Renter's Insurance: What It Is and How It Works

Renter’s insurance, also known as “tenant’s insurance.” is one way for renters to limit their financial risk. It offers coverage for property, liability in the case of injury, and additional money for housing expenses in the wake of a catastrophe.

Now is an important time for tenants to think about having renter’s insurance. With about 36% of American households renting—and a number of those households now “rent burdened,” which is defined as spending more than 30% of their income on housing—many renters are strapped for cash. These households are likely unable to cover unexpected expenses, making the careful management of risk vital.

How It Works

Renter’s insurance works like other forms of insurance. Maintaining a policy will pay out money if your property is damaged or stolen, so long as it falls within the policy’s specific coverage area. 

There are a number of generic categories of renter’s coverage. Some of the most common, discussed more below, are liability, personal property, and loss of use coverage. It’s important to check the terms of the specific policy you are purchasing to know what’s included.

To use the insurance, you will have to file a claim with the company you have the insurance with.

Renter's Insurance vs. Landlord's Insurance

Renter’s insurance is sometimes confused with other types of property insurance. For instance, tenants often assume that, because their landlord has insurance, they are covered as well when something bad happens. They aren’t.

Landlord’s insurance will cover the physical property itself, not all the belongings you house on that property or any liability you may have if someone is badly hurt on that property while you’re renting it. For that, you need renter’s insurance. According to research by SafeHome.org, 55% of renters in the country, an estimated 61 million people, purchase renter’s insurance.

RCV vs ACV

For damaged property, insurance will usually cover the purchase price with the depreciation subtracted, which is termed the “actual cash value” (ACV).

This is usually different from the “replacement cost value” (ACV), which is the price it would take to get an equivalent item that is brand new. 

You may be able to choose which type of coverage to buy. Though replacement cost is a little more expensive, it can be worth considering, especially if you have a lot of goods that don’t hold their value.

Is renter’s insurance required by law?

Unlike some other types of property protection, renter’s insurance is not required by law. However, landlords and management companies can insist that you purchase such insurance in order to rent from them. When they do, it will be spelled out in the rental contract.

So while not legally necessary, you still may need renter’s insurance to rent a specific place. In fact, according to research by SafeHome.org, most people who have renter’s insurance, about 75%, do so because they are required to by their landlord.

What does renter’s insurance cover?

Property insurance, the kind your landlord has, protects the building itself. If a fire burns it down to its cinders, those cinders—and other structural components of the building—are covered. But what about your things? To have protection for them, you need renter’s insurance.

Precisely what’s covered in the renter’s insurance will depend on your specific policy. Renter’s insurance generally covers damage to property and losses due to theft. It will also cover liability, in case an injury happens to someone at the place you’re renting and you are found liable. This means you won’t have to pay for things such as ambulance rides and medical payments.

Also, should the rental property become uninhabitable—say that fire mentioned above displaces you—renter’s insurance will provide money for living expenses. This can mean staying in a hotel or paying for food, though the total amount it will provide is capped.

Let’s look at two examples of the best renters' insurance companies. Lemonade, an artificial-intelligence–based insurer, promises coverage for personal theft, water damage, and fire damage on its website.

Liberty Mutual's rental policies include coverage for your belongings as well as personal liability, along with a number of other optional coverages, such as earthquake insurance and jewelry coverage.  

What isn’t covered by renter’s insurance?

There’s a lot that renter’s insurance won’t cover, starting with natural disasters. Earthquakes and floods, for example, are considered “acts of god”and will normally require separate insurance. Windstorm and lighting damage probably will be covered, according to the Insurance Information Institute.

Your roommates won’t get coverage, either, unless they are listed on your policy. Some insurance companies restrict roommate coverage to family members.

Another category rental insurance won’t cover is damage caused by pets. If your cat scratches the furniture, your renter’s insurance typically won’t cover it.

It’s important to note that regardless of the kind of insurance, providers will refuse to pay out in cases where the damage or injuries were caused by “negligence,” meaning essentially that it resulted from unreasonable actions. Insurance won’t cough up for damage that’s intentionally caused, either.

How are costs determined?

For damaged property, insurance will usually cover the purchase price with the depreciation subtracted, which is termed the “actual cash value.” This is usually different from the “replacement cost,” which is the price it would take to get an equivalent item that is brand new. You may be able to choose which type of coverage to buy. Though replacement cost is a little more expensive, it can be worth considering, especially if you have a lot of goods that don’t hold their value.

What if your things are destroyed when you are traveling? Renter’s insurance often includes “off-premises coverage,” which covers you and your possessions while you’re traveling. If they A damaged or stolen while you’re away from home, you’re good.

How do you calculate the amount of coverage you need?

Figuring out how much renter’s insurance you need hinges on the details of your life. Add up the likely value of what you own and create a “home inventory” by documenting and taking notes on the value of your possessions, including photographing them. Track down any receipts or other documentation that can prove value.

You should carefully inspect your budget and possessions to see how much of a deductible you want. The lower the deductible, of course, the higher the premiums you’ll pay.

What about liability protection? Most policies insure renters for liability of at least $100,000. It’s sometimes recommended that you purchase more, as much as $300,000 to $500,000, if you have investments or savings worth more than $100,000 and frequently host guests.

Ultimately, the goal is to find the coverage you want at a price you can afford.

How do I file a renter’s insurance claim?

When filing an insurance claim, fastidious documentation is key. Remember to hold onto any documents that can prove what you assert in your claim.

First, check the terms of your contract to see what’s included. Pay attention to what kind of claim you’re filing. Then, reach out to the insurance provider. It should inform you of how much time you have to finish filing the initial claim, but it’s usually a day or two.

You may need to file a police report. You should also let your landlord know. In fact, clueing in the landlord on what’s happening may be required by your rental contract.

Then, after collecting any necessary files—such as a police report or notes about what property was stolen or damaged—submit the claim.Hold onto any documents that can show you’ve taken these steps

When is renter’s insurance worth it?

Many advisors recommend renter’s insurance as a safeguard against sudden disasters. Viewed this way, it’s supposed to be a shield against the unexpected.

Probably because it’s not legally required, most people who purchase renter’s insurance do so because their landlords force them. As noted above, about 55% of renters have this insurance. This pales in comparison with the number of homeowners who have homeowner’s insurance, which the National Association of Insurance Commissioners puts at 85%.

Still, renters face risks too. And with 32% of Americans unable to handle an unexpected expense of more than $400 by paying cash (according to the Board of Governors of the Federal Reserve System), renter’s insurance begins to sound like a prudent choice. Replacing all your possessions is likely to cost far north of $400.

Though renters are excluded from assessments of climate change’s impact on housing markets, climate disasters and worsening conditions are making natural disasters, such as fires and floods, more common. They are also impacting insurance markets, adding a potential complication to acquiring protection, depending what you are seeking. Renters should determine whether a special policy for flood damage, for example, makes sense for them.

Include whether you need renter’s insurance when you think about your life circumstances, finances, location, and overall goals. Weigh the costs, the coverage, the headache of filing a claim, and the likelihood of actually getting a payout. If your landlord requires you to have it, include the cost when you estimate your housing budget.

Frequently asked questions (FAQs)

What is the average cost of renters insurance per month?

Nationally, the average cost for renter’s insurance was $173 per year in 2020, or a little more than $14 per month, according to the latest data available from the Insurance Information Institute, a consumer information nonprofit. However, the actual price will vary by place. In California, for example, insurance premiums ran $171 on average, while in nearby Oregon they were $154.

Can I get renter’s insurance if I have a pet?

Yes, but it doesn’t cover all the damage your pet might cause. Renter’s insurance might cover you under the liability clause if your pet hurts someone, but it won’t provide coverage if your pet destroys the furniture, whether it belongs to you or your landlord.

Can I add additional coverage for high-value items?

Yes. Extra insurance can be useful for protecting high-value possessions, usually through a tailored rider (sometimes called a “floater”) specifically designed for items such as jewelry or fine art and antiques.

Where can you get the best renter’s insurance?

The best renter’s insurance will offer enough coverage to mitigate your risk should a calamity happen. It should also fit within your budget. To find it you need to comparison-shop with your specific goals in mind.

What is ‘replacement cost’?

The term “replacement cost” refers to the price required to purchase an equivalent item in current money. This is different from the “purchase price” or “actual cash value,” which is the amount the item you lost is currently worth, including subtracting depreciation for age or wear and tear. (Think of the difference in value between a new TV and a used one.)

How much is renter’s insurance with $100,000 of liability coverage?

Most renter’s insurance options offer personal liability coverage for people being injured at your rental for up to $100,000. On average, renter’s insurance costs about $14 per month, according to the Insurance Information Institute's calculation. Again, this figure will differ by state. In Texas, for example, the average renter’s insurance premium was $216 per year, while in Tennessee it was $187.

Are my roommates covered under my renter’s insurance policy?

Generally, no. However, some companies will cover them if you name them on the policy.