what is hazard insurance

What Is Hazard Insurance? A Detailed Guide

Buying a new home is an exciting as well as an exhausting process. The joy of the prospect of finding a new abode for yourself and your family comes along with a variety of decisions that need to be made. This usually involves dealing with several new and complex-sounding terms. So, what is hazard insurance for homeowners? Hazard insurance is one such, frequently used term, which is likely to pop up when you are in the process of arranging a mortgage on your property. In most cases, it is mandatory to have Hazard insurance on the property to be able to get a loan for it. 

What Is Hazard Insurance?

It is important to understand what is Hazard insurance before you set out to buy a property. It won’t come as a surprise if you already have Hazard insurance and are simply not familiar with the term. This could just stress you out unnecessarily. To make it easier to understand what we exactly mean by Hazard insurance, let’s define Hazard insurance. 

Hazard Insurance Definition

what is hazard insurance

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Hazard insurance can be defined as that particular segment of your homeowner’s insurance policy that takes into account the protection of the actual structure of the house from any damage that might be caused by perils or hazards that have been covered under your homeowner’s policy. 

Hazard insurance is also sometimes called dwelling coverage and it provides a cover for the protection of only the structure of the house. The structure of the house includes the bricks, window panes, shingles, and doors, thus, the house itself. 

What Is Covered Under Hazard Insurance?

The perils against which your hazard insurance covers you are specific. Conveniently, the policy itself will detail the hazards against which the policy will provide coverage on your property. They usually include the below mentioned 16 perils:

  • Hail or windstorm
  • Aircraft
  • Lightning or fire
  • Smoke
  • Theft
  • Explosion
  • Vandalism
  • Weight of ice, snow, or sleet
  • Civil commotion or riot
  • Falling objects
  • Freezing of pipelines
  • Overflow or accidental discharge of steam or water 
  • Volcanic eruption
  • Accidental and sudden cracking, burning, tearing, or bulging
  • Accidental and sudden damage from an electric current generated artificially 
  • Vehicles

Types Of Hazard Insurance

The next question that comes to mind what is hazard insurance types. Primarily, there are two types of hazard insurance that determine the scope and extent of the coverage you get under your policy. These are named Peril Policies and Open Peril Policies. 

Peril Policies: The Peril Policies, which cover the HO-1 as well as HO-2 policies, are the lesser expensive kind among the two. They cover the house, detached structures of the house, and personal belongings from the hazards which have been mentioned specifically in the policy. The HO-1 policy includes 10 of the above-mentioned perils while HO-2 policies are more expansive and cover all of the 16 perils mentioned above. 

Open Peril Policies: The Open Peril Policies, which include the HO-3 and HO-5 policies cover the house from all the perils apart from the ones which have been specifically excluded by your insurer. The difference between the HO-3 and HO-5 policies is that HO-3 covers the named perils for personal property while the HO-5 policy covers your personal property with the open perils.

According to the findings by Insurance Information Institute, Lightning, Fire, and Hail Damage are the most expensive hazard insurance perils and Hail and Wind are the most frequent claims of hazard insurance.

What Is Not Covered In Hazard Insurance?

what is hazard insurance

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Damages caused by mudslides, landslides, sinkholes, and floods are typically not covered under Hazard insurance by most insurers. Besides these events, Hazard insurance also does not cover:

  1. Personal property of the owner of the home that can be picked up and moved inside the house. Contents coverage is your go-to for insurance on these things.
  2.  If a guest is hurt in your house, then medical insurance for the same is also not covered under Hazard insurance.
  3. If the hurt guest sues you for the same, then the Personal liability expenses for the same cannot be claimed by the owner under Hazard insurance.
  4. If for any given reason, you need to stay at a hotel as your home is unavailable temporarily, then the loss of use of your house is not covered under Hazard Insurance. 

However, certain insurers may provide you with earthquake or flood endorsement that can be added to your homeowner’s policy by paying an additional premium. If this facility is not provided by your insurer, you can buy a standalone insurance policy through some other company.

Hazard Insurance For Homeowners 

As a standard practice, you won’t have to get a separate Hazard insurance policy for your house. It will be a part of your homeowner’s policy. Therefore, before making such a huge investment in purchasing a house, it is important to understand what is Hazard insurance for homeowners. Even if the mortgage doesn’t require you to get Hazard insurance, it is still advisable to get Hazard insurance for your home, which may be your single biggest investment ever.

How Much Hazard Insurance Is Needed For Your Home

If your home is exposed to only risks of hail, lightning, and fire, you would need only a minimum amount of Hazard insurance. But if the home is located in an area that is susceptible to other, costlier perils like mudslide, earthquakes, and floods, you will have to add separate, specific hazard insurance cover so as to have an adequate amount of insurance. 

Commonly, people make a faulty judgment that only that amount of Hazard insurance is needed on your house that covers for the loan taken. Actually, your hazard insurance amount should be enough to cover the complete rebuilding cost of your home, assessed at the current market prices for construction and labor. The rebuilding cost for your house would depend on a number of factors, including the local construction cost, the square foot area of your home, the build and age of your home, the credit score of the homeowner, etc.

Homeowners may also decide to beef up the hazard insurance cover for their property. It is actually better to pay the cost of extra hazard insurance directly than having to deal with the medical as well as legal expenses out of your own pocket. If severe weather events or peril resulting situations are a common feature for the area where your home is located, it makes sense to have an adequate amount of Hazard insurance cover for your property.

When Is Hazard Insurance Needed?

Having Hazard insurance is not a legal requirement. But this does not mean that you have absolute freedom to decide if you want to get it for your house or not. As an example, if you are looking to get a mortgage on your home, your lender may ask you to get a certain amount of Hazard insurance. This is because the lender secures the mortgage against the property’s value. If the property faces damage due to something like fire or accident, it would lead to a reduction in the value of the property. To safeguard themselves from such a loss, the lenders ask for hazard insurance on your property. 

Also Read: Why Universal Life Insurance Is Important?

How Much Does Hazard Insurance Cost?

what is hazard insurance

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The Hazard insurance cover cost for your property depends on a number of factors, which determine how much you would have to spend to safeguard your property against perils. These factors include:

  • The materials used to construct the house
  • The age and value determined for your house
  • The deductible amount
  • The limit of the policy
  • The fact that your property has a security feature or not
  • The value of every owned thing, both inside as well as outside the property

The rates on a property are set on the likelihood of a claim being made on it. Among the several factors considered while deciding the cost of hazard insurance, the age of the property is the most important one. This is because older homes are more susceptible to damage and hence they increase the chance of a claim. Security features on your property, like burglar alarms, also are an important factor while deciding the insurance cost. The better the security system on the property, the lower will be the premium charged on its insurance cover. 

Importance Of Hazard Insurance For Your Home

Purchasing a property is a crucial, often a one-time investment you make in your entire life. Most likely, you are going to invest a huge amount of your savings and income in your dream home. Since it is a financial as well as an emotional investment of a large magnitude, you would not want to take an irrecoverable risk on your decision.  

Here, Hazard insurance comes to your rescue. Mostly, buyers go for a mortgage on their property, and here too, Hazard insurance is a required feature for the lender. Hazard insurance also safeguards you from the risks posed by nature, which are beyond the scope of your control. It gives you the assurance that even in case of a natural peril or an accident of certain kinds, you will be able to recover the costs incurred on your property. 

For more finance-related concepts you can have a look at the FinanceShed, and stay tuned for more updates.