What is hazard insurance?

Hazard insurance provides coverage to your home and the structure of your home if its damaged by covered perils like fire and bad storms.

Hazard insurance is the backbone of your homeowners insurance policy, providing financial protection for your home and personal belongings against whatever hazards or perils are covered in your policy. Hazard insurance also covers your living expenses if you're forced to relocate when your home is damaged or destroyed by a covered peril.

Hazard insurance, along with liability coverage and medical payments to others coverage — make up your typical homeowners insurance policy. The amount insured for the main portion of your hazard coverage – personal property, other structures, and loss of use coverage – is commonly calculated as a percentage of your total dwelling coverage (50%, 10% and 20%, respectively).

But what exactly does hazard insurance consist of, what hazards are covered, and how much hazard insurance do you need? The answer depends on a lot of factors like the value of your home, where you live, how old your home is, and more.

Read on to learn more about hazard insurance:

What is hazard insurance?

Hazard insurance is the part of your homeowners insurance policy that covers the structure of the home itself and personal property against perils ranging from fire to theft. It can also refer to other structures, like your garage, or additional living expense coverage.

There are three different kinds of coverage under hazard insurance: actual cash value coverage, replacement cost value coverage, and guaranteed replacement cost/extended replacement cost coverage that determine both the extent to which your home and belongings are covered and how high those premiums will run.

Is hazard insurance required?

Before taking out a mortgage, most lenders will require homebuyers to, at the very minimum, buy hazard insurance. Some mortgage companies will require far more coverage than just hazard insurance, but coverage to rebuild your home or at least part of your home is considered an absolute must.

That's because the mortgage is secured against the value of your property, and lenders want to ensure that their investment is protected against unforeseen circumstances like theft, fire and natural disasters. Most lenders will require a certain level of hazard insurance coverage, so if you live in an area susceptible to bad weather, break-ins, or you just live in an old and structurally delicate house, your lender may require you to add enhanced coverage.

Types of hazard insurance

Hazard insurance is broken up into three components; actual cash value (ACV) policies is the minimum amount of coverage in a homeowners policy, and replacement value coverage (RVC) and extended replacement cost (ERC) are both enhanced coverage options.

Actual cash value

ACV policies reimburse you for the replacement cost of whatever was damaged minus any depreciation that the structure may have incurred over time.

For example, if your house burns down, but was renovated 15 years prior to it burning down, ACV coverage will cover the home, but only after the 15 years of structural depreciation is accounted for. Actual cash value coverage often leaves residents — especially owners of old homes with higher repair costs — paying out-of-pocket repair expenses.

For this reason, ACV policies are only recommended for owners of newer homes, or homes not as susceptible to bad weather or human-induced wear and tear.

Replacement cost value

RCV policies are a safer bet if you live in an older home or an area prone to natural disasters. Like ACV, they cover the cost of repair or replacement of your house, but house deterioration and depreciation value isn’t deducted from rebuild cost, so it’s rebuilt at the current prices for labor and materials, which were higher than when the home was initially built. Premiums are far higher under RCV plans, but the enhanced coverage and financial protection is worth the higher short-term monthly losses.

Extended replacement cost value

ERC covers your home’s repair and replacement cost, but with the added guarantee that the insurer will cover any unexpected increase in costs to repairs. If you live in areas prone to natural or regional disasters where labor or supplies could become temporarily scarce or expensive during the rebuild, ERC would have you covered.

This level of hazard insurance is rarely required by lenders, but it remains incalculably valuable and sometimes necessary for people who live in coastal areas.

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What does hazard insurance cover?

There are two types of hazard insurance policies: named peril policies and open peril policies.

Named peril policies are the more inexpensive of the two, as this type of coverage only covers perils that are explicitly named in the policy (typically about 10-16 perils, depending on how much coverage you elect to purchase).

Open peril policies are more open-ended; have more “wiggle room,” per se, and covers every peril except those explicitly excluded by the insurer (covers all perils in named peril policies plus perils not explicitly excluded in the policy).

Damage from perils represents the most numerous and most costly homeowners insurance claims, as fire and lightning account for the most costly claims on average, around $45,000 per claim, according to the Insurance Information Institute. Wind and hail are the most frequently claimed perils. Luckily, both of these perils are covered on your basic hazard insurance plan.

Although earthquakes and floods aren’t covered by hazard insurance, you can look at adding these to your homeowners policy, or just purchase separate earthquake and flood insurance entirely.

How much hazard insurance do you need?

There are a few crucial factors that determine how much hazard insurance you need to cover your home’s structural damage and your belongings: the cost to rebuild your home and the value of your personal property.

Homes which are at risk of common perils like fire, lightning, hail, and wind damage only need basic hazard insurance on their homeowners policy, while homes susceptible to additional perils like flooding, earthquakes, or mudslides need to add separate hazard coverage — flood and earthquake insurance — in order to be covered.

Coverage is also determined based on how much a total rebuild of your house would cost; not the original purchasing price of your home, not even the current real estate value of your home, but the rebuild. The amount that you spend on a rebuild can vary from home to home, and in most cases it has nothing to do with its actual value.

Rebuild costs depend on the local construction costs, the square footage of the home, the style of the house (rebuild materials for a historic Dutch colonial home will be invariably more expensive than materials for a concrete home), if you have garages or gardening sheds, and so on. The amounts vary, but most insurance companies put their minimum hazard coverage amount at $300,000, while the maximum is typically $775,000.

What's the cost of hazard insurance?

You don’t pay separate deductibles for hazard insurance, as every component (hazard, liability, medical) makes up one homeowners insurance policy, which requires one monthly premium. However, hazard insurance variables can play a demonstrative factor in how much comes out of your bank account each month. These factors include, but aren’t limited to:

  • The age and value of your home

  • The materials your home is made of

  • The value of everything you own both inside and outside the home

  • Your policy limit

  • Your deductible amount

  • Whether your home has security features or not

Insurers set rates based on how likely you are to file a claim. Perhaps the biggest indicator of claim frequency is the age of your home, as older homes can be damaged easier, leading to more claims. Insurers also check to see what kind of security features you have, such as burglar alarms, and often base rates on that as well. Homes with better security systems will generally file less claims, leading to lower monthly premiums.

Your policy limit and how high or low your deductible is also affects how much you pay in monthly premiums. A high policy limit and low deductible may mean far higher monthly premiums than you’d like, but these are the cost-factors you can customize to your liking.

At Policygenius, we’ll guide you through the homeowners insurance process and help you choose a policy that's both effective and affordable.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.