Hazard insurance vs. homeowners insurance

Prior to closing on a home loan, your lender will require you to purchase hazard insurance to protect the property — and your lender’s investment — from certain hazards. But what they’re referencing is the coverage provided in a standard homeowners insurance policy.

Hazard insurance refers to the specific portion of your homeowners insurance policy that protects your home from perils covered in your policy. Your mortgage company wants to make sure that, at the very least, the structure of the home has adequate coverage against potential risks like fire, theft, or bad storms so that it can be rebuilt in the event of a total loss.

But as a homeowner with potentially hundreds of thousands of dollars worth of personal property and combined assets, you’ll want a comprehensive homeowners insurance policy that covers the replacement cost of your personal belongings, additional living expenses if you’re forced to relocate, and legal expenses if someone is injured in your home and sues. Your lender may only see to it that you have enough insurance to rebuild the home, but you should make sure you’re not simply settling for the bare minimum in coverage.

Is hazard insurance the same thing as homeowners insurance?

Yes, when your mortgage company tells you to get hazard insurance for your home, what they really mean is a homeowners insurance policy.

However, there are other types of insurance products — namely dwelling fire policies for landlords — that could qualify as sufficient coverage and secure you a home loan. But keep in mind that dwelling fire policies are only intended to protect the structure of the home against covered hazards. If the home is your primary residence, you’ll want a complete homeowners insurance policy.

What is homeowners insurance?

Homeowners insurance, in its most basic form, is coverage for your home, personal property and combined assets in the event your property is damaged, burglarized, or you’re held liable for an accident.

But there are actually eight different types of homeowners insurance coverage forms, and the different policy types vary in terms of how many perils are covered, insured property types, how you’re reimbursed for a claim, and whether you own or rent.

If you own a condo, you’ll get what’s referred to as an HO-6 condo insurance policy; if you rent, you’ll get an HO-4 renters insurance policy; if you own a single-family home, you’ll typically get what’s referred to as a special form HO-3 policy designed for homeowners.

Coverages

As you go through your homeowners insurance policy, you’ll notice it’s broken up into six distinct provisions, or coverages.

• Dwelling coverage - Covers the structure of your home itself, its roof, and its foundation

• Other structures coverage: Covers detached structures like your garage, shed, fence, deck, or basketball arena

• Personal property coverage - Covers your personal belongings contained inside as well as outside the home

• Loss of use coverage - Covers additional expenses if you’re forced to live somewhere else after a disaster or event that makes your home uninhabitable

• Personal liability coverage - Covers your personal liability expenses if someone is injured in your home and sues

• Medical payments coverage - Pays for a guest’s medical expenses if they’re injured in your home

Claim reimbursement

When you file a claim for covered losses or damages and you and your insurer agree to a settlement, you’ll first pay your deductible, which is the amount you pay out of pocket for damages before your insurer covers the remaining amount. The amount you’re reimbursed depends on which of the following two reimbursement provisions are in your policy:

• Actual cash value - Actual cash value policies are the least expensive, are usually required for older homes, and offer the smallest reimbursement for damages. Actual cash value policy settlements only reimburse you for what your home or personal property was worth at the time it was damaged or destroyed.

• Replacement cost value - Replacement cost value policies are more expensive than ACV, but are the safest bet in making sure you’re not left paying out of pocket to make up for the depreciated value. Replacement cost settlements replace the damaged or stolen property at its full cost to buy new, regardless of wear and tear.

What is hazard insurance?

Hazard insurance is simply the language that some lenders use in the mortgage contract to describe an insurance policy that covers your home against specific perils. Your lender will include “scope of coverage” requirements, coverage amount requirements, deductible requirements, and proof of insurance once you’ve obtained a policy.

There are two types of homeowners insurance policies that determine what hazards are covered: named perils, which protects your home and personal belongings against 16 perils named in your policy; and open perils, which covers everything except perils specifically listed in the policy.

It varies by insurer and policy type, but the dwelling and other structures provisions of your policy are usually covered by open perils, or those left off your policy, while damage to personal property is only covered if it results from one of the 16 named in your policy.

Named perils

A named perils policy covers these 16 perils:

• Fire or smoke

• Lightning

• Hail and windstorms

• Theft

• Vandalism

• Damage from vehicles

• Damage from aircraft

• Explosions

• Riots and civil commotion

• Volcanic eruption

• Accidental discharge or overflow of water or steam

• Falling objects

• Freezing of household systems like AC or heating

• Sudden and accidental damage from an electrical current

• Weight of ice, snow, or sleet

Open perils policy

An open perils policy covers everything except these perils:

• Earth movement

• Ordinance of law

• Certain types of water damage

• Power failure

• Neglect

• War

• Nuclear hazard

• Intentional loss

• Government action

• Collapse of structures (some coverage may be provided in your policy)

• Theft to your house if its under construction

• Vandalism (if home is vacant for more than 60 days)

• Mold, fungus, or wet rot (although some coverage may be provided)

• Wear and tear

• Mechanical breakdown

• Smog, rust, and corrosion

• Smoke from agricultural smudging and industrial operations

• Discharge or seepage of pollutants

• Birds, vermin, rodents, and insects

• Animals that you own