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What Is Hazard Insurance and How Is It Different From Home Insurance?

Hazard insurance covers the structure of your home, and mortgage lenders often require it as a condition of your home loan.

Damaged property

Hazard insurance is the part of a homeowners insurance policy that protects your home’s physical structure. It’s also called “dwelling coverage,” and mortgage lenders often require you to have it as a condition of your home loan. We go over what hazard insurance covers, whether you need it, how it relates to your mortgage and how much it costs.

What is hazard insurance?

Hazard insurance policies protect your house’s structure if it is damaged. This includes parts of your home like:

  • Walls, ceiling and floors.
  • Built-in appliances such as faucets, boilers and water heaters.

Mortgage lenders may require you to buy hazard insurance, but hazard insurance is not a standalone policy. It is most often part of a homeowners insurance policy, where it is usually referred to as dwelling coverage.

Mortgage lenders usually only require HO-1-level coverage, which is a home insurance policy type that covers the physical structure of the home. HO-1 home insurance policies 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
  • Volcanic eruption

However HO-1 policies are rarely sold due to their limited protection. You’re more likely to find an HO-2, HO-3 or HO-5 policy, which include additional protections. HO-3 policies are the most common homeowners insurance policy in the U.S., and where most people will find hazard insurance.

The perils included under hazard insurance coverage can vary based on the insurer and the policy type. For example, home insurance companies may not cover wildfires in high-risk areas if the home’s roof is built with wood shingles.

How are hazard insurance and home insurance different?

Hazard insurance is the subsection of a home insurance policy that protects the physical structure of your home from covered perils, but home insurance policies include other coverages as well. For example, standard homeowners insurance coverage include personal property coverage, personal liability protection and loss of use protection.

The table below outlines the coverage in a standard HO-3 homeowners policy, only one of which is required by mortgage lenders.

Hazard insurance requirements on a mortgage
Coverage Required by lenders? What it covers
Hazard insurance (dwelling coverage) Yes The structure of your home.
Personal property No Your belongings.
Personal liability No Costs if you’re found responsible injury to someone or damage to their property, including lawsuits.
Loss of use No Increased living expenses if you temporarily cannot stay in your home due to a loss.

To learn more about what a standard homeowners insurance policy covers, see our article on home insurance basics.

How much does hazard insurance cost?

Hazard insurance cannot be purchased on its own, so we gathered rates for a standard HO-3 policy, as that’s where most people will get hazard insurance. We found that hazard insurance as part of a home insurance policy can range from $1,038 a year for $150,000 of coverage, up to $2,092 a year for $450,000 of coverage.

how hazard insurance amount affects home insurance rates Note: Average rates are based on non-binding estimates provided by Quadrant Information Services. Your rates may vary.

What you pay for hazard insurance depends primarily on where you live. Every region has its own unique hazards, and it costs more to insure homes in areas with high disaster risk.

For example, states like Louisiana, Texas, Florida and Oklahoma have the highest average home insurance rates in the country, largely because they are prone to natural disasters. Conversely, 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 homeowners insurance rate factors, including:

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

How hazard insurance works with your mortgage

Mortgage companies often require hazard insurance from their mortgage holders to protect their investment – the structure of the home. Because mortgage lenders only invest in your home, they don’t require personal property or personal liability protection.

Why do lenders require hazard insurance?

If you have a mortgage, the physical structure of your house acts as the collateral for that loan. If that collateral is damaged, the mortgage company’s investment loses value, which is why mortgage companies have an interest in protecting the homes they give loans on.

If a peril is excluded by your home insurance, your mortgage company may still require you to have hazard insurance for it. For example, earthquakes are not covered by standard homeowners insurance policies, but if you live in a high-risk area, your mortgage lender may require you to buy a separate earthquake insurance policy.

There are several other hazards typically excluded from standard HO-3 coverage:

  • Flood
  • Neglect
  • Sewer backup

Hazard insurance 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.

Hazard insurance and escrow

It is common for mortgage lenders to set up escrow for homeowners. Escrow is a savings account that holds the funds which go toward your mortgage payment, home insurance premium and real estate taxes. Payments into escrow occur once a month.

The main function of escrow is to simplify the payment process for folks financing a home and break up the payments over a 12-month period so they are more manageable. Escrow allows homebuyers to make one monthly payment that covers their mortgage payment, home insurance premium and property taxes. In this way, your homeowners insurance premium can be looped into the mortgage payment.

Condo hazard insurance

If your homeowners association, or HOA, master insurance policy doesn’t cover the interior structure of your unit, such as the floors, walls and ceiling, mortgage lenders may require that you have hazard insurance for the interior of your unit.

Your homeowners association will have a master insurance policy that insures the building and shared spaces. However, there may be interior parts of your unit that the master policy doesn’t cover. Most condo owners will find their hazard insurance included within their HO-6 policy, which is the standard property insurance coverage for condos. For more information about the types of condo insurance and what it covers, see our condo insurance basics.

Methodology

In order to calculate cost of hazard insurance, we gathered quotes for an HO-3 homeowners insurance policy. The policy specifications were as follows:

  • Dwelling coverage: $150,000, $250,000, $350,000 and $450,000
  • Other structures coverage: 15% of dwelling coverage
  • Personal property coverage: 50% of dwelling coverage
  • Loss of use coverage: 20% of dwelling coverage
  • $100,000 personal liability
  • $500 deductible

The sample home was in Illinois and built in 1965. Illinois was used because it has about average insurance rates in the U.S., and its insurance market resembles the national insurance market. We collected quotes from Allstate, American Family, Country Financial, Erie, Farmers, State Farm, Travelers and USAA for every ZIP code in Illinois.

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