Hazard Insurance Guide

If you’re planning to opt for a mortgage, you must know about hazard insurance.

Why? 

Because before you can officially close on your mortgage, you will be obliged to pay closing costs and fulfill certain lender requirements, one of them being purchasing hazard insurance for the property. 

As the mortgagee has a financial interest in the property, they would like to ensure that it’s protected against natural hazards. If your house gets damaged by a covered hazard or burgled, your acquired hazard coverage will compensate for the loss. 

In a nutshell, hazard insurance is a major component of a homeowner’s insurance that covers one’s home. Usually referred to as dwelling coverage, it’s not a standalone policy but rather a part of your overall homeowner’s coverage policy that encompasses insurance for your liability coverage and personal belongings. 

Remember, home hazard insurance can keep your home safe against natural hazards. So, without any more delays, let’s get started and understand the hazard insurance meaning, how this coverage works, and other essential details.  

What we'll cover in this guide: 

• What Is Hazard Insurance?
• How Hazard Insurance Works
• Hazard Insurance and Mortgages 
• What Does Hazard Insurance Cover?
• What Does Hazard Insurance on Your Home Doesn’t Cover?
• Homeowners Insurance vs. Hazard Insurance: Are They the Same? 
• How Much Does Hazard Insurance Cost?
• Separate Hazard Insurance Policies
• FAQs

What Is Hazard Insurance?

According to the Consumer Financial Protection Bureau (CFPB), hazard insurance is a term generally used to define the coverages for certain risks offered by homeowner’s insurance. Put simply, hazard insurance covers the structure of your property from covered hazards (also called perils), such as fire, wind, lightning, hail, severe storms, vandalism, and other natural events. As long as the particular event is covered within the insurance policy, the property owner will be reimbursed for any damages incurred. 

Hazard insurance is usually a prerequisite for a mortgage. Some states might even ask you to acquire a natural hazard disclosure report (NHD) to see whether your property resides in a natural hazard zone. 

Generally, the property owner will be obligated to pay for a year’s worth of premiums at the time of buying the insurance. However, this may vary depending on the specifics of the policy. Once you purchase the coverage, you’ll pay a deductible (the amount a property owner is responsible for covering on a claim). Once the deductible is met, the insurer will pay for expenses up to the policy coverage limits. 

In addition, hazard insurance is often used interchangeably with catastrophe insurance. Though both policies provide coverage for significant natural disasters, they’re fundamentally different.

If you ask someone in the insurance industry, “What is hazard insurance?” they’ll tell you it’s a component of a homeowner’s policy that safeguards the structure of the home. On the other hand, catastrophe insurance is a separate, standalone insurance policy that covers specific kinds of disasters, including man-made ones. 

Some of the best hazard insurance companies include USAA, Allstate, Nationwide, and Chubb.

Note: In general, home hazard insurance refers only to the coverage of the roof, structure, and foundation of your property. Although in some insurance policies, it can be extended to personal belongings and furnishings as well.

How Hazard Insurance Works

As explained earlier, commercial hazard insurance shields a property owner against damage caused by natural perils. It’s typically a part of a homeowners insurance policy that safeguards the main dwelling as well as other nearby structures, for example, a garage. To be well-prepared for every incident, property owners must ensure that common hazards are covered in their homeowner’s insurance policy package. 

Generally, hazard insurance policies are renewable and written for one year.

Bear in mind, the amount of commercial hazard insurance needed depends entirely on what it would cost to replace the property in case of a total loss. Please note that this amount may differ significantly from the property's value listed on the current real estate market. 

Property owners are usually given the option to beef up the hazard coverage of their insurance policy. After all, it’s better to pay the upfront fees of extra commercial hazard insurance than to cope with the medical and legal issues out of pocket. 

Hazard Insurance and Mortgages 

If you have or are planning to take out a mortgage on your property, you will most probably be mandated to hold a homeowners insurance policy. Strictly speaking, what they want you to have is commercial hazard insurance because this component of a homeowners insurance policy is directly associated with the home structure itself, in contrast to a loss of use, personal liability, or personal property coverage.

In addition, lenders require hazard insurance on a mortgage since they have a financial interest in the property. They would like to ensure that it’s protected against natural hazards. If your house gets damaged by a covered hazard or burgled, you can tap into the acquired hazard coverage to receive compensation. 

Generally, obtaining a standard homeowners insurance policy will fulfill the lender's requirements. Nevertheless, the level of protection needed will depend on the local municipality laws as well as other special considerations. For instance, if you own an expensive property in a natural hazard zone or a high-risk area, the lender may ask for additional coverage.

What Does Hazard Insurance Cover?

Hazard insurance coverage protects your property in the event of damage by a covered hazard or peril. 

Named Perils

Most home insurance policies include named perils coverage. It will pay for the following damages:

1. Lightning or fire
2. Hail damage or windstorm
3. Theft
4. Smoke
5. Weight of ice, snow, or sleet
6. Explosion
7. Civil commotion or riot
8. Vehicles
9. Vandalism
10. Aircraft
11. Falling objects
12. Volcanic eruption
13. Freezing
14. Accidental overflow or discharge of water or steam
15. Accidental and sudden damage from burning, tearing apart, cracking, or bulging
16. Accidental and sudden damage from a synthetically produced electrical current

Open Perils

On the other hand, open perils coverage ensures your property is covered against everything but the particular hazards mentioned in the policy, including: 

1. Flood damage 
2. Earthquakes
3. Mechanical breakdown
4. Wear and tear
5. Intentional loss
6. Mold
7. Corrosion
8. Foundation cracking from tree roots
9. Infestation of birds, insects, rodents, and vermin
10. Natural settling, shrinking, cracking, expanding of the foundation

What Does Hazard Insurance on Your Home Doesn’t Cover?

Damages to personal belongings or injuries sustained on your property aren’t covered by hazard insurance. Keeping this in mind, if a natural disaster occurs, home hazard insurance only safeguards your property’s structure from a peril listed in your policy. This may involve the property’s structure, fences, sheds or garages, along with some belongings inside the property if a covered hazard damages them. 

Note: Floods and earthquakes are not covered by hazard insurance coverage, but your coverage provider may provide separate earthquake or flood insurance that you could buy as a home insurance add-on or a separate policy.

Homeowners Insurance vs. Hazard Insurance: Are They the Same? 

Short answer: yes and no. 

Hazard insurance refers to a major component of a homeowner’s insurance that essentially covers one’s home structure as well as additional structures on the property (e.g. garage, shed, fence, etc.) in case they get damaged by a covered peril. Usually referred to as dwelling coverage, it’s not a standalone policy; it’s a part of your overall homeowner’s coverage. 

On the other hand, homeowners insurance policy already includes hazard insurance. It also protects built-in appliances, like the water heater and plumbing. 

As far as a homeowners insurance policy is concerned, it generally encompasses the following areas of coverage:

• Hazard insurance — to safeguard the structure of your property against covered natural hazards or perils. 
• Liability insurance — to guard you against complaints or lawsuits that might be filed against you in case somebody gets injured on your property.
• Personal property insurance — to protect your personal belongings (like TV, clothing, etc.) against covered hazards.
• Additional living expenses (ALE) insurance — to compensate you for temporary lodging in case a covered hazard damages your property.

Please note the types and categories of coverage you have — as well as the hazards covered by them — depend on the kind of policy you carry.

How Much Does Hazard Insurance Cost?

Remember, property owners don’t have to pay for hazard insurance as a separate, standalone policy. Rather, it’s incorporated into their broader homeowners policy. You will be astounded to learn that hazard coverage makes up the majority of your home policy. It costs on average $1,250/year. 

Additionally, please note that the overall hazard insurance cost will depend on factors related to the property itself, including:

• Location of the property
• Property’s square footage
• The type of home structure
• Property’s age
• Roof type of the property (slate, metal, or composite shingle)
• Your credit history
• Claims history
• Supplementary security features (e.g. alarm system)

In addition, the insurance providers determine rates based on how likely you’re to file a claim. For instance, if you live in a high-risk area, a natural hazard zone, or your property is older and more prone to damage, you will probably have to pay higher rates. It’s partially because the property might get severely damaged by peril, so it will cost more to repair. 

To help you understand the average cost of hazard insurance, we have listed some of the major hazard insurance companies along with their average costs below:

Average Hazard Insurance Cost

Do You Have to Pay Hazard Insurance on Your Mortgage?

Nearly every lender will require you to take out homeowners insurance coverage. Based on the risk factors related to a particular property, you may also be obligated to add home hazard insurance to your mortgage. 

Geico hazard insurance, USAA home insurance, and Allstate are popular companies to consider in case you require hazard insurance on a mortgage. 

Is Hazard Insurance and PMI the Same Thing?

No, they aren’t. 

PMI or private mortgage insurance is usually required if you provide a down payment of less than 20% of a property purchase. The aim is to protect the mortgage lender if a homeowner defaults on the loan payments. 

On the other hand, home hazard insurance safeguards property owners from personal losses on their homes. If you are still wondering, “What is home hazard insurance?” please go through the first sections of this guide for an elaborate explanation. 

Separate Hazard Insurance Policies

In some regions, certain weather or natural conditions aren’t included in the home hazard insurance of homeowners coverage. Typically, it’s because that particular region or area is susceptible to those events, and it’s costly for the hazard insurance company to incorporate them in a standard policy. 

For instance, a beach-facing property in Florida can be prone to tropical storms and hurricanes. In contrast, properties in California situated near fault lines may have a greater chance of experiencing earthquakes.

Therefore, property owners who live in a high-risk area or a natural hazard zone usually need to buy a separate home hazard insurance policy to sufficiently safeguard their property against common perils. Some of these separate hazard insurance policies include flood insurance policy, earthquake policy, or coverage that protect against landslides and sinkholes, as standard homeowner’s insurance hazard coverage rarely covers such earth movements. 

Geico hazard insurance, USAA home insurance, and Allstate are popular companies to consider for these policies. 

Home Hazard Insurance Guide: Conclusion 

If you are planning to opt for a mortgage, you should be aware of hazard insurance. 

As the mortgagee has a financial interest in the property, they would like to ensure that it's protected against natural hazards. So, if your house is damaged by a covered hazard or burgled, you can tap into the acquired hazard coverage to receive compensation for the loss. 

So, that’s all for today — we would love it if this blog post on Home hazard insurance helped you in any way possible. Let us know if you have any queries and if there is more to add!