Hazard insurance for homeowners: what it is and who needs it

What is hazard insurance?

If you have homeowners insurance, you already have hazard insurance. This phrase just refers to a specific section of your policy.

The term hazard insurance is mainly used by financial lenders and mortgage companies; it is less so used by insurance professionals. While it can be confusing, it helps to think about hazard insurance in terms of financial interest. If you have a mortgage on your home, your mortgage company has an insurable interest in it. This means that they could lose money if your home is destroyed in a fire or hurricane. To protect their investment, most mortgage companies require you to have home insurance.

Hazard insurance refers to the part of your home insurance policy that financially protects your mortgage lender — that is, coverage for your home’s physical structure. Think about it this way. Your mortgage lender has no financial interest in your couch, television or a potential liability lawsuit if someone is injured on your property. They do, however, want to make sure that the physical structure of your home is insured. If your mortgage company requires you to have hazard insurance, you are in the clear if you already have a home insurance policy.

In contrast, home insurance is primarily designed to protect the homeowner’s financial interest in their property. Home insurance includes other coverage types like personal property, liability and additional living expenses if your home is uninhabitable due to covered damage (like a fire).

What does hazard insurance cover?

Hazard insurance generally provides coverage for 16 major perils, including:

• Fire or smoke
• Lightning
• Hail and windstorms
• Theft
• Vandalism
• Damage from vehicles
• Damage from aircraft
• Explosions
• Riots and civil commotion
• Volcanic eruption
• Accidental discharge or overflow of water or steam
• Falling objects
• Freezing of household systems like AC or heating
• Sudden and accidental damage from an electrical current
• Weight of ice, snow or sleet

Exactly what hazard insurance covers will depend on your policy type. Some types of hazard insurance protect your home on an open-peril basis. This means that you are financially covered for any kind of loss except what is specifically excluded from your policy. Other policies protect your home on a named-peril basis, meaning you are only covered if your home is damaged by a peril listed in your policy. You can see how different policy types compare in the table below. Keep in mind that the HO-3 is the most popular policy type.

Hazard insurance exclusions

Even with an open-peril policy, you are not financially protected from everything. Exclusions will depend on your policy and provider, but in general, you can expect that your home’s physical structure won’t protected from:

• Floods
• Earthquakes
• General home maintenance
• Pests
• Mold
• Intentional losses
• Neglect
• Nuclear hazards
• Government action
• War

How much is hazard insurance?

Hazard insurance is part of a homeowners policy. It cannot be purchased separately, so it’s difficult to pinpoint how much hazard insurance costs. For reference, the average cost of homeowners insurance in the U.S. is $2,304 per year for $300,000 in dwelling coverage, according to rates from Quadrant Information Services. However, the amount you pay will vary based on the coverage types and policy limits you select, as well as your state and ZIP code.

You’ll want to shop around for homeowners insurance that includes hazard coverage tailored to your needs and your mortgage company’s requirements. If you live in a state prone to tornadoes, for example, you’d likely want to ensure your policy doesn’t exclude tornado damage. Similarly, if you live along the Gulf Coast, it would help to ensure you have adequate windstorm coverage for hurricanes.

Hazard insurance is included as part of your policy’s dwelling coverage, which typically makes up more than 90 percent of your homeowners premium cost. It is listed as “Coverage A” or “dwelling coverage” on your declarations page. This is one of the most important parts of home insurance, as the policy limits for the other types of included coverage are usually calculated as a percentage of your dwelling coverage.

How much hazard insurance do you need?

You want to make sure you have enough hazard insurance, or dwelling coverage, to rebuild your home in the event of a total loss. You should also consider purchasing enough personal property coverage to cover all your belongings. Many insurance companies have a valuation tool to determine your dwelling coverage amount. For your belongings, it helps to create an inventory to determine your coverage needs.

You’ll also want to make sure your deductible is affordable for your budget. In some parts of the country, hurricane windstorm coverage may require a separate deductible, which is typically 1 to 5 percent of the insured value of your home. Even though a higher deductible can lower your premium, it should never be more than what you can comfortably afford to pay at the drop of a hat.

Who should consider hazard insurance?

If you have a mortgage or loan on your home, you may not have a say in whether or not you need hazard insurance. Most mortgage companies require homeowners to have hazard insurance. But even if you own your home outright, most insurance experts recommend getting home insurance.

Homeowners in states that face a high risk of natural disasters are more likely to file a hazard insurance claim. That also means some of the hazards that are common in your area may be restricted or excluded from standard policies, though, since the risk of payout is much higher for the insurance company.

It is important to note which types of hazards are specifically excluded in your policy, especially if you live in a disaster-prone state. For example, if earthquakes or floods have occurred in the past, you will want to either purchase a supplemental policy for coverage or ask your insurer if endorsements are available to cover that type of disaster.

Frequently asked questions