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Hazard Insurance. What and Why?

This is a quick guide that will try and explain what hazard insurance is. In this guide, you will learn everything you need to know about hazard insurance, how it works and why you need it. Just briefly, below are some of the sub-sections that this post will cover:

  • What is hazard insurance?
  • How does hazard insurance work?
  • How hazard insurance covers your home
  • What is hazard insurance on a mortgage or home loan?
  • Hazard insurance vs homeowners insurance
  • What hazard insurance covers and what it does not cover
  • Frequently asked questions

So if you are looking forward to getting hazard insurance for your home, this post will be essential to you. Let’s kick it off.

What Is Hazard Insurance – Hazard Insurance Definition

Hazard insurance is a coverage that aims to insure only your home’s structure. That means that a homeowners insurance policy will cover any other kind of damages in your home. Additionally, it is important to note that hazard insurance isn’t meant to cover injuries caused by you or guests. A liability insurance cover will cover such injuries if you have. 

Hazard insurance is perhaps so common because lenders require it when borrowers apply for any mortgage loan. Additionally, lenders insist on hazard insurance because it is the only homeowners insurance policy directly related to the structure of your home. And because of this, most people now think that hazard insurance is purchased separately, which is not true. Therefore, don’t panic when your lender asks for a hazard insurance policy because a homeowners insurance policy will meet their requirements.

That said, homeowners insurance policies usually include hazard insurance. However, make sure that hazard insurance is included in your homeowners insurance cover unless you want to foot the bill to repair all damages caused by natural disasters that hazard insurance policy would cover.

How Does Hazard Insurance Work?

Hazard insurance will cover your home for any damages caused by lightning, fires, rainstorms, hail and wind, among other natural calamities. It is always included in the homeowners insurance policy, which protects your home and the nearby areas. To prepare for any eventuality, you must make sure that your insurance policy covers the common hazards.

The amount you’ll have to pay for your hazard insurance depends a lot on the property value. That means that the amount paid will vary from one homeowner to another. Also, it is essential to note that the amount you will pay for your hazard insurance depends on how much it will cost to put up the home in the event of a calamity.

Most homeowners today beef up their coverages. Ideally, it’s a better idea to pay your hazard insurance premiums upfront than to wait and cover the losses out-of-pocket. And because there have been adverse weather conditions in some American regions (particularly states suffering from wildfires, tornados and hurricanes), securing hazard insurance early enough would be a good bet.

How Hazard Insurance Covers Your Home

As I said earlier, the amount you will pay for hazard insurance policy depends on the provisions included in your policy. There are three options you can choose from – the Actual Cash Value (ACV), Replacement Cost Value (RCV), and an Extended Replacement Cost (ERC). Let’s look at each of these options to know their provisions, shall we?

1. Actual Cash Value

Actual Cash Value reimburses you for any structure damaged, but only after the depreciation of the damaged structure has been calculated and deducted.

Assuming that your home got burnt, ACV will compensate you for the rebuild of your home, but after your home’s depreciation has been calculated and the amount deducted from what should be reimbursed.

Ideally, ACV prevents you from tackling such losses out-of-pocket. This is why you should only consider Actual Cash Value as a last resort and not your priority option in a hazard insurance policy.

2. Replacement Cost Value

I would say that Replacement Cost is generally safer than the Actual Cash Value option. This is especially true if you reside in an area with a lot of natural calamity occurrences. Unlike the Replacement Cost policy will cover the rebuild or repair of your home, but the insurer will not deduct the depreciation before reimbursement.

Premiums are no doubt higher in this policy than under the ACV. However, there’s value under the Replacement Cost policy because it doesn’t deduct the depreciation value of your home before they can compensate you.

3. Extended Replacement Cost

Extended Replacement Cost is an upgrade of the previous policies. It covers the replacement and repair costs, but there’s also a guarantee that the insurer will also cover any increase in the costs. The amount most insurers will cover range between 25 to 50 percent. That means that if you reside in an area prone to natural calamities, Extended Replacement Cost could be a good bet. Finally, lenders will not require an Extended Replacement policy, but it is essential.

What Is Hazard Insurance on a Mortgage or Home Loan?

When planning to take out a home loan or a mortgage, it’s a no brainer that you should possess homeowners coverage. However, you don’t have to purchase it separately as part of hazard coverage relates directly to homeowners insurance.  

If you purchase a general homeowners insurance policy, you’ll be satisfying your providers’ needs. But, the level of protection will vary depending on your state laws. Sadly, your coverage provider may require additional coverage if you have an expensive property in a high-risk area.

Hazard Insurance Vs. Homeowners Insurance – Is There a Difference?

Many people don’t understand the difference between these two. Hazard coverage isn’t a separate policy, but a portion of it related directly to the homeowners insurance. More often, hazard insurance will come in handy for damages should you experience a natural disaster.

The remaining portion of your homeowners policy will often protect you from losses, theft, or any other damage. Additionally, homeowners insurance will cover for medical bills should someone get injured at your house. Also, it will pay for legal bills if the victims sue you for their injuries.

Insuring your home can be overwhelming. For example, you need to be well-knowledgeable on the policy terms, costs, and coverage plans. Even more, your provider may ask you to secure hazard coverage, which sounds like an additional coverage to your homeowners policy. So it would be best if you’re well-informed on your policy terms.

That said, let’s go in-depth at both hazard and homeowners coverage to see who they are, services they provide coverage for, and why both are essential to secure your home.

What Hazard Insurance Covers and What It Does Not Cover

Now that you know what hazard insurance is, how it works and how it covers your home, it would be necessary to know what is included and what’s not under hazard insurance. Below are some of the eventualities that hazard insurance will cover:

  • Freezing of plumbing
  • Lightning
  • Windstorm
  • Hailstorms
  • Explosion
  • Riot or civil commotion
  • Volcanic eruption
  • Vehicles
  • Smoke
  • Vandalism
  • Theft
  • Falling objects
  • Snow weight,
  • Ice, or sleet
  • Discharge/ overflow of water
  • Fires
  • Aircraft

There are two categories of hazard insurance policy – named and open peril policies.

Named peril policies are a bit more expensive than the open peril policy. This is because the named peril will cover the replacement or repair of your home, plus your personal belongings also damaged as a result of the calamity.

On the contrary, open peril policies do not cover the damages or loss of your personal belongings. However, they do cover the replacement and repair of your home structures. That said, it would be a safer bet to go with the named peril policies if you don’t want to spend any coin when the worst happens.

According to The Insurance Information Institute, hailstorms, fires and lightning are some of the most common calamities, resulting in $45000 or more in claims.

Most insurance providers do not include earthquakes and floods in the hazard insurance policy. However, some providers will allow you to add the same in your homeowners insurance policy. If your insurance provider does not offer this option, get a standalone policy to cover you for the same.

Frequently Asked Questions

1. How Much Does Hazard Insurance Cost?

How much you pay for your policy will depend on factors such as coverage for additional living expenses, personal property insurance, and liability insurance. However, the hazard coverage factors will determine your monthly and annual premium rates. It’sIt’s also worth noting that these hazard factors aren’t limited to:

  • The age of your home
  • The construction materials
  • The value of your liabilities both inside and outside the property
  • The policy limit
  • The deductible amount.
  • Whether or not you installed security features in your home.

2. Do I Need Hazard Insurance if I Have Homeowners Insurance?

It depends. Hazard insurance is usually included in most homeowners insurance policies. If not, you will need to get hazard insurance. Also, hazard insurance isn’t an obligation or a legal requirement. So you can decide to go for it or skip it.

However, it would be a good idea to purchase hazard insurance, especially if you are one of those people who would like to take a mortgage loan to get a house. This is because most lenders will require a homeowners insurance policy to lend you a loan.

Bottom Line

Hazard insurance is critical, especially if you live in a high-risk area with lots of natural calamity cases. Also, hazard insurance, which is usually included in a homeowners insurance policy, will help you secure any mortgage loan to buy a home. I would recommend that you purchase a homeowners insurance policy that includes hazard insurance policy in it.

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