The Limitations of Renter’s Insurance

Just because you don’t own your home, you don’t need insurance, right?

Believing this can be a slippery slope, consider that renter’s insurance policies will cover your possessions in the event of a theft or disaster.

Look around your home and imagine how much it would cost to replace everything in it. Seems steep compared to the low cost of a renter’s insurance policy, doesn’t it?

However, paying for renter’s insurance means paying attention to exactly what the policy covers and there are some limitations.

Here’s what you need to know about renter’s insurance, its limitations and why you should have it anyway:

What Does Renter’s Insurance Cover?

Renter’s insurance is a similar policy to home insurance, except that it does not cover the actual structure of the building you live in.

However, renter’s insurance will pay for your personal property as well as offer liability protection and the cost of housing and meals should you become displaced from your apartment.

Renter’s insurance costs far less than homeowner’s insurance but is not without its limitations:

The Limitations of Renter’s Insurance:

1. Actual Cash Value

When it comes to the cost of having damaged or stolen items replaced, you can choose whether to have ACV (actual cash value) or RCV (replacement cash value) included in your policy.

Since most renters try to keep the cost of their insurance premiums low, they tend to opt for the ACV option, since it costs less than RCV.

However, the actual cash value of an item is the cost to replace the item minus depreciation. That means that the policy will only pay out what the item is worth today, not how much you originally paid for it.

Replacement cost value, on the other hand, covers the cost of a new item. 

For instance, say you need to claim the cost of your television. With ACV, your 50-inch Panasonic HDTV may only be valued at a cost equivalent to a 24-inch no-name television.

With RCV, you would receive a payout to cover the cost of a new 50-inch Panasonic HDTV.

While the choice between replacement and actual cash value is not necessarily a limitation when it comes to renter’s insurance, it certainly can be if you are trying to keep the cost of your premiums low.

2. High Value Items

The terms of your renter’s insurance policy may not cover special items like engagement rings or custom art.

These items sometimes have specific limits of insurance, or a maximum amount your policy will pay out for these belongings. 

Always check your policy documents to see what that maximum payout is. If your high value items are worth more than the limit listed, you can either:

  • Take the payout and eat the difference, or
  • Increase the limit for your high value items by increasing your policy coverage.

Be sure to double check with your insurance broker to determine which possessions are covered and which will require additional coverage.

3. Flooding and Earthquakes

Renter’s insurance will cover a multitude of damages to your personal property, including those caused by fire, lightning, windstorms, hail and smoke.

However, your renter’s insurance policy will not cover flooding and earthquakes.

Under the “earth movement” exclusion of insurance policies, earthquakes, tremors, landslides and sinkholes are not covered.

If you live in an area that is high-risk for earthquakes and flooding, you’ll want to consider adding additional coverage in case of these events.

The Importance of Renter’s Insurance

Even with its limitations, it is recommended that you have renter’s insurance to protect your personal property.

Ideally, your insurance broker can find you a policy that has few limitations.

The low cost of renter’s insurance is an important investment when it comes to protecting your financial health in the event of a theft, accident or disaster.

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