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Considering Hazard Insurance? Here’s What You Need to Know

October 27 2018
by Leisl Bailey

Woman standing with head in hands in front of burned house.

Obtaining hazard insurance is an essential part of becoming a homeowner.

Yes, hazard insurance is an additional expense, but it’s one that’s well worth it. It offers two key things: financial protection in case of a terrible emergency and consistent peace of mind.

What is hazard insurance?

Hazard insurance is a home insurance policy that fills in the gaps that regular homeowners insurance leaves behind.

Hazard insurance complements your existing homeowners insurance policy. Hazard insurance is not a separate policy. In the real estate and insurance industries, most people refer to hazard insurance clauses as “riders.” This means that they “ride along with” the rest of the contract.

These riders are so important because homeowners insurance only covers the physical structure of your home, its fixtures, and its contents from a finite number of risks. These risks could be things like hailstones, high winds, thunderstorms, or fires. The coverage provided to the actual structure of your home is known as dwelling coverage.

If any other sort of hazard damages your home, you would be out of luck without the additional added coverage. With a typical “bare bones” homeowners insurance policy, it would likely be completely up to you to rebuild your home—usually out of pocket. Not a good situation to be stuck in.

Why do you need hazard insurance?

Unlike owning and driving a car, you can technically own a home without having homeowners insurance. However, many mortgage lenders will not approve an applicant for financing if they do not have hazard insurance clauses included in their current homeowners’ insurance policy.

Are you planning on purchasing your new home with cash and are okay with taking a risk? Then technically you do not need to purchase homeowners insurance with hazard insurance clauses. But, if you take the more common route of obtaining financing to pay for your new home, then you will need to follow the stipulations of your lender.

You might have heard the term “hazard insurance on a home loan.” This does not mean actual insurance on the mortgage itself, but rather a requirement that the home have the hazard coverage before the lender will grant a loan.

What does hazard insurance cover?

Hazard insurance covers the things that regular homeowners insurance policies do not.

Many people might consider hazard insurance to have one purpose: to cover risks that are unlikely to happen. But if and when they do, the associated costs are often significant, even devastating.

Here are a few of the common types of hazard insurance clauses that you can add on to your homeowners’ insurance policy:

  • Civil unrest and riots
  • Damage from fire and smoke
  • Damage from the weight of snow, sleet, or ice
  • Earthquakes
  • Explosions
  • Falling objects (be it tree branches, pianos from second windows, or even space rocks)
  • Hail
  • Power surges
  • Theft
  • Vandalism
  • Water damage from household appliances or bursting pipes
  • Wildfires
  • Wind damage

This is by no means a comprehensive list. Some hazard insurance policies may protect only against specifically named damages like those listed above, or they can cover all forms of damage except those specifically excluded.

Before purchasing your policy, check in with your insurance company about the specific clauses and coverage types that they recommend.

Exceptions to Hazard Insurance

There are certain areas and events that insurance companies will consider “exceptions” to hazard insurance.

A great example of this is obtaining hazard insurance to cover the costs of damages from earthquakes or wildfires in the state of California. These two types of disasters seem to occur commonly in the state. So, they don’t fall under the “low risk/high expense” parameters of the insurance. It’s similar to adding coverage for hurricane damage if you live in Florida.

While coverage for these natural disasters is available in these areas, the extra coverage is going to be significantly more expensive due to the higher likelihood of a claim. You might also run into this problem when purchasing a new policy if you have filed a claim before.

How much does hazard insurance cost?

How much you pay for homeowners insurance and the hazard inclusions heavily depends on a variety of factors.

These factors include the assessed value of your property, the limits of your particular policy, the state you live in, and the amount of your deductible. Your homeowners’ insurance policy will clearly state your deductible.

So, in the unfortunate situation that you need to file a claim, it is all you will pay.

The average costs of homeowners insurance and hazard insurance inclusions can vary greatly by state and property worth.

How are hazard insurance claims typically handled?

Insurance agents usually handle claims made against hazard insurance the same way they would handle any other homeowners insurance claim.

First, they check your contract to ensure that you paid for the proper inclusion. Then, the company sends an inspector to assess the damage and validity of the claim.

Then they can disburse the needed funds to help you rebuild your personal property and, in some cases, for additional living expenses.

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