Why do we take out home and renter’s insurance?
People take out homeowners or renter’s insurance for the same reason they take out car and health insurance: If a home, or rental property, is damaged or someone else injured on the property, insurance helps owners cope with the financial consequences. Homeowners and renter’s insurance is actually a combination of two different types of protection, hazard insurance and liability insurance.
Hazard insurance protects you against unintentional damage or destruction to your house or its contents, including fire, storm, theft, vandalism and similar threats. It can cover the cash value of the damages or the replacement value; replacement value pays enough to replace what you lost, but cash value only pays what a property is worth. The cash value for a five-year-old $1,000 television won’t be $1,000, for instance, because it depreciates with age, making it worth less in the insurer’s eyes.
Liability insurance covers personal liability for accidents on your property. If your neighbor trips on a hose in your yard and breaks his ankle, for example, liability insurance will pay for his medical expenses, up to the policy limit.