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Hazard insurance is a term lenders use in reference to homeowners insurance that covers the home itself. It's not a standalone policy—it's part of your standard homeowners insurance policy and is often required at the time of purchasing a new property.
Hazard insurance is a way for a lender to protect the collateral on the loan they issued—your home, in this case. It generally only covers hazardous occurrences listed explicitly within the policy, so purchasers must be clear about their coverage and what is or is not covered by homeowners policies.
What Is Hazard Insurance?
The first time you hear of hazard insurance may be as you prepare to purchase a home. That's because lenders typically require a homeowners insurance policy is in place in order to protect their investment.
The bank or lender, in the interest of protecting the collateral on their loan, wants to make sure there is insurance specifically in place to guard against the types of hazards that could destroy the home. Hazard insurance is not required during a cash sale but it can help you protect yourself financially.
Businesses can also take out hazard insurance for the contents inside a building or even property like mobile equipment.
A standard homeowners insurance policy covers what it would cost to rebuild the house as-is today, also called replacement cost. Replacement cost may be different than what you paid for the home, as it is meant to take into account materials cost and not current market value.
What Does Hazard Insurance Cover?
Hazard insurance covers various types of hazards that may destroy your home.
These may include:
- Damage from storms like hail and lightning
- Fire and smoke
- Damage from nature such as falling tree limbs
- Break-ins that result in vandalism or theft
Insurance companies take into account common or likely hazards to insure against. Often, these are specially named as part of the insurance policy in a list of "named perils." Typically, the peril needs to be specifically named to receive coverage. Sometimes, a policyholder can add coverage for specific named perils that wouldn't otherwise be covered.
Homeowners who want to have broader coverage can opt for "open peril" policies. These tend to cover anything unless it is specifically excluded.
What Doesn't Hazard Insurance Cover?
One of the major threats that hazard insurance does not cover is flood damage. That's because distinct flood insurance policies are available—and perhaps even required—for homeowners in flood-prone areas. Making sure you have flood insurance when required is an important step when purchasing a home.
Floods aren't the only thing that's typically ignored by hazard insurance. Disasters like earthquakes, landslides and sinkholes typically don't fall under the scope of basic home insurance. Homeowners may be able to purchase an additional policy if they live somewhere prone to these events.
Maintenance incidents that are under the control of the homeowner also are not typically covered by insurance. That means if a sump pump fails and leaves a basement in 3 feet of water or a septic tank backs up and spills sewage into a house, insurance will not pay out.
Similarly, dog attacks may not be covered under homeowners insurance—depending on the breed of the dog. In some cases, liability protection can be used to cover expenses from a dog bite on your property.
Policies are also unlikely to pay for catastrophes like war or nuclear accidents.
How Much Does Hazard Insurance Cost?
There is no separate charge for hazard insurance—it is part of the premium you pay for homeowners insurance. The average cost of homeowners insurance in the United States in 2021 was $1,241.64, according to the latest data from the National Association of Insurance Commissioners.
Many different elements affect your homeowners insurance cost. One factor is the replacement cost of your home or what it would cost to rebuild your home today. Another is the cost to replace your belongings.
Another factor in deciding how much coverage you need as a homeowner is your net worth. Homeowners insurance protects you from being sued for your assets in a liability case after an accident or injury on your property.
You can often choose a balance of premium and deductible costs that work for you. A higher premium means your monthly or yearly costs are higher but you will pay less out of pocket in the event of a claim. A higher deductible means you pay less on premiums but will have a bigger cost when you file a claim for which you are responsible.
Hazard insurance is an inescapable cost for most homeowners, but there are ways to lower the expense. Maintaining a good credit score is key, as insurance companies in many states can use a credit-based insurance score to help decide your rates. Better credit can help you get better rates, so put the right foot forward before buying hazard insurance by maintaining good credit practices like low credit utilization and on-time payments.