What is a Hazard Insurance Policy? What Does it Cost & Cover?
Anytime you take out a home mortgage, your lender will require you to purchase a hazard policy. Hazard Insurance protects both your new property and the lender’s investment, but what exactly does it cover and how much does it cost?
What is a Hazard Insurance Policy?
As the name implies, hazard insurance coverage is designed to protect the structure of your home against a number of potential hazards. Since your mortgage company is the one bearing most of the risk on your home purchase, they want to ensure that their investment is protected against damage and destruction. Hence, the requirement for a hazard policy on your home insurance policy.
What Does Hazard Insurance Cover?
Hazard insurance coverage will protect your dwelling from named perils, offering to repair, rebuild, or replace these within the policy limits if they are destroyed or damaged. This means protecting:
- The actual structure of the home
- Any garages, sheds, or other included structures
- Your belongings inside the home, if they are damaged or destroyed by a covered event
Coverage includes both the interior and exterior of the home, too. So if a hailstorm damages your roof and causes a leak that ruins your living room drywall, you’ll likely be covered by your hazard policy.
The situations that your hazard insurance may cover can include:
- Fire and smoke damage
- Windstorms and/or hail
- Theft or vandalism
- Power surges or lightning strikes
- Water damage (such as that caused by a broken pipe or faulty appliance; this typically does not include flooding due to weather or your negligence)
- Rioting or civil unrest
Be sure to read the fine print on your policy, so you know what is and is not protected by your insurer.
Things Hazard Insurance Will Not Cover
While your home and its contents will be covered from many unexpected situations, hazard insurance won’t protect you from everything.
For example, you won’t be protected from:
- Infestations such as bedbugs or termites
- Unless you live in certain states, you also won’t be protected by landslides, mudslides, or sinkholes (and in those special states, you’ll still need to choose the optional coverage when purchasing your policy)
- The weight of snow, ice, and sleet is not covered (you need a Special Form of your home insurance for that, learn more on the National Real Estate Insurance Group’s website)
- In most states, earthquakes and floods are excluded from standard hazard insurance policies (if you want to be protected from these natural disasters, you will need to purchase separate earthquake or flood insurance policies)
- Live along the Atlantic or in the Gulf? You probably won’t be protected against hurricane-related damage, unless you’ve opted for special coverage. Even if you are covered and your claim is approved, you may be required to pay an increased (and often hefty) deductible for damages related to that event
- There are also other situations that many insurers refuse to cover. This includes mold unless it is directly attributable to a sudden (covered) water damage situation
Is Hazard Insurance the Same As Homeowners Insurance?
If you purchase homeowners insurance, also called an HO3 policy, you will automatically be covered by hazard insurance. That’s because hazard insurance falls under the umbrella of homeowners insurance; as such, it is one key component of your overall homeowners insurance coverage.
While hazard insurance protects your dwelling and surrounding structures, homeowners insurance includes:
- Dwelling coverage and other included structures coverage
- Your personal belongings, even when they are away from the home (such as your car being vandalized at the mall). Personal property coverage will reimburse you for the losses of your personal belongings. You can choose between a replacement cost or an actual cash value option.
- Personal liability coverage (if someone were to be injured on your property)
- Loss-of-use coverage, which will provide you with certain additional living expenses if your home becomes uninhabitable due to a covered situation (like hotel bills, food, etc.)
So while hazard insurance and home insurance aren’t the same thing, they do go hand-in-hand. Both types of coverage work together to ensure that you and your belongings are protected no matter what may lie ahead.
Can You Buy Stand-Alone Hazard Insurance?
If hazard insurance is one subset of homeowner’s coverage, and your mortgage lender only explicitly requires the former in order to disburse your home loan, can you purchase hazard insurance as a separate policy? You’d certainly save a lot of money in the process…
Unfortunately, this is not possible. Hazard insurance and homeowners insurance may be categorized differently, but they don’t really exist without one another. So, what is hazard insurance on a mortgage? When your lender tells you to buy hazard coverage, what they are really saying is, “Buy a homeowners insurance policy so that you can protect this dwelling that we are funding.” They don’t care about the other provisions or optional features of your policy; they just want to ensure that the hazard coverage part is in place and paid.
How Much Does Hazard Insurance Cost?
The cost of hazard insurance will vary based on your location, the provider you choose, and the specifics of your home. As a general rule of thumb, the annual cost of hazard insurance is around 0.20-0.35% of the purchase price of your home.
So, if you live in a lower-cost homeowners insurance state, like Oregon, you might find that a policy on a $200,000 home could cost you $400 for 12 months. In a state like Florida, though — where hazards abound and insurance premiums respond accordingly — you might pay closer to $700 for that same year.
Of course, these are only estimates, and the actual hazard portion of your homeowners premium will vary. Our licensed insurance agents will help you get the most affordable home insurance quotes with enough hazard insurance coverage.
Do I Need Hazard Insurance If I Pay Cash for My Home?
Some people only purchase insurance coverage if they are forced to do so (think liability coverage for drivers, or health insurance mandates). So, if you pay cash for your home and don’t have a mortgage lender requiring you to buy hazard coverage, should you really bother with buying pricey coverage?
As with most insurance products, it’s generally considered a (very) good idea. Your home is one of the biggest investments you will make, and few of us have the means to cover catastrophic repairs out-of-pocket. With 2-out-of-5 Americans unable to even handle an unexpected $400 emergency expense, it’s easy to see how a busted water pipe or tree-crushed roof could be financially devastating. Even if you own your home outright and aren’t required by a lender to have homeowner’s insurance, it should still be an absolute must in your book. You can choose a high deductible and low coverage limits to reduce monthly insurance rates, but this coverage — that protects you from catastrophe — shouldn’t ever be up for debate.
If you want to make sure you’re getting the best deal on home and auto insurance, Gabi can help find the lowest cost option from the best insurance companies in minutes!