What is hazard insurance for homeowners?

Hazard insurance refers to the section of homeowners insurance that covers damage to the structure of your home. Most mortgage lenders require hazard insurance to protect their investment.

Pat Howard 1600

By

Pat Howard

Pat Howard

Managing Editor & Licensed Home Insurance Expert

Pat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

Updated|3 min read

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Key takeaways

  • Hazard insurance refers to an insurance policy that covers damage to the structure of your home in case of a fire, windstorm, hail event, or other disasters.

  • Mortgage lenders often require borrowers to secure a hazard insurance policy before letting them close on the home.

  • While there are several policy types that could qualify as hazard insurance, the most common is homeowners insurance.

  • Along with providing hazard insurance via dwelling coverage, home insurance includes multiple other coverages that homeowners need.

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Hazard insurance definition

Hazard insurance refers to an insurance policy that covers damage to a home's structure due to an unexpected disaster or loss. Hazard insurance typically covers the most common types of natural hazards and property damage, including fire, lightning strikes, wind, and other covered perils.

While most types of hazard insurance cover at least 16 causes of damage or loss, damage due to earthquakes or flooding is generally not covered. However, some insurance companies may offer earthquake or flood insurance coverage for an additional fee.

What is hazard insurance on a mortgage?

Before you can finalize a mortgage to buy your home, your lender will likely require you to purchase hazard insurance. Most lenders require this coverage to secure their investment (your home), which serves as collateral that they're able to seize if, for example, you stop paying your mortgage.

But in the unfortunate event the house was destroyed and you didn't have hazard insurance to pay for rebuild expenses, you and your lender would incur a major financial loss. For that reason, mortgage lenders usually require hazard insurance until the home is fully paid off.

Along with requiring you to purchase hazard insurance, your lender may have stipulations around how you pay for it. In fact, most mortgage lenders will require you to pay your hazard insurance premiums and property taxes through an escrow account if your down payment is less than 20%. In other words, you're paying for insurance as part of your monthly mortgage payment.

Learn more >> Homeowners insurance & escrow accounts

Mortgage escrow example

Say you have a $1,500 monthly mortgage bill. A portion of your payment — say, $1,000 — will go toward paying off the principal and interest on your loan. The remaining $500 will be your escrow payment, which will be deposited into your escrow account for your agent to pay your insurance, property taxes, and PMI each month.

Is hazard insurance the same thing as homeowners insurance?

While homeowners insurance is most commonly associated with hazard insurance, it isn't the only residential property insurance policy out there. For example, one lender may only require enough hazard insurance to cover the home's structure and nothing else, like a dwelling fire insurance policy, while another lender may require a more comprehensive policy like HO-3 homeowners insurance.

But regardless of what type of hazard insurance your lender accepts, it's important to make sure your home and assets are adequately protected — and homeowners insurance is the best way to do that. Along with providing hazard insurance (aka dwelling coverage) for the structure of your home, home insurance policies come with five additional coverages that cover your possessions, living expenses if you need to live elsewhere during repairs, and liability if you're responsible for an accident or injury.

Learn more >> What's the difference between hazard insurance & home insurance?

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What does hazard insurance cover?

Hazard insurance covers the costs if your home is damaged by an unexpected event that's covered under your policy. The most common types of home insurance policies provide comprehensive "open perils" coverage, while older homes or homes with a complicated risk profile are occasionally restricted to more limited "named perils" coverage.

What hazard insurance covers

Certain policy types, like HO-1 and HO-2 homeowners insurance, only cover the 16 named perils listed in your policy, including:

  • Fire or lightning

  • Windstorm or hail

  • Explosion

  • Riot or civil commotion

  • Aircraft

  • Vehicles

  • Smoke

  • Vandalism

  • Theft

  • Falling objects

  • Weight of snow, ice, or sleet

  • Accidental discharge or overflow of water or steam

  • Sudden and accidental tearing apart, cracking, burning or bulging

  • Freezing of plumbing

  • Sudden and accidental damage from an artificially generated electrical current

  • Volcanic eruption

What hazard insurance does NOT cover

The more common HO-3 and HO-5 policies provide open perils coverage, meaning your home is covered against everything except the specific perils listed in the policy, including:

  • Earthquakes

  • Flood damage

  • Mold

  • Foundation cracking from tree roots

  • Faulty construction

  • General wear and tear

  • Corrosion

  • Pests (insects, vermin, rodents, etc)

  • Intentional damage

  • Natural settling, cracking, shrinking, expanding of the foundation

Earthquakes and floods aren’t covered by hazard insurance, but your insurer may offer separate flood or earthquake insurance that you can purchase as a separate difference in conditions (DIC) insurance policy or home insurance add-on.

How does hazard insurance coverage work?

Hazard insurance pays for damage or loss to your home's structure if it's damaged due to a covered disaster, but the amount you're reimbursed on a claim depends on which level of coverage you have.

There's generally three levels of hazard insurance coverage: actual cash value, replacement cost value, and extended replacement cost.

While actual cash value hazard insurance is generally the cheapest, it offers the least amount of protection — and most insurers don't even offer this as a dwelling coverage option anymore.

On the other hand, replacement cost and extended replacement cost coverage offer the most comprehensive level of protection for your home.

Actual cash value

Actual cash value (ACV) policies pay out for the depreciated value of your home, meaning its age and condition will be factored into your claim reimbursement.

For example, if your 15-year-old roof is damaged, ACV coverage will reimburse you for the loss only after 15 years of depreciation have been subtracted from the payout.

Replacement cost value

Replacement cost value (RCV) pays the amount it'd cost to rebuild your home with materials of similar type and quality, without deducting depreciation from your payout. So if your 15-year-old roof was damaged, you’d be reimbursed for the value of a new roof.

Extended replacement cost

Extended replacement cost covers your home at its replacement cost, but with the added guarantee that the insurer will cover any unexpected increase in repair costs. Most insurers will give you the option of extending your home’s replacement cost an additional 20% or 50% past your dwelling coverage limit. This is a smart option for homeowners who live in natural-disaster prone areas where replacement costs can skyrocket after a major event.

Generally speaking, you should have enough hazard insurance to rebuild the home from the group up — not the home's market value or purchase price.

How much does hazard insurance cost?

Hazard insurance makes up the bulk of your homeowners insurance policy, which on average costs around $1,899 annually, according to our analysis of 2022 home insurance rate data from across the country.

The overall cost of coverage will depend on factors related to the home itself, including:

  • Your home’s square footage

  • The location of your home

  • The construction type of your home

  • Your roof type — hip, gable, or flat

  • The number of bathrooms in your home

  • Your home’s age

Insurers set rates based on how likely you are to file a claim. If you live in an area that experiences frequent natural disasters, or your home is older and more susceptible to damage, that can significantly impact your rates.

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Frequently asked questions

Can I remove hazard insurance from my mortgage?

If you have a mortgage on your home, your lender will likely require you to keep the home insured until you've paid off the loan balance. Once you've paid off your mortgage and your lender removes the lien from your home, you're free to cancel hazard insurance if you'd like. However, that may be especially unwise since you have 100% ownership in the home and would be responsible for any damage or loss.

Is hazard insurance tax-deductible?

When purchased for a rental property or place of business, you may be able to deduct your hazard insurance premiums from your taxes. But if purchased for your primary residence, your premiums are not tax-deductible since it would be considered a personal expense.

Is hazard insurance the same thing as mortgage insurance?

No. Hazard insurance and mortgage insurance are two different kinds of financial protection that serve different parties. Hazard insurance covers you the homeowner in the event your house is damaged, while mortgage insurance protects the lender if you fail to make mortgage payments.

Author

Managing Editor & Licensed Home Insurance Expert

Pat Howard

Managing Editor & Licensed Home Insurance Expert

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Pat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

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