Is Hazard Insurance The Same As Homeowners Insurance?

Is hazard insurance the same as homeowners insurance? This is a common question for new and existing homeowners alike. This article will discuss the difference between homeowners’ insurance and hazard insurance.

New homeowners need to understand the difference to ensure they have proper proof of insurance for their mortgage, whereas homeowners who have paid off their mortgage still need to understand what is covered under an existing policy and what they might have to pay out of pocket.

In my experience, purchasing a home comes with so many complicated legal terms and conditions that new buyers can easily be overwhelmed, and even existing homeowners are looking for ways to save money. So, what is the difference between hazard insurance and homeowners’ insurance, and when do you need them?

Most homeowners’ insurance policies are sold as package deals, broken down into multiple sections, each of which applies to potential issues with your home.

Contents of Homeowners Insurance Policies

The contents of your homeowner’s insurance policy are broken down into different sections designated by numbers or letters such as “Coverage A” or “Section 1”.

The insurance industry also uses technical terms for different homeowners insurance policy types, like “HO-2” for the basic liability coverage and “HO-3” as the special form for personal property coverage.

Each designated section refers to one aspect of your coverage. Hazard insurance, sometimes called dwelling insurance, is the primary section.

What is Hazard Insurance?

Hazard insurance provides insurance coverage if the structure of your home is destroyed. This is the thing your lender will ask you to carry while you are paying off your house.

The easiest way to understand it is to think of a cake (who doesn’t like cake?): Hazard insurance is the cake, plain and simple, but there are lots of extra coverage options you can get akin to frosting, sprinkles, and candles.

Hazard insurance is the primary portion of any homeowner’s insurance policy, and it can help offset repairs following a natural disaster, theft, or other damage.

If you own a home outright and have no existing mortgage, you are not legally required to carry homeowners’ insurance or hazard insurance, though it is still a sound investment unless you can afford to rebuild your entire home out of pocket after an unexpected catastrophe.

However, your lender will likely require hazard insurance if you have a mortgage. Standard homeowners’ policies typically fulfill any lender requirement for hazard insurance.

When you purchase a home, the mortgage terms will outline the required coverage level. Mortgage lenders require homeowners to carry insurance for the duration of their mortgage.

Once you have hazard insurance, you might think you can rest easily, with all your potential risk covered. I learned the hard way that this isn’t true. I have since learned that it is better to know what is covered and what isn’t before you file a claim.

So, what is covered with hazard insurance?

Hazard insurance covers your primary residence and your physical structure and permanent fixtures. Each policy contains specific language dictating which types of events are covered and which parts of the house are covered.

Yes, this can sound complicated, but reviewing your policy can help to sort things out when damage does occur. Let’s look at some example of events:

• Hail damage
• Lightning damage
• Explosions because of gas leaks
• Structural damage if a vehicle runs into your home
• Damage because of a fallen tree
• Vandalism
• Theft

Physical Structure

Now you know what events are covered, but what about the second part: the parts of the house? Hazard insurance provides coverage for the physical structure of your home, such as your:

• Roof
• Foundation
• Windows
• Walls
• Doors

Fixtures

It also applies to some parts inside your home, like any permanent fixtures. Some examples include:

• Built-in appliances
• Attached structures like decks or garages
• Heating
• Plumbing
• Electrical

*Unless otherwise noted, damages refer only to the primary dwelling.

What Doesn’t Hazard Insurance Cover?

While your policy will explain what all is covered, it should also list what isn’t. Think back to the cake; any extras you want like frosting or sprinkles need to be added on top of the cake.

Sticking with the cake metaphor, the good news is that most insurance providers will let you buy extras for your cake. Let’s look at what those extra might be.

Additional Structures

If you have other structures on your property, like a garage, shed, or barn, your hazard insurance policy will not apply to them.

Don’t overlook the potential cost of replacing an entire barn, detached garage, or shed. Thankfully, you can add these items pretty easily. You just need additional structure coverage. Many policies provide coverage for additional structures at a rate of ten percent of the limits for hazard insurance.

Personal Property

Hazard insurance applies to the physical structure of your primary residence and its fixtures, but it does not apply to your goods. And who doesn’t want their personal goods protected?

For that, you need personal property coverage.

Personal property coverage protects your personal belongings or the items within your home, something particularly important if you don’t live in a gated community with round the clock surveillance, and, in my experience, even if you do. Usually, your coverage is a percentage of your hazard insurance amount. The average rate is fifty percent.

Loss of Use

Hazard insurance might cover repairing your home after damages, but if you cannot live in your home while the repairs are being made, hazard insurance will not cover the cost. Let’s say you own a home in California and have basic hazard insurance. A fire comes through your town and burns part of your home.

Your hazard insurance would cover the cost of repairs, but it wouldn’t cover the cost of living while those repairs are happening.

Don’t let that happen to you. Consider loss of use coverage.

To be clear, with loss of use coverage, you will likely need to have some way of paying for hotels and food out of pocket (or on a credit card) up front, but your insurance will reimburse you so long as you keep all your receipts.

The wording in each policy will differ but generally includes expenses such as:

• Housing,
• Meals,
• Storage for household goods.

Personal Liability

Hazard insurance does not apply to any costs incurred because of injury on your property.

Let’s say you hosted a dinner party and your friend had an accident, resulting in an emergency room visit and sprained wrist. Without personal liability coverage, your friend can sue you for their emergency room visit and medical costs. They can also take you to court for pain and suffering.

If you get sued and don’t have personal liability coverage, you might be on the hook for those costs out of pocket.

If you have personal liability coverage, it would apply to damages and legal defenses. Each policy will differ in terms of what is protected and excluded but each policy will give you peace of mind.

Medical

This section works in tandem with personal liability and provides medical coverage for anyone injured on your property accidentally. This only applies to medical expenses, not legal defense, lawsuits, or damages.

With additional medical coverage, you won’t have to pay out of pocket for the emergency room visit mentioned above.

This coverage can also be purchased as part of your homeowner’s insurance policy.

If you or someone else who resides on your property is injured, this section of your homeowner’s policy will not cover medical expenses. Many policies will also exclude coverage for any business activities you hold on your property.

Fire, Flood, or Other Natural Disaster Insurance

If you live in an area prone to natural disasters, you might be required to purchase additional coverage. Under certain circumstances, your hazard insurance might not apply to specific natural disasters common in your area.

According to the Insurance Information Institute, fire and lightning damage represent the most severe insurance claims over the last four years, totaling an average of over $77,000 per claim.

Many parts of California, for example, require fire insurance which may or may not be available through your existing homeowner’s insurance provider. Property along the coast or tornado-prone areas might also be required to hold additional natural disaster coverage by mortgage lenders and banks.

These specific policies, unlike hazard insurance, can be purchased individually. However, much like the hazard insurance section of your homeowner’s policy, these apply to the primary dwelling on your property.

Still, you can add this additional coverage to a loss of use addition and know that should your kitchen and bathroom burn down, your policy will cover the repairs and the hotels.

According to US News, companies like State Farm provide multiple additional options like water backup coverage, service line coverage, and identity theft protection.

Water Backup

Most hazard insurance will not cover water backup resulting from a backed-up drain or an issue with your sump pump.

Infestations

Pests can cause structural damage, but most insurance providers do not cover infestation from invasive pests like rodents or termites under a hazard insurance policy.

Wear and Tear

All insurance policies are designed to help with unexpected or sudden accidents, not regular maintenance. As such, your hazard insurance policy is unlikely to cover things like a 20-year-old roof suddenly leaking.

How Much is Hazard Insurance?

Growing up I remember hearing “How much is this gonna cost me?” in a low, growling voice. As an adult, that line still makes its way through the house, but in my voice. Even the thought of doubling the shed gave pause as I did the math on how much more that might cost in insurance.

The cost of hazard insurance depends on many factors, but it should generally provide enough coverage to rebuild your home if destroyed. This might be different from the amount you paid for your home, but it should represent the estimate for rebuilding the square footage of your home.

Some factors that influence the cost include:

• The square footage of your property
• When the house was built
• What type of roof it has
• Where you are located

Roof Type

The type of roof you have influences your risks and, therefore, your costs. Sometimes it might be worth it to replace your roof (when the time comes) with something more expensive up front, but cheaper long term as far as your homeowners insurance is concerned.

For example, asphalt shingles are less flammable than wooden roofs and, therefore, might contribute to a lower hazard insurance premium, especially if you live in an area prone to wildfires.

Location

The cost of hazard insurance will vary based on your location. Coastal properties or properties located near forests have higher risks of natural disasters, so prices are typically higher.

Similarly, crime rates in your ZIP code influence the cost of your homeowner’s insurance policy if you have personal property coverage because crime rates determine the likelihood of theft in your area.

According to Forbes, the average policy for a home valued at $350,000 is $1,582 per year.

If you have paid off your home or you paid for your home in cash (lucky you), you may not be required to carry homeowners insurance, but that does not mean there are not still scenarios where it could prove helpful.

As hazard insurance is just one of many coverage sections outlined in a homeowners insurance policy, buyers who have paid off their mortgage or who purchased their home in cash can still benefit from a homeowners insurance policy with a lower hazard insurance coverage limit but increased coverage limits for things like:

• Personal Property
• Loss of Use
• Personal Liability

Even those who own their home outright are still at risk for unexpected catastrophes, and unless you are comfortable paying to rebuild your home entirely out of pocket at a moment’s notice, maintaining some level of insurance coverage can be an invaluable investment.

Even if there are no issues with your primary residence, a homeowners insurance policy can provide coverage if someone injures themselves or there is theft and loss of personal property.