What precisely is hazard insurance, and what is its purpose? What does it cover, and what doesn't it protect? Why is it important?
If you have heard the term “hazard insurance” but are unclear about its meaning or purpose, this article should help.
What is hazard insurance?
The term “hazard insurance” is usually used by mortgage companies to describe the part of your homeowners insurance that pays for structural repairs to your home. So technically, your dwelling coverage, also called Coverage A, is hazard insurance.
Because the term is frequently used by lenders, many homeowners first encounter it when finalizing their mortgages. Lenders want you to have enough coverage so that their financial interest in your home is protected while you have a balance remaining due on your loan.
Hazard vs. hazard insurance
One reason hazard insurance might be confusing for homeowners is because the word “hazard” has multiple meanings in the industry. When used on its own, a hazard describes a condition that increases your chances of experiencing a loss from a peril. For example, not cleaning your chimney for years is a hazard because it increases your chances of experiencing a loss from a peril, namely fire.
Hazard insurance, on the other hand, protects you in losses caused by several perils – whether or not you have hazards that increase their likelihood. If you have a standard home insurance policy, then chances are you have hazard insurance.
Is hazard insurance the same as mortgage insurance?
Mortgage insurance is not the same as hazard insurance, although both protect the financial interests of the lender.
Hazard insurance protects against direct physical loss to the structure of your primary residence. Your mortgage lender wants you to have this so they know you have the resources to repair your home should a covered loss occur. Mortgage insurance, often referred to as private mortgage insurance (PMI), protects your lender if you default on the loan.
In essence, hazard insurance insures the home, while mortgage insurance insures the loan.
A lender may require mortgage insurance if a borrower does not have at least a 20% down payment when purchasing a home. You might also be asked to get PMI if your loan-to-value ratio is over 80%. Homeowners may be able to get the required PMI dropped after they have made enough monthly payments to build sufficient equity in their home.
What is covered under hazard insurance?
Hazard insurance covers your home from specific perils. For many policies, covered perils include:
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Fire.
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Hail.
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Lightning.
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Vandalism.
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Fallen trees.
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Explosions.
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Vehicles colliding with your home.
That said, you still want to read through your home insurance policy for the complete list of perils covered by your hazard insurance. If you have questions regarding your hazard insurance coverage, contact your insurance provider.
What isn’t covered by hazard insurance?
The hazard insurance portion of a standard homeowners insurance policy doesn’t cover:
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Damage to other structures on your property or your personal belongings.
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Additional living expenses if damages force you to temporarily relocate.
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Expenses associated with liability claims.
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Medical bills for people injured on your property.
However, most home insurance policies include coverage for all of these through other coverage parts.
Hazard insurance also has some common exclusions. For example, it generally doesn’t cover damage caused by regular wear and tear or neglect. It also doesn’t cover intentional damage.
Moreover, your hazard insurance doesn’t cover flooding or storm surge from a hurricane. Earth movements, like earthquakes, landslides, and sinkholes, are also typically excluded. Homeowners often get separate policies or insurance endorsements to cover these perils.
Will I have to pay a deductible on a home hazard insurance claim?
Deductibles are common in hazard insurance and apply to claims made by the insured and covered by the policy. While increasing a deductible may lower your homeowners insurance costs, be cautious about having very high deductibles. Try to get a deductible you can afford even if you’re facing a disaster.
How much does hazard insurance cost?
Hazard insurance costs vary depending on your home’s location, size, and the building materials used in construction. Your hazard insurance premium can also be impacted by your credit-based insurance score and claims history.
Recent industry data places average home insurance rates around the country at $1,411 annually. The average continues to go up as the number and severity of storms increase and construction and reinsurance costs rise.
For tips on keeping your premium under control, read our article How to lower home insurance costs.
