Hazard insurance is the term mortgage lenders use for the dwelling coverage in a homeowners insurance policy. Dwelling coverage pays to repair or rebuild your home's structure after a covered loss such as fire, windstorm, hail, or lightning. You do not buy hazard insurance as a separate policy, so a standard homeowners insurance policy already includes the hazard coverage your lender asks for.
What does homeowners insurance cover?
A standard homeowners policy pairs dwelling coverage with protection for other structures, personal property, loss of use, and liability. Dwelling coverage is the part lenders call hazard insurance.
A standard homeowners insurance policy typically covers the following:
- Dwelling coverage: This is the foundation of your policy. It protects the physical structure of your home and attached structures such as garages. Coverage extends to damages caused by perils such as fire, hail damage, theft, and more.
- Other structures coverage: This can provide coverage for detached structures such as a fence, detached garage, or shed.
- Personal property coverage: This coverage protects your personal belongings, including furniture, electronics, clothing, jewelry, and other personal possessions. If these items are damaged, lost, or stolen due to a covered peril, your insurance policy will help reimburse you for their value. The payout depends on whether the policy settles losses at replacement cost or actual cash value.
- Liability coverage: This aspect of your homeowners insurance policy protects you financially if someone is injured on your property or if you accidentally cause damage to someone else's property. It helps cover legal defense costs, as well as potential settlements.
- Additional living expenses (ALE): If your home becomes uninhabitable due to a covered loss, ALE coverage provides financial assistance for temporary housing, meals, and other living expenses until your home is repaired.
Common exclusions in homeowners insurance
While homeowners insurance offers broad protection, it typically excludes certain types of damage or losses. These exclusions may include:
- Natural disasters, such as earthquakes or floods. If you live in a region prone to any of these events, you may want to consider exploring additional coverage options. Talk to your insurance agent to see what coverages are available to you.
- Gradual deterioration of your home or belongings caused by day-to-day use (otherwise known as wear and tear) is typically not covered by a standard homeowners insurance policy.
What is hazard insurance?
Hazard insurance is the lender's term for the dwelling coverage in a homeowners policy, which pays for physical damage to your house. Your policy lists the same protection as dwelling coverage. Lenders ask for "hazard insurance" because the house secures the loan and they want proof that the structure is protected.
Typical perils covered by hazard insurance include1:
- Fire
- Windstorms
- Hail
- Lightning
Openly's standard homeowners policy for primary and secondary homes is written on an HO-5 form, which covers the dwelling on an open-perils basis: any cause of loss the policy does not specifically exclude is covered. See how HO-3 and HO-5 policies differ.
Why mortgage lenders require hazard insurance
Mortgage lenders typically require homeowners to maintain hazard insurance as a condition of most mortgages. The home serves as collateral for the loan. Lenders ask for proof of coverage before closing and are added to the policy as the mortgagee, so first-time buyers should make sure to have documentation.
Requirements differ by lender and loan program. A lender also may set flood insurance requirements based on location. If you have any questions about specific requirements or coverage amounts, it's best to contact your mortgage lender directly.
Comparing hazard insurance and homeowners insurance
Hazard insurance is one part of homeowners insurance. The table shows how the two terms line up.
|
Hazard insurance (lender term) |
Homeowners insurance (the policy) |
|
|---|---|---|
|
What it is |
The dwelling coverage in a homeowners policy. |
A package policy with several coverages. |
|
What it pays for |
Repair or rebuilding of the structure after a covered loss. |
The structure, other structures, belongings, extra living costs, and liability. |
|
Sold separately? |
Not under that name. A homeowners policy includes it. |
This is the policy you buy. |
|
Who uses the term |
Mortgage lenders and loan documents. |
Insurers, agents, and your declarations page. |
What affects the cost of homeowners insurance?
Another key distinction between hazard insurance and homeowners insurance lies in their requirements and costs:
Hazard insurance is often mandated by mortgage lenders and is typically included as part of a homeowners insurance policy. While it's a separate component, the cost is usually bundled into the annual premium.
The cost of homeowners insurance varies based on several factors. See how home insurance is calculated.
- Location: Premiums can rise with exposure to hurricanes, wildfire, or hail.
- Home value: Rebuild cost, not market value, sets the dwelling limit and the premium tied to it.
- Coverage limits: The amount of coverage you choose will influence your premium.
- Deductibles: A higher deductible can lower the premium and raise what you pay out of pocket after a loss.
How a claim for dwelling damage works
You report the damage, document it, and an adjuster measures the loss against your dwelling coverage:
- Contact your agent or insurer to report the damage once it is safe.
- Protect the home from further damage, such as tarping a damaged roof, and keep receipts.
- Provide necessary documentation, such as photos and repair estimates.
- Work with the insurance adjuster to assess the damage and determine the payout, minus your deductible.
For homeowners insurance claims involving personal property, liability, or additional living expenses, expect to document each item or expense, such as a home inventory of damaged belongings or receipts for hotel stays.
Common misconceptions about hazard insurance and homeowners insurance
Dispelling common myths and clarifying the scope of coverage can help homeowners make informed choices about their insurance policies and avoid costly surprises.
Misunderstanding coverage
A second policy bought for "hazard insurance" duplicates the dwelling coverage already in a standard homeowners policy.
Policy overlaps and gaps
While homeowners insurance offers more comprehensive coverage, it is important to closely review your specific policy to identify any potential coverage gaps or exclusions. Certain natural disasters, high-value possessions, and specific types of damage may require additional policies or endorsements.
Impact of misconceptions on claims
A homeowner who assumes flood damage is covered learns otherwise at claim time. Check the exclusions before a loss.
Dropping coverage after the mortgage is paid off
The lender requirement ends when the loan does. The exposure continues: structural repairs and injury claims from visitors become your cost. We recommend speaking with your insurance agent if you have any questions or concerns about your policy.
How to choose the right insurance coverage for your home
.Start with your home's risks and your rebuild cost, then compare carriers on coverage terms before price, then re-evaluate how much coverage your home needs.
Assessing your home’s risk factors
It's important to evaluate your home's unique characteristics and potential risks to determine the right level of insurance coverage. These features change the coverage a home needs:
- Location: Homes in areas prone to hurricanes, earthquakes, floods, or wildfires face higher risks of damage or destruction. High crime rates can also impact your home's risk factor.
- Age and construction: Older homes with older electrical, plumbing, or roofing may face stricter underwriting at some carriers. The type of materials used in the construction of your home can also affect the dwelling's vulnerability to different hazards. For instance, wood-frame houses are more susceptible to fire damage.
- High-value items: Policies set special limits for jewelry, art, and collectibles, and a scheduled personal property endorsement insures each item individually.
Comparing insurance providers
Once you've assessed your home's unique risk factors, compare carriers on these points:
- Review the coverage options offered by each provider, starting with the dwelling limit and how the policy settles a loss, at replacement cost or actual cash value. Guaranteed replacement cost pays the full cost to rebuild, even above the dwelling limit when you choose to rebuild.
- Compare premium costs for the same dwelling limit and deductible.
- Consider the impact of different deductible amounts on your premium and out-of-pocket expenses.
- Read reviews and consider the reputation of the insurance provider for claims handling and customer satisfaction.
- Research the financial stability of the insurance provider through financial strength ratings. Check ratings from organizations like A.M. Best.
Consulting with insurance professionals
An independent agent quotes several carriers side by side and checks that your dwelling limit matches your rebuild cost.
Check your dwelling limit with an independent agent
A homeowners policy already includes the hazard coverage your lender asks for. What remains is whether your dwelling limit matches the cost to rebuild. Ask your independent agent to review the number and to check whether Openly is available for your home. If you do not have an agent, search home insurance agents near me with Openly's Find an Agent tool, then ask for a quote for home insurance.
* We provide this information to help you understand insurance. Any coverage is subject to the terms of your policy. Please refer to your policy and declarations page for complete terms, conditions and coverage details.
1 Troy Segel. “What Is Hazard Insurance for Homeowners? How Coverage Works.” Investopedia.com. Updated 11 June 2024. Accessed 7 August 2024. https://www.investopedia.com/terms/h/hazardinsurance.asp
