When you take out a mortgage on a house, lenders will often require you to buy hazard insurance to protect the home against unexpected damage or loss. This has led to the misconception that hazard insurance is somehow separate from homeowners insurance, but the differences between the two are negligible.
Hazard insurance is simply a reference to the coverage in your homeowners insurance policy that covers the structure of your home from perils Learn about what hazard insurance is, what it covers, and why it’s required by mortgage lenders.
Hazard insurance vs. homeowners insurance: What’s the difference?
Before extending you a mortgage, your lender will have a set of requirements that you’ll need to meet ahead of your closing date. One of these requirements is proof of a hazard insurance policy to protect the home (and the lender’s investment) from unexpected disasters, including fire, windstorms, and vandalism.
This often leaves the impression that hazard insurance and homeowners insurance are two different things, but they actually refer to the same thing. Hazard insurance refers to the part of your homeowners insurance policy that covers the structure of your home — aka your policy’s dwelling coverage.
What does it do?
Pays for damage to the structure of your home
Pays for damage to the structure of your home, personal property loss, and liability-related expenses
When can you use it?
If your home is damaged by a covered peril
If your home or belongings are damaged or stolen,
if you're legally responsible for someone else's injury or property damage
How do you get it?
By purchasing homeowners insurance
By applying for a policy through an insurance company or independent agent
Mortgage lenders often require “hazard insurance” — not homeowners insurance — because it only has a financial interest in your home itself. The part they’re not telling you is hazard insurance is not a separate insurance product — it’s just part of your overall home insurance policy package.
What is homeowners insurance?
Homeowners insurance is a financial protection policy that covers damage or loss to your property and your personal liability if you’re legally responsible for an accident. Since it is made up of several different types of property and liability coverages, home insurance is often referred to as a “package policy.”
There are several different types of homeowners insurance policies (HO-1 through HO-8) that provide different levels of protection for various property types and coverage needs. If you own a condo, you’ll get what’s referred to as an HO-6 condo insurance policy; if you’re a renter, you’ll get an HO-4 renters insurance policy; if you own a single-family home, you’ll get an HO-3 homeowners insurance policy.
Homeowners insurance coverages
A standard homeowners insurance policy is made up of six coverages. They also have their own distinct limit of liability, which is the maximum amount your insurance company will pay out in the event of a claim.
Dwelling coverage: Covers the cost of damage to the structure of your home and any attached structures.
Other structures coverage: Covers the cost of damage to structures that aren’t attached to your home, like a detached garage, shed, fence, or above-ground pool.
Personal property coverage: Covers the cost of personal property damage or theft. Applies to losses that occur on and off of your property.
Loss of use coverage: Covers the cost of temporary lodging, restaurant meals, and relocation expenses while your house is being repaired after a covered loss.
Personal liability coverage: Covers you from expensive lawsuits if you’re legally responsible for someone’s injury or damage to their property.
Medical payments coverage: Pays for a guests’ medical expenses, regardless of who is at fault.
Levels of coverage
The amount you’re reimbursed on a homeowners insurance claim for damage or loss to your home or personal property depends on which level of coverage you have in your policy. A standard homeowners insurance policy has two distinct coverage levels:
Actual cash value: This pays the depreciated value of your home or personal belongings if they’re stolen or damaged by a covered peril. Actual cash value is the cheapest level of coverage, but it also provides lower claim reimbursements.
Replacement cost value: Replacement cost covers the value of your home or personal belongings if they’re stolen or damaged without deducting depreciation from the claim payment. Replacement cost is more expensive than actual cash value, but provides larger claim reimbursements.
What is hazard insurance?
Hazard insurance refers to the section of your homeowners insurance policy that covers the structure of your home against covered perils. It’s also a term that some lenders use to refer to a homeowners insurance policy package.
Depending on what type of home insurance you have, the hazard insurance part of your policy will be covered by either named perils, which covers your property against the 16 perils listed in your policy; or open perils coverage, which covers all causes of damage or loss except the specific perils listed in your policy.
In a standard home insurance policy, your dwelling and other structures have open perils coverage, while your personal belongings have named perils coverage.
Fire or lightning
Windstorm and hail
Riot or civil commotion
Damage caused by aircraft
Damage caused by vehicles
Vandalism and malicious mischief
Weight of snow, ice, or sleet
Accidental discharge/overflow of water
Sudden tearing/cracking of appliances
Ordinance of law
Certain types of water damage
Dog bite liability for certain breeds
Pest damage and removal