What is hazard insurance? How hazard insurance works.
Hazard insurance
An integral part of buying a house is determining what kinds of insurance coverage you need. In the selection you choose, you may need to purchase hazard insurance.
Although it is necessary in many cases, hazard insurance isn’t a common choice, and many people don’t know why they might need it.
If you’re confused about hazard insurance and what it can do for you, our guide will tell you everything you need to know.
Table of contents
- What is hazard insurance?
- How hazard insurance works
- What is hazard insurance on a mortgage?
- What does hazard insurance cover?
- What is not covered by hazard insurance?
- Separate hazard insurance policies
- How much hazard insurance do you need?
- Hazard insurance FAQ
- Hazard insurance cost
What is hazard insurance?
In essence, hazard insurance coverage protects your home from hazards or natural disasters. It’s usually a prerequisite when qualifying for a mortgage.
Some regions also require the purchase of a Natural Hazard Report (or NHD report), which shows if a property is in an area deemed a natural hazard zone or a high-risk area.
Hazard insurance coverage protects a property owner from damages caused by fires, severe storms, hail, sleet, and other natural weather events.
The property owner will receive compensation for any damage incurred by covered specific weather events within the policy.
Typically, the property owner will pay an upfront premium for 12 months when purchasing the policy, but this will depend on the policy details.
Hazard insurance is often considered the same as catastrophe insurance. Both deal with coverage for large-scale natural disasters, although they are technically different.
Within the insurance industry, hazard insurance refers to a portion of a standard homeowners insurance policy that protects the structure of a home. In contrast, catastrophe insurance usually refers to a separate, standalone policy that covers specific disasters, including man-made ones.
How hazard insurance works
Generally, hazard insurance covers your home’s structure, roof, and foundation. However, some policies can also extend coverage to personal belongings and furnishings.
Homeowners can often add extra hazard coverage to their policy. It’s worth paying the upfront costs of extra coverage than needing to file a claim and dealing with out-of-pocket costs.
As severe weather events become more commonplace, increased hazard insurance may become necessary for more homeowners.
Suppose you have hazard insurance, and a specific weather occurrence damages your property and is covered within your policy. In that case, you will be compensated for the damages.
Even if your property isn’t in a high-risk area, hazard insurance will give you peace of mind while it protects your property and finances.
In summary:
- Hazard coverage is commonly a subsection of a homeowners policy designed to protect the main building and other nearby structures, such as a shed.
- Hazard insurance protects a property owner against weather damages, such as fires, lightning, wind, hail, snow, rainstorms, and other natural events.
- To be prepared for every possible scenario, homeowners should ensure that common hazards are covered in their policy package.
- Policies are typically annual contracts and are renewable.
Note: To calculate the amount of hazard insurance required, estimate what it would cost to replace your home in the event of a total loss.
What is hazard insurance on a mortgage?
If you are taking out a mortgage on your home, it’s common practice to carry homeowners insurance required by your lender.
In fact, they want you to have hazard coverage since it is the portion of the homeowners' insurance directly related to the home’s structure (in contrast to loss of use, personal liability, or personal property coverage).
Purchasing a general homeowners policy will usually satisfy the lender’s requirement, though the level of protection you require will depend on local laws and certain considerations.
The lender may require you to have additional coverage if you have an expensive property in a high-risk area.
What does hazard insurance cover?
It can be confusing to comprehend what is and isn’t covered by your hazard insurance policy. Generally, this insurance will only cover the occurrences listed explicitly in the policy.
So, ensuring your policy covers disasters in your area is essential. For example, if you live in a high-risk area for flooding, it may be reasonable to expect floods and the potential damage they could cause to your home.
Suppose you buy a home in an area at risk of a flood (or a flood zone). You may have to purchase an additional policy to cover the risk of floods.
It’s worth mentioning that not all hazard insurance policies are equal. Reading through your homeowners' policy to learn what exclusions your policy may have is important. If you have any concerns, you should speak with your insurance agent.
You may need to purchase additional coverage to protect against specific events.
Several categories are covered by hazard insurance. Most categories are natural disasters, but some risky home appliance malfunctions are also covered by hazard insurance.
These risks include:
- Lightning damages
- Heavy wind and hail
- Fire and smoke
- Theft and vandalism
- Damage from snow, ice, or sleet
- Fallen trees and other falling objects
- Damage from vehicles, including cars and aircraft
- Damage caused by heaters, AC units, or electric currents
What is not covered by hazard insurance?
Hazard insurance does not cover injuries sustained on your property and damages to personal property. Therefore, hazard insurance only protects your home’s structure from a disaster named in your policy.
This coverage may include additional structures such as sheds, garages, fences, and certain personal belongings inside the home (if the policy covers them).
Additionally, water damage caused by flooding is typically not covered, so homeowners will need to purchase flood insurance separately. It’s much the same for mudslides, landslides, and earthquakes in high-risk areas, as they are also not covered.
For example, if your property is in an area prone to landslides, it may not be covered by your insurance, so you might want to also purchase separate insurance covering landslides.
Depending on where you live, your hazard insurance coverage will change. Overall, you may add additional insurance coverage or purchase a separate policy covering specific occurrences.
Other instances that aren’t covered might include mold damage, pest infestations, or general wear and tear.
Separate hazard insurance policies
As mentioned earlier, certain natural or weather-related events are excluded from hazard coverage of homeowners insurance in some areas. If the area in question is prone to these weather events, it’s too costly for the insurance provider to include them in a standard policy.
For example, a beachfront property might be susceptible to hurricanes and tropical storms. In summary, the way to cover these high risks is by purchasing a separate hazard insurance policy.
How much hazard insurance do you need?
In general, you need to buy enough hazard insurance to cover what it would cost to rebuild your home from scratch if it’s completely destroyed. To do that, you need to calculate the estimated cost.
Known as the “replacement cost,” this figure isn’t necessarily the same as your property’s asking price or what you paid to buy it.
Instead, this figure is based on the estimated cost of rebuilding the house to its pre-disaster condition. This figure includes materials and labor costs, for example.
If you don’t know how to calculate this estimation, your insurer can help you estimate the right amount.
For extra peace of mind, you can consider one of these optional coverage types:
Guaranteed replacement cost
This coverage pays as much as necessary above the coverage limit to rebuild your home.
Extended replacement cost
When a natural disaster causes widespread damage in a certain area, local construction costs often go up due to higher demand. If this happens, your replacement cost coverage might not suffice. That’s where extended replacement cost coverage comes in handy. You may be able to choose an amount around 10% to 50% above your coverage limit to protect you when costs are higher than expected.
The bottom line
Hazard insurance is a part of most standard home policies.
Depending on your lifestyle and where you live, a standalone hazard insurance policy may not include all of the coverage you need.
Therefore, it’s wise to verify you have the necessary coverage. You should contact your insurance agent and mortgage lender to determine your needs.
Hazard insurance FAQ
Is hazard the same as property insurance?
No, hazard insurance is a subsection of homeowners insurance that only covers damage to the home’s structure. Property insurance covers damage to the home, damage or theft of personal property, and personal liability.
The two are often packaged together to offer homeowners a comprehensive policy for their homes and belongings.
Is hazard the same as mortgage insurance?
No, it’s not. Hazard insurance is part of a home policy and helps protect the structure of homes. In contrast, mortgage insurance helps protect the lender if mortgage payments are late.
Do mortgage lenders require hazard insurance?
When qualifying for a mortgage, you’re usually required to have an amount of hazard insurance coverage under your homeowners' insurance policy.
A lender may require you to have additional hazard coverages, such as floods, earthquakes, or landslides, depending on the risk of natural disasters in your area.
Every location and lender has different requirements. Therefore, these factors are considered when shopping for a mortgage.
Can you shop around for hazard insurance?
Yes, comparing different hazard and homeowners insurance policies will help you get the best possible deal for your specific needs.
Is hazard insurance tax-deductible?
Assuming you’re covering your primary home, hazard insurance generally isn’t tax-deductible. However, if you buy hazard insurance for a rental, you may be able to deduct those premiums from your taxes.
Hazard insurance cost
Hazard insurance costs vary depending on several factors, including where you live and your credit score. Additionally, the policy details, such as the deductibles and policy limits, will determine the overall cost.
In summary, the following factors affect the cost of hazard insurance.
- Your location
- Type of building
- Coverage required
- Deductibles and limits
- Previous claims history
Because hazard insurance can be especially expensive in certain areas, many mortgage lenders offer an escrow account, splitting the cost of an annual premium into monthly payments.
Hazard insurance quote
Your home is your most valuable investment, and failure to insure it can cause substantial financial issues in the event of theft or damage.
Pitsas Insurances offers tailor-made homeowners insurance policies to protect your house and belongings.
Why insure your home with us?
- Low excess rates
- Special offers for holiday homes
- Tailor-made insurance packages
- Clear terms and conditions
- Comprehensive contracts
- Additional coverages available
To find out more about what we can offer you, see here.
To receive a hassle-free quote, see here.