This coverage for the physical structure of your home is a standard part of a homeowners insurance policy.
Imagine you have an offer on the house you want and are ready to close. Your lender suddenly demands proof of hazard insurance.
What should you do? You knew that you would have to get homeowners insurance as part of the mortgage closing process, but hazard insurance too?
What is hazard insurance?
Homeowners insurance policies include hazard insurance. This covers the damage to your home from hail, fire and other natural disasters. This type of insurance is usually not available on its own.
Lenders often use the term “hazard insurance”, which refers to coverage for your home’s structure. Lenders want to protect their investment so they may require that you have certain coverage before they approve your mortgage.
Is hazard insurance equivalent to homeowners insurance?
It’s not exactly. You can also call it dwelling insurance, but that is only one part of a homeowner’s policy. Standard home insurance covers you for other things such as personal property and living expenses in the event that your home is damaged.
Although the coverages aren’t exactly the same, a homeowners policy will typically satisfy your lender’s requirement for hazard insurance.
What is hazard insurance?
Your home’s damage from fire, water pipes burst or heavy snow is covered by your hazard insurance. The majority of homeowners policies cover your home structure on an “open perils” (or “all risk” basis. This means that every cause of damage to your home is covered, unless otherwise stated in your policy.
A standard homeowners policy won’t usually cover the following:
- Normal wear and tear.
- Backup sewer.
- Nuclear action or war.
- Intentional damage done by the homeowner.
Some perils may allow you to purchase additional coverage. For example, you can buy flood insurance through the federal government or other private providers (and depending on where you live, your lender might require it).
A limited form of hazard insurance is available for homeowners that covers their home on a “named-perils” basis. These policies cover your home only for the perils listed on the policy. These perils could include:
- Lightning or fire.
- Hailstorms or windstorms
- Aircraft damage.
- Vehicles can cause damage.
- Volcanic eruptions.
- Falling objects
- Weight of ice, snow, or sleet
- Water overflow from appliances, plumbing and air conditioning can cause water to leakage.
- These same household systems can be frozen.
- Sudden damage caused by a power surge
- Sudden tearing or cracking of hot water systems, steam systems, air conditioning, or fire-protective systems.
Hazard insurance coverage generally comes with a deductible, or an amount you’re responsible for in case of damage. Let’s say you have a $1,000 deductible. Your insurance company would pay $4,000 if a storm causes $5,000 damage to your roof. You would cover the remainder.
What amount of hazard insurance are you required?
You will need enough hazard coverage to pay the entire cost of rebuilding your house if it is destroyed.
This figure, also known as the “replacement price” of your house, is not necessarily the same as the property’s purchase price. It is based on the cost of materials and labor required to restore the house to pre-disaster conditions. The correct amount can be estimated by your insurer.
These optional coverages can give you a little more peace of mind.
- Cost of extended replacement. Your replacement cost coverage may not be sufficient if a hurricane or snowstorm causes extensive damage to a region. If costs rise beyond your coverage limit, extended replacement cost coverage can provide a buffer. It will pay out up to 10% to 50% more than the coverage limit.
- Guaranteed replacement cost. Guaranteed replacement cost coverage goes one step further. It covers as much as you need above your dwelling coverage limit in order to rebuild your house.
What is the cost of hazard insurance?
Hazard insurance is included in your homeowners insurance coverage. It doesn’t cost any extra if you have a standard policy. The average cost of homeowners insurance is $1,585 per year, according to NerdWallet’s rate analysis, but your cost may differ depending on where you live, the size of your home and how much coverage you need.
Adding coverage for perils not typically included in a homeowners policy — such as flooding or earthquakes — will cost extra.
How to obtain hazard insurance
Most major insurers offer standard homeowners policies that include hazard insurance. You can look for home insurance quotes online or ask an independent insurance agent to shop around on your behalf. It’s smart to compare quotes from at most three insurance companies in order to get the best price.