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What’s the Difference Between Hazard and Homeowners Insurance?

Hazard insurance covers the structure of a home. It’s similar to home insurance, but not quite the same thing.

Damaged property

Hazard insurance, a part of a homeowners insurance policy, covers the home’s physical structure from covered perils. Lenders such as mortgage companies and banks can require you to get hazard insurance when they lend you money to purchase a house. While hazard insurance and homeowners insurance are connected, they’re not the same thing.

This article covers the following:

How are Hazard Insurance and Home Insurance Different?

Hazard insurance is the part of a home insurance policy that protects the physical structure of the home against specific perils. A homeowners insurance policy consists of hazard insurance plus other forms of coverage: personal property protection, liability, and loss of use.

In short, hazard insurance only covers damages to the actual home. Homeowners insurance, on the other hand, includes hazard insurance and additional coverage for your property and liability.

What is Hazard Insurance?

Hazard insurance is a portion of homeowners insurance that covers the house’s structure against covered damage. This includes the roofing, walls and ceilings. Built-in appliances such as faucets, boilers, and water heaters are also covered under hazard insurance.

There are a variety of homeowners insurance policy types depending on the range of home insurance you want. Mortgage brokers are usually only interested in HO-1 level coverage, due to it solely covering the physical structure of the home. HO-1 home insurance policies only cover the following basic named perils:

  • Fire and lightning
  • Hail and windstorm
  • Explosions
  • Damage from aircraft
  • Vehicular damage (Unless cause by policyholder)
  • Vandalism and theft
  • Riot and civil disturbance

HO-1 policies are rarely sold now, since they often only cover the above perils with no extra coverage for any other events that can damage your house. They often provide little or no coverage for personal belongings in the home. HO-2, HO-3, and HO-5 policies provide basic HO-1 coverage, plus increasing protection for extra perils such as damage from falling rocks, accidental water, freezing, or electrical damage. They also cover your personal property and liability, among other things, which HO-1 policies don’t. An HO-3 policy is the most common home insurance policy in America.

What perils an insurer does and does not cover under their definition of hazard insurance can vary based on the insurer and the policy type. If the house is in an area where a named peril is a higher risk, it may come with extra stipulations. For example, home insurance companies may not cover a wildfire in an area prone to fires if the home’s roof is built with wood shingles.

What is Hazard Insurance on a Mortgage?

Mortgage companies can require hazard insurance from their mortgage holders to protect their investment – the structure of the home. Lenders aren’t so concerned with your belongings and your liability, so they don’t require insurance for that. Hazard insurance covers perils that can destroy the home and leave the lender without collateral to collect on.

If the peril is excluded, the mortgage company may still require you to have hazard insurance for it. For example, Hurricane damage is not covered by standard homeowners insurance policies. However, mortgage companies often require homes in states along the East Coast have hurricane insurance as part of their hazard insurance due to the high risk of hurricanes.

Other common hazard insurance exclusions are:

  • Earthquake
  • Flood
  • Sump pump failure
  • Sewer backup

Damage due to normal wear and tear is also not covered under hazard insurance. It covers for accidental damage, not for improper maintenance.

A homeowner is usually required to buy a year’s worth of hazard insurance when escrow ends. Escrow is a financial account set up by your mortgage broker that is used to pay a home’s periodic real estate taxes and your home insurance costs. As such, your monthly home insurance premium will be built into your monthly mortgage payment. Your initial home insurance premium is set for 12 months when escrow closes, then is recalculated based on current insurance cost facts at the beginning of the next 12-month period.

While hazard insurance is required by mortgage companies, it should not be confused with mortgage insurance. Mortgage insurance protects the lender in the event of you defaulting on your home loan. Banks will often require hazard insurance if they’re giving you a home loan, or if a house is being offered as collateral on a loan.

How Much Does Hazard Insurance Cost?

What you pay for hazard insurance depends primarily on where you live. Every region has their own unique hazards, and it costs more to insure a home in an area with a high risk of disasters.

For example, disaster prone states like Louisiana, Texas, Florida, and Oklahoma have the highest average home insurance rates in the country. On the other side, states with relatively mild climates like Oregon, Utah, Idaho, and Nevada have the lowest average home insurance rates.

The cost of hazard insurance also depends on several other rate factors, including:

  • The construction style and replacement cost of the house
  • Policy limit and deductibles
  • Your credit score and claim history

What is Homeowners Insurance?

Home insurance covers you, your belongings, and your home. Your home’s actual structure is covered by hazard insurance, which is part of a larger home insurance policy. Other parts of an HO-3 homeowner’s policy include:

  • Property protection: This coverage protects the belongings in your home such as your clothing, electronics, furniture, and household appliances.
  • Liability: Should you be sued due to a bodily injury on your property or property damage caused by you or your family, liability covers your defense costs and court awards.
  • Medical payments: If someone is injured on your property, your homeowners insurance provides no-fault medical coverage that allows the injured party to send their medical bills directly to your insurer.
  • Loss of use coverage: If your home endures enough damage due to a covered peril to render it unlivable, loss of use coverage will help you relocate while it is rebuilt or repaired, as well as cover excess costs.

 

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