When you buy a new home through financing with a mortgage, your lender requires you to include a certain amount of coverage called hazard insurance. Hazard insurance isn’t a separate type of insurance from homeowners coverage; instead, it’s just one of many parts of a robust home insurance policy.
Before a bank will offer you a mortgage, you’ll need to meet a list of requirements given to you by your lender. Chief among these requirements is proof of a hazard insurance policy. Hazard insurance acts to protect your home—and thus the bank’s investment—from unexpected catastrophes or disasters such as fire, windstorms, vandalism and other threats.
Let’s walk through what’s usually covered under the hazards portion of your home insurance policy (and how to shop for affordable home insurance coverage).
What is hazard insurance?
Hazard insurance covers the structure of your home. In other words, it’s the dwelling coverage portion of your home insurance policy. Banks and other mortgage lenders require hazard insurance when you buy your house, but it’s usually included as part of a regular home insurance policy that covers more than that.
|Hazard Coverage||Homeowners Insurance|
|What does it cover?||Pays for damage to your home’s structure||Covers the damage to the structure of your home, liability expenses and personal property losses|
|When can I use it?||If the home is damaged by a covered peril||When your home or belongings are damaged or stolen or if you are found legally responsible for another’s injury or property damage|
|How do you buy it?||As part of a regular homeowners insurance policy||Buying a policy from an insurance company or through a third-party broker|
By contrast, homeowners insurance is a generally comprehensive policy that covers damage or losses to your property and personal liability if you’re responsible for an accident.
Home insurance is typically called a “package policy” due to the different types of property and liability coverage it contains. There are several different types of home insurance policies that offer different levels of protection, ranging from HO-1 policies to HO-8. For renters insurance, an HO-4 policy is standard. For single-family homeowners, an HO-3 home insurance policy is the typical purchase.
What does hazard insurance cover?
What’s covered under the hazard insurance portion of the policy largely depends on your specific home insurance. It’ll either include named perils coverage, which offers protection against 16 different types of catastrophic events, or open perils coverage. Open perils coverage is different in that it covers all causes of damage or loss with the exception of specific perils listed in the policy.
Standard home insurance policies offer open perils coverage for your dwelling/structures and named perils coverage for personal property.
|Named Perils||Open Perils|
|1. Fire or lightning||1. Earth movement/earthquake|
|2. Windstorms or hail||2. Ordinance of law|
|3. Explosions||3. Certain types of water damage|
|4. Riots or civil disturbances||4. Power failure|
|5. Damages caused by aircraft||5. Neglect|
|6. Damage caused by vehicles||6. War|
|7. Smoke||7. Nuclear hazards|
|8. Volcanoes||8. Intentional loss|
|9. Vandalism or malicious mischief||9. Government actions|
|10. Theft||10. Dog bite liability for certain breeds|
|11. Falling objects||11. Home-based businesses|
|12. Weight of snow, ice and sleet||12. Pest damage and removal|
|13. Accidental discharge or overflow of water|
|14. Sudden tearing or cracking of appliances|
|16. Power surges|
Hazard Insurance and Mortgage Requirements
Mortgage lenders only require you to purchase insurance to cover the structure of your home, but a regular home insurance policy will fulfill the mortgage insurance requirements. In fact, most insurance companies won’t actually sell you a standalone hazard insurance policy.
Mortgage requirements aren’t the only reason to buy homeowners insurance, however. Home insurance can help cover the costs of rebuilding your home after a catastrophe, and it helps you recover losses associated with personal property. You’ll also want to look at buying additional insurance coverage, such as flood insurance, because most insurance policies don’t include it.
When you sit down to shop for home insurance, it’s recommended to purchase a replacement cash value policy (RCV policy) rather than an actual cash value policy (ACV policy). The difference between the two is simple:
- RCV policies will pay the full cost of replacement or rebuilding, regardless of the age or condition of your home prior to filing your claim.
- Actual cash value policies, by contrast, take depreciation into account and may not pay out the full cost of replacement.
For example, let’s say a named peril demolishes your home. It may cost $250,000 to rebuild your home due to increased labor and supply costs, but your ACV policy only covers you up to $225,000. That puts you on the hook for the remaining costs. An RCV policy that covers full replacement will pay out the full amount, minus your deductible.
Understand Your Homeowners Insurance Policy with the Help of SelectQuote
If you still have questions about your home insurance coverage—including the hazard insurance portion of your policy—or want to shop for a more robust level of insurance, SelectQuote can help.
We can walk you through your existing coverage limits and help you shop for more affordable rates. We compare quotes from several companies at once to help find you the best deal. We shop. You save. Let SelectQuote help you find your new home insurance policy today.