Should tenants insure their possessions?

This blog started as a short piece to alert tenants to the pros and cons of Contents Insurance.  I ended up expanding it to kick around my opinions on insurance in general.

We had two major maintenance issues lately where the tenant’s possessions were damaged. The first was where a sewerage pipe became blocked and the resultant backflow exited into the ground floor unit occupied by our tenant.  It was a major mess, necessitating the tenants being provided with alternative accommodation while carpets were replaced, then cleaning and sanitising took place.  While the owner fortuitously had Landlord Insurance that covered the repair cost and the tenant’s accommodation, unfortunately both the Landlord and the Owners Corporation were deemed not liable for the tenant’s loss.  Their furniture and other items were damaged.

The second incident was a burst hot-water service, occurring on a Saturday night when the tenant was away from Sydney for the night.  When water began appearing in the foyer and the unit below, the alarm was called early Sunday morning.  The Fire Brigade came and broke in through the front door.  We were called (we always inform the Strata Manager and Owners Corporation about our tenancies), so we could let the tenant know what he could expect to find on his return. Apparently, a plastic shopping bag left on the laundry floor ended up covering the floor waste, so that didn’t help matters.  A laptop sitting on the floor in the living room was very damp as well.  There were some lessons there.  Carpets were lifted, industrial dryers were delivered that day and by Thursday, the tenant could move back in.  Again, there was damage and losses and the tenant was not covered by Contents Insurance.

In both cases, the landlord was protected by insurance and the tenants were not. That’s the point of me writing this.  I suspect many tenants don’t have insurance and many of them assume that when damage is done to their possessions, through no fault of their own, that they will not be out of pocket.

The reality is that in a fire, or another significant event, a tenant can lose some or all of their possessions and no one comes to the rescue.  The odds are low, but not zero.

I’m not suggesting that you must have contents insurance, but you definitely should consider it.  Etty and I live in a unit in the heart of Sydney and we don’t insure our contents.  I’m a little contrarian about insurance and I’ll explain why.

In my view there are only two circumstances when you should take out any insurance policy.

  1. You can’t afford the loss. This is the most important one.  A good example is when you own and drive a car. The alternatives are Comprehensive, Third Party Property or No Insurance.  If you cannot afford to completely replace your car from your bank account, without massive pain, then choose the first.  If you can, then choose the second.  Thirdly, in the rare case you can easily replace someone else’s Ferrari, or you’re insane, then choose the last option.  In Contents Insurance terms, if you lose your possessions and cannot afford to replace them, then you should be insured.  If you are like Etty and I, where we could replace all our stuff (even though the cost would be a bit painful), then it’s best to not insure. To be frank, there is a part of us that would actually welcome the forced opportunity to update things.
  2. You’re a poor risk. If you are someone who insurance companies would love to exclude from taking out a policy, then get insured.  If you are sickly, get health insurance.  If you love toffee, get dental insurance.  I’m sure you get the point.

Two more quick thoughts.

What happens when you have a very expensive item? Perhaps you’ve inherited a painting worth $70,000.  Should you insure it?  Probably not, I’d say. The question is: if you lost it, would you go out and replace it?  If not, then there is no good reason to insure it (unless you are Category 2 and tell everyone you have a valuable painting and leave your doors unlocked).

Last point – Excesses.   This expands on your capacity to afford a loss.  It’s a good idea to increase the excess on car insurance policies to your pain point.  Rather than have an $800 excess, consider increasing it to $2,000 or $4,000 and pocket hundreds of dollars off your premium.  As you probably know, 72% of drivers believe they are better than average, so the odds are in your favour.

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