Purchasing a home is a huge step, and with it comes a slew of new responsibilities and decisions. Among those is homeowners insurance: Which provider is the best, which policy do you need, and which coverage options should you look for? Your mortgage loan provider will likely require you to have certain coverage levels and add-ons, and one term you may see again and again is “hazard insurance.” If you’re a first-time homebuyer, this term may be unfamiliar; read on to learn more about what hazard insurance is and what it does and does not cover.
What Is Hazard Insurance?
Contrary to popular belief, hazard insurance is not its own type of insurance. Instead, it’s often included as a subsection of your larger homeowners insurance policy. Homeowners insurance covers a broad range of potential damages, and each are grouped into their own type of coverage, of which hazard insurance is one.
Hazard insurance is specifically designed to cover damages to your home’s structure caused by natural events like severe weather, earthquakes, or fires. It’s important to realize that only the home’s structure is covered — personal belongings damaged by natural events, for instance, do not fall under the umbrella of hazard insurance. That’s where other aspects of your homeowners insurance come into play, covering you against damages or losses to your home and personal property not caused by natural disasters, or for things like medical bills and legal bills if someone is injured at your home.
What Is Covered by Hazard Insurance?
As you select and build out your homeowners insurance, look out for the wording of your policy. There are two ways your policy may define what’s covered under hazard insurance: open perils or named perils. Open perils provides coverage for any reason that has not been excluded, while named perils only covers the perils or hazards listed in the policy.
If you have the option to choose, open perils is typically the better option. An open perils policy inherently covers more risks, giving you protection for everything except the exceptions listed on your policy. If you have a named perils policy that doesn’t specifically list backed-up sewers, for instance, you’re out of luck if you run into that particular issue. That said, because open perils policies are more comprehensive, they are also more expensive.
Regardless of which type of policy you choose, it’s fairly standard for hazard insurance to cover a handful of events.
Hazard insurance covers:
- Civil unrest or riot
- Damage caused by the weight of snow, sleet, or ice
- Falling objects
- Fire and smoke
- Power surges
- Water damage caused by a household appliance or burst pipe
- Wind and windstorms
Some natural disasters are not covered by homeowners insurance, and you need to purchase coverage separately if they’re common in your area.
Hazard insurance does not cover:
- Landslides and mudslides
How Much Hazard Insurance Do I Need?
If you’re financing a home, your lender will likely require you to include hazard insurance, but it’s a good idea to include it regardless. A few hundred dollars per year is a drop in the bucket compared to a devastating loss from a fire or other event.
And these events happen more often than you think — hazard damages are some of the most common homeowners insurance claims, and the Insurance Information Institute found that fire and lightning damages are the largest claims on average.
If you’re wondering how much hazard insurance you will need, first calculate how much it would cost to replace your home if it were to be completely destroyed. The amount should include the cost of your home and the current market value and replacement cost of all of your home’s contents. Hazard insurance is probably already included as you build your homeowners insurance policy, but if you have any questions about adjusting the amount of coverage, an insurance agent is a great resource.
As with all kinds of insurance, the higher your coverage levels, the higher your premium. However, don’t sell yourself short on the coverage you need. The best way to find affordable coverage is to compare quotes from multiple companies; try starting with our favorite homeowners insurance companies.
Which type of reimbursement should I pick?
Deciding on the the level of hazard insurance coverage is just one piece of the puzzle when building your policy; it’s also important to understand how you’ll be reimbursed should the worst happen. As you search for a good hazard insurance policy, keep an eye out for these types of reimbursement:
- Actual Cash Value will reimburse you for your home’s replacement cost at the time of the loss, minus any depreciation. It’s not the best choice unless you live in a booming real estate area — if property values drop, the amount (based on the home’s value at the time) could be less than you’ll need to repair or rebuild your home.
- Extended Replacement Cost Value or Replacement Cost Value are safer choices. Replacement cost value is straightforward. It covers the cost of the repair or replacement of damaged property with similar materials and quality without depreciation being deducted. Extended replacement cost adds a set percentage above your policy’s limits to protect you against sudden increases in repair and rebuilding costs. And if a widespread natural disaster happens, it’s likely that repair and rebuilding costs will rise.
- Learn more about the different types of homeowners insurance policies and endorsements.
- Get quotes from the top insurers in our review of the best homeowners insurance companies.
- Find out how to calculate the amount of homeowners insurance you really need.