In my case, the *one* time I took my iPhone out of the Incase case I bought for it (which as bkeene correctly described, is a piece of crap, but definitely protects it against droppage), it accidentally slipped out of my hand and landed on its back glass side up. A few minutes later, I noticed my WiFi signal get gradually weaker, and in about 5 minutes, the phone was completely bricked--no wifi signal, no EDGE and the phone actually popped up an error message saying, in essence, that my phone is in fact, bricked and could no longer make calls. This from a modest fall of around 12 inches above a ceramic tiled floor.
Thankfully there was no visible damage to the unit, so I took it into my local Genius Bar, played dumb (often referring to my self-hacked WRT54 wireless router as "my wireless thingy"), and recieved a new replacement unit a few days later.
It absolutely freaks me out to think what would happen if the glass broke or something. After the first year of ownership, Applecare is worth buying for laptops and ipods, but it really sucks that they don't protect you against accidental damage, considering how much they charge you for Applecare. So I'm on the "iPhone insurance is worth it" side of the fence.
USAA, my renter's insurance provider, covers accidental loss or damage to personal property, and specifically computer gear. YMMV with your provider.
Source: http://ask.metafilter.com/71254/Is-Iphone-insurance-worth-it#1062469
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