
The second type of coverage is the coverage for loss of use. This coverage pays to provide you with a temporary place for you to stay in the event that your leased space becomes uninhabitable as a result of one of the named perils. Third is your personal liability coverage. This comes into play in the event that you cause injury or harm to another person or their property as a result of your negligence.
For example, what if you started a fire in your apartment, which destroyed the entire building and the personal property of other tenants? These coverages usually start at $100,000, but options up to $1,000,000 may be available.
Finally, medical payments coverage will pay any necessary medical expenses of someone injured on or through your property. Injuries that take place away from your premises are also covered in the case that you, a household employee, or your pet caused the injury.
So when you say that your next apartment complex requires $100,000 of coverage, they are referring to liability coverage. This is not uncommon, and it may be that the insurance company for the apartment complex is requiring this as a condition of their providing insurance coverage for the building itself.
So let’s look at a real world example of how your renters insurance would protect you—compared to what the cost would be to you without it—and then you decide if it is beneficial to you to carry this coverage. We will work from the example of a four-unit apartment building that would cost $300,000 to replace if burnt to the ground or otherwise completely destroyed.
Let’s say you get a phone call from your child’s school letting you know that she just fell on the playground and broke her arm. At the time you received the call, you were busy cooking dinner. You rush out the door to attend to your child and totally forget about the dinner left on the stove. You return from the emergency room four hours later and find that your apartment has been destroyed by the fire and resulting smoke damage.
Consider what a disaster of that magnitude is could potentially cost. Let’s say that to replace your personal property, it will take $32,000. As a result of the fire, your apartment is uninhabitable for two months at a cost to you of $900 per month. Beyond that, the damage to the building itself is $55,000, for which you are personally responsible, because it was your negligence that caused the fire.
But luckily, your agent sold you a renters policy with $50,000 in personal property coverage, $100,000 liability coverage, loss of use coverage, and a $1000 deductible. This policy cost you $20 per month and also earned you a multi-line discount of $10 per month on your auto policy, making the net cost $10 per month.
Your renters insurance policy would leave you responsible for your agreed-upon deductible of $1,000, while the insurance company would cover the remaining expenses—$32,000, plus $1,800, plus $55,000 (minus your $1,000 deductible)—coming to a grand total of $87,800 in damages.
So you tell me. Is $120 per year worth that kind of protection?
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.